Exhibit 99.1

 

 

American State Financial Corporation

Accountants’ Report and Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

 

 

 

 

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Independent Accountants’ Report

Board of Directors

American State Financial Corporation

Lubbock, Texas

We have audited the accompanying consolidated balance sheets of American State Financial Corporation (Corporation) as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these 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 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 American State Financial Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

We also have examined, in accordance with attestation standards established by the American Institute of Certified Public Accountants, American State Financial Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 7, 2012, expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

 

February 7, 2012

San Antonio, Texas

 

 

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Independent Accountants’ Report

Audit Committee and Board of Directors

American State Financial Corporation

Lubbock, Texas

We have examined American State Financial Corporation’s (Corporation’s) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assertion of the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our examination.

We conducted our examination in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the examination to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our examination included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our examination also included performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

An entity’s internal control over financial reporting is a process, effected by those charged with governance, management and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. Because management’s assessment and our examination were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our examination of the Corporation’s internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9-C). An entity’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the entity’s assets that could have a material effect on the financial statements.

 

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, American State Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of the Corporation as of and for the year ended December 31, 2011, and our report dated February 7, 2012, expressed an unqualified opinion thereon.

 

February 7, 2012

San Antonio, Texas

 

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American State Financial Corporation

Consolidated Balance Sheets

December 31, 2011 and 2010

 

		2011				2010
Assets
Cash and due from banks		$	108,821,430			$	85,947,710
Excess deposits with Federal Reserve and federal funds sold			61,250,000				162,170,000
Cash and cash equivalents			170,071,430				248,117,710
Available-for-sale securities			328,220,398				285,747,808
Held-to-maturity securities			1,259,589,114				939,347,059
Total securities			1,587,809,512				1,225,094,867
Loans			1,211,889,893				1,100,027,166
Less: Allowance for loan losses			(24,500,000	)			(18,450,000	)
Loans, net			1,187,389,893				1,081,577,166
Bank premises and equipment, net			27,546,451				25,588,193
Accrued interest receivable			17,350,559				15,823,248
Net deferred income taxes			2,416,000				5,657,000
Foreclosed assets held for sale, net			292,004				849,001
Goodwill			23,252,610				23,252,610
Bank owned life insurance			53,315,308				51,462,406
Other assets			12,245,113				13,385,352
Total assets		$	3,081,688,880			$	2,690,807,553
Liabilities
Deposits
Demand—noninterest bearing		$	561,064,540			$	466,079,683
Demand—interest bearing			618,625,048				485,407,658
Savings			598,213,359				527,291,036
Time deposits of $100,000 or more			432,073,410				416,216,532
Time deposits of less than $100,000			249,552,325				262,101,461
Total deposits			2,459,528,682				2,157,096,370
Securities sold under repurchase agreements			323,076,357				265,133,404
Accrued interest payable			362,907				603,689
Federal income taxes payable			2,678,389				2,059,513
Other liabilities			16,329,992				15,065,055
Total liabilities			2,801,976,327				2,439,958,031
Stockholders’ Equity
Common stock, $10 par value; authorized 10,000,000 shares; issued and outstanding 4,024,625 shares			40,246,250				40,246,250
Additional paid-in capital			41,695,500				41,665,500
Retained earnings			249,255,177				229,367,664
Accumulated other comprehensive income			11,718,891				2,054,045
			342,915,818				313,333,459
Treasury stock, at cost
Common; 2011 – 1,554,542 shares, 2010 – 1,548,905 shares			(63,203,265	)			(62,483,937	)
Total stockholders’ equity			279,712,553				250,849,522
Total liabilities and stockholders’ equity		$	3,081,688,880			$	2,690,807,553

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Consolidated Statements of Income

December 31, 2011, 2010 and 2009

 

		2011				2010				2009
Interest Income
Interest and fees on loans		$	63,242,584			$	59,600,457			$	56,195,462
Interest on investment securities
U.S. government obligations			132,935				102,122				—
Other U.S. government agency obligations			20,358,510				22,298,184				21,007,757
State and political subdivision obligations			10,012,303				9,121,497				7,814,874
Mortgage-backed securities			13,692,095				14,608,290				17,734,175
Other			173,725				178,694				63,176
Interest on excess deposits with Federal Reserve and federal funds sold			272,382				185,067				190,793
Total interest income			107,884,534				106,094,311				103,006,237
Interest Expense
Interest on deposits			12,105,027				16,040,393				19,184,359
Interest on securities sold under repurchase agreements			1,997,203				2,718,721				3,021,366
Total interest expense			14,102,230				18,759,114				22,205,725
Net Interest Income			93,782,304				87,335,197				80,800,512
Provision for Loan Losses			4,092,077				4,598,391				10,788,761
Net Interest Income After Provision for Loan Losses			89,690,227				82,736,806				70,011,751
Noninterest Income
Service charges			20,206,424				18,584,585				17,987,336
Mortgage loan sales			3,367,958				3,807,480				3,491,994
Investment securities gains, net			1,708,931				1,009,374				1,112,181
Income from fiduciary duties			3,543,923				3,535,698				3,226,235
Other			12,784,204				10,995,572				10,255,627
Total noninterest income			41,611,440				37,932,709				36,073,373

 

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Consolidated Statements of Income (continued)

Years Ended December 31, 2011, 2010 and 2009

 

		2011				2010				2009
Noninterest Expense
Salaries and employee benefits		$	39,534,070			$	39,677,552			$	35,137,389
Occupancy expense			2,576,953				2,571,986				2,622,390
Depreciation			3,584,482				3,418,768				3,127,002
Repairs and maintenance and equipment rental			8,246,506				6,100,270				5,199,905
Advertising and promotions			3,915,761				3,603,552				4,096,644
Federal Deposit Insurance Corporation premiums			1,836,570				2,568,108				3,398,384
Professional fees			2,993,252				2,482,127				2,222,736
Supplies, stationary and printing			1,155,202				1,274,273				1,057,389
Taxes other than on income and salaries			944,700				846,040				838,991
Other			7,625,474				6,828,456				7,240,642
Total noninterest expense			72,412,970				69,371,132				64,941,472
Income Before Income Taxes			58,888,697				51,298,383				41,143,652
Provision for Income Taxes			16,770,000				15,272,000				12,014,000
Net Income		$	42,118,697			$	36,026,383			$	29,129,652
Basic Earnings Per Share		$	17.04			$	14.58			$	11.75
Diluted Earnings Per Share		$	16.99			$	14.57			$	11.75

 

 

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2011, 2010 and 2009

 

										Additional Paid-in Capital				Retained Earnings				Other Comprehensive Income (Loss)				Treasury Stock				Total
		Common Stock
		Shares				Amount
Balance, January 1, 2009			4,024,625			$	40,246,250			$	40,609,500			$	197,584,931			$	1,593,719			$	(50,496,717	)		$	229,537,683
Comprehensive income
Net income			—				—				—				29,129,652				—				—				29,129,652
Other comprehensive income, net of tax
Change in unrealized appreciation on available-for-sale securities, net of taxes			—				—				—				—				(551,744	)			—				(551,744	)
Total comprehensive income																											28,577,908
Stock option compensation expense			—				—				340,000				—				—				—				340,000
Dividends on common stock, $5.50 per share			—				—				—				(13,558,811	)			—				—				(13,558,811	)
Sales of 1,500 shares of treasury stock			—				—				—				—				—				151,500				151,500
Purchases of 89,830 shares of treasury stock			—				—				—				—				—				(13,199,047	)			(13,199,047	)
Balance, December 31, 2009			4,024,625				40,246,250				40,949,500				213,155,772				1,041,975				(63,544,264	)			231,849,233
Comprehensive income
Net income			—				—				—				36,026,383				—				—				36,026,383
Other comprehensive income, net of tax
Change in unrealized appreciation on available-for-sale securities, net of taxes			—				—				—				—				1,012,070				—				1,012,070
Total comprehensive income																											37,038,453
Stock option compensation expense			—				—				716,000				—				—				—				716,000
Dividends on common stock, $8.00 per share			—				—				—				(19,814,491	)			—				—				(19,814,491	)
Sales of 22,148 shares of treasury stock			—				—				—				—				—				2,247,600				2,247,600
Purchases of 10,396 shares of treasury stock			—				—				—				—				—				(1,187,273	)			(1,187,273	)
Balance, December 31, 2010			4,024,625				40,246,250				41,665,500				229,367,664				2,054,045				(62,483,937	)			250,849,522
Comprehensive income
Net income			—				—				—				42,118,697				—				—				42,118,697
Other comprehensive income, net of tax
Change in unrealized appreciation on available-for-sale securities, net of taxes			—				—				—				—				9,664,846				—				9,664,846
Total comprehensive income																											51,783,543
Stock option compensation expense			—				—				30,000				—				—				—				30,000
Dividends on common stock, $9.00 per share			—				—				—				(22,231,184	)			—				—				(22,231,184	)
Purchases of 5,637 shares of treasury stock			—				—				—				—				—				(719,328	)			(719,328	)
Balance, December 31, 2011			4,024,625			$	40,246,250			$	41,695,500			$	249,255,177			$	11,718,891			$	(63,203,265	)		$	279,712,553

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

 

		2011				2010				2009
Operating Activities
Net income		$	42,118,697			$	36,026,383			$	29,129,652
Items not requiring (providing) cash
Depreciation			3,584,482				3,418,768				3,127,002
Deferred income taxes			(1,963,000	)			(189,000	)			(1,604,000	)
Provision for loan losses			4,092,077				4,598,391				10,788,761
Net gain on sales of investment securities			(1,708,931	)			(1,009,374	)			(1,112,181	)
Gain on sales of foreclosed assets			(111,858	)			(342,333	)			(12,419	)
Write-down on foreclosed assets			202,496				149,999				21,000
Amortization of premium relating to investment securities, net			10,383,002				3,892,869				979,955
Gain on disposal of bank premises and equipment			(35,592	)			(20,883	)			(12,500	)
Stock option compensation expense			30,000				716,000				340,000
Changes in
Accrued interest receivable			(1,527,311	)			124,159				(643,886	)
Other assets			(712,662	)			(3,488,796	)			(8,291,958	)
Accrued interest payable			(240,782	)			(197,739	)			(224,947	)
Federal income taxes payable			618,876				65,072				1,218,137
Other liabilities			1,263,509				1,299,234				2,104,908
Net cash provided by operating activities			55,993,003				45,042,750				35,807,524
Investing Activities
Proceeds from maturities of held-to-maturity securities			198,502,570				214,356,244				237,154,900
Proceeds from maturities of available-for-sale securities			29,537,951				26,210,782				21,911,596
Proceeds from the sales of available-for-sale securities			409,909,555				19,978,572				22,779,759
Proceeds from the sales of held-to-maturity securities			13,550,371				—				5,404,260
Purchases of held-to-maturity securities			(539,970,321	)			(227,108,719	)			(309,581,259	)
Purchases of available-for-sale securities			(468,049,995	)			(110,317,445	)			(126,964,264	)
Net change in loans			(110,905,805	)			(41,880,480	)			(73,945,255	)
Proceeds from the sale of foreclosed assets			1,467,359				2,142,333				925,173
Expenditures for bank premises and equipment			(5,550,676	)			(7,467,726	)			(3,171,501	)
Proceeds from sales of bank premises and equipment			43,528				20,883				12,500
Net cash used in investing activities			(471,465,463	)			(124,065,556	)			(225,474,091	)

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2011, 2010 and 2009

 

		2011				2010				2009
Financing Activities
Net increase in deposits		$	302,432,311			$	225,267,036			$	165,746,485
Net increase in securities sold under repurchase agreements			57,942,953				38,688,387				32,127,869
Proceeds from sales of treasury stock			—				2,247,600				151,500
Dividends paid			(22,229,756	)			(19,811,828	)			(13,584,152	)
Purchases of treasury stock			(719,328	)			(1,187,273	)			(13,199,047	)
Net cash provided by financing activities			337,426,180				245,203,922				171,242,655
Increase (Decrease) in Cash and Cash Equivalents			(78,046,280	)			166,181,116				(18,423,912	)
Cash and Cash Equivalents, Beginning of Year			248,117,710				81,936,594				100,360,506
Cash and Cash Equivalents, End of Year		$	170,071,430			$	248,117,710			$	81,936,594
Supplemental Cash Flows Information
Interest paid		$	14,343,012			$	18,956,853			$	22,430,672
Income taxes paid		$	18,517,888			$	15,783,674			$	12,470,863
Real estate acquired in settlement of loans		$	1,001,000			$	785,000			$	1,727,254
Dividends declared, not paid		$	617,521			$	618,949			$	616,288

 

 

See Notes to Consolidated Financial Statements

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

American State Financial Corporation (the Corporation) provides a variety of financial services to individuals and corporate customers in the South Plains, West Texas and North Central areas of the State of Texas. The Corporation’s primary deposit products are demand deposits and time and savings accounts. Its primary lending products are real estate, commercial (including oil and gas related) and agriculture loans. The Corporation also provides trust services. The Corporation is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary American State Bank (the Bank). All significant intercompany accounts and transactions have been eliminated in consolidation.

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 those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.

Cash Equivalents

The Corporation considers all liquid investments with original maturities of three months or less to be cash equivalents.

Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions.

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. The Corporation had no trading securities at December 31, 2011 and 2010. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

For debt securities with fair value below amortized cost, when the Corporation does not intend to sell a debt security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

There were no other-than-temporary impairments recorded in the years ended December 31, 2011, 2010 and 2009.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. There were no unrealized losses recognized during the years ended December 31, 2011, 2010 and 2009. Gains and losses on loan sales are recorded in noninterest income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method.

The accrual of interest on real estate, agricultural and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Personal loans are typically charged-off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired and unimpaired loans that are classified due to performance, financial trends or

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

other factors. For those loans that are classified, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Corporation’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets, which generally range from 15 to 20 years for buildings and 3 to 10 years for remaining assets.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation are included in net income or expense from foreclosed assets.

Goodwill

Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. An impairment analysis was performed for the years ending December 31, 2011, 2010 and 2009, and it was determined that there was no impairment loss.

Treasury Stock

Common stock shares repurchased are recorded at cost.

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Stock Options

At December 31, 2011 and 2010, the Corporation has two share-based employee compensation plans, which are described more fully in Note 13.

Income Taxes

The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also included resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. At December 31, 2011 and 2010, a valuation allowance was not considered necessary.

The Corporation recognizes interest and penalties on income taxes as a component of income tax expense.

The Corporation files consolidated income tax returns with its subsidiary.

Earnings Per Share

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The average market price per share for diluted earnings per share calculations was based upon treasury stock purchases and other offers to purchase the common shares of the Corporation. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method.

Treasury stock shares are not deemed outstanding for earnings per share calculations.

 

15

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

The following table illustrates the computation of basic and diluted earnings per share:

 

		2011								2010								2009
		Amount				Per Share Amount				Amount				Per Share Amount				Amount				Per Share Amount
Net income		$	42,118,697							$	36,026,383							$	29,129,652
Basic:
Weighted average shares outstanding			2,471,096			$	17.04				2,471,701			$	14.58				2,479,575			$	11.75
Diluted:
Weighted average shares outstanding			2,471,096								2,471,701								2,479,575
Effect of dilutive securities—options			8,179								121								—
Total			2,479,275			$	16.99				2,471,822			$	14.57				2,479,575			$	11.75

Options to purchase 21,248 shares and 52,348 shares outstanding at December 31, 2010 and 2009, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Recent Accounting Pronouncements

ASU 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 clarifies how fair values should be measured for instruments classified in stockholders’ equity and under what circumstances premiums and discounts should be applied in fair value measurements. The guidance also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks or counterparty credit risks. Required new disclosures for financial instruments classified as Level 3 fair values include (1) quantitative information about unobservable inputs used in measuring fair values, (2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs and (3) a description of the valuation processes used. ASU 2011-04 also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair value is required to be disclosed. ASU 2011-04 will be effective for the Corporation prospectively for annual periods beginning on January 1, 2012. Adoption of ASU 2011-04 is not expected to have a material impact on the Corporation’s financial statements.

ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all non-owner changes in shareholders’ equity be

 

16

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and will require that the Corporation change its presentation of comprehensive income.

ASU 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment. ASU 2011-08 amends Topic 350, Intangibles—Goodwill and Other, to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2011-12, Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

Reclassifications

Certain reclassifications have been made to the 2010 and 2009 financial statements to conform to the 2011 financial statement presentation. These reclassifications had no effect on net income.

Note 2: Restriction on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2011 was $11,082,000.

 

17

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Note 3: Securities

The amortized cost and approximate fair values of securities are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
Available-for-sale Securities:
December 31, 2011
U.S. government agencies		$	229,393,622			$	16,596,992			$	(74,055	)		$	245,916,559
Mortgage-backed securities securities			49,629,891				268,255				(82,272	)			49,815,874
State and political subdivisions			31,166,994				1,400,806				(79,835	)			32,487,965
		$	310,190,507			$	18,266,053			$	(236,162	)		$	328,220,398
December 31, 2010
U.S. Treasury securities		$	24,852,989			$	—			$	(1,200,968	)		$	23,652,021
U.S. government agencies			201,052,786				6,471,774				(1,347,085	)			206,177,475
Mortgage-backed securities			29,638,504				11,741				(274,561	)			29,375,684
State and political subdivisions			27,042,484				213,538				(713,394	)			26,542,628
		$	282,586,763			$	6,697,053			$	(3,536,008	)		$	285,747,808
Held-to-maturity Securities:
December 31, 2011
U.S. government agencies		$	368,815,320			$	23,723,424			$	(57,582	)		$	392,481,162
Mortgage-backed securities			600,210,892				17,756,437				(720,939	)			617,246,390
State and political subdivisions			290,562,902				15,916,614				(373,206	)			306,106,310
		$	1,259,589,114			$	57,396,475			$	(1,151,727	)		$	1,315,833,862
December 31, 2010
U.S. government agencies		$	340,752,143			$	18,986,978			$	(366,835	)		$	359,372,286
Mortgage-backed securities			339,770,902				12,537,408				(801,975	)			351,506,335
State and political subdivisions			258,824,014				5,961,816				(2,106,854	)			262,678,976
		$	939,347,059			$	37,486,202			$	(3,275,664	)		$	973,557,597

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Within one year		$	205,261			$	205,841			$	61,895,727			$	63,660,088
One to five years			75,400,606				79,256,824				298,932,246				316,484,003
Five to ten years			158,923,839				172,332,185				423,770,164				445,363,274
After ten years			75,660,801				76,425,548				474,990,977				490,326,497
Totals		$	310,190,507			$	328,220,398			$	1,259,589,114			$	1,315,833,862

 

18

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $961,707,000 at December 31, 2011 and $774,808,000 at December 31, 2010.

Gross gains of $2,409,740, $1,009,374 and $940,749 and gross losses of ($1,268,043), $-0- and ($2,391) resulting from sales of available-for-sale securities were realized for 2011, 2010 and 2009, respectively.

During 2011, the Corporation sold a total of $12,983,137 of held-to-maturity securities for $13,550,371, resulting in a realized gain of $567,234. During 2010, the Corporation did not sell any held-to-maturity securities. During 2009, the Corporation sold a total of $5,230,437 of held-to-maturity securities for $5,404,260, resulting in a realized gain of $173,823. These sales were permissible under investment accounting guidance as the Corporation had collected greater than 85% of the principal outstanding at acquisition.

Certain investments in debt securities have fair values that are less than their historical cost. Total fair value of these investments at December 31, 2011 and 2010, was $213,159,976 and $237,969,197, which is approximately 13% and 19%, respectively, of the Corporation’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent changes in market interest rates over the yield available at the time the underlying securities were purchased. Management believes the declines in fair value for these securities are temporary.

The following table shows the Corporation’s investments’ gross unrealized losses and fair value of the Corporation’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:

 

		December 31, 2011
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Available-for-sale (AFS):
U.S. government agencies		$	25,135,749			$	(46,455	)		$	10,091,800			$	(27,600	)		$	35,227,549			$	(74,055	)
Mortgage-backed securities			26,837,380				(82,272	)			—				—				26,837,380				(82,272	)
State and political subdivisions			—				—				6,246,118				(79,835	)			6,246,118				(79,835	)
Total temporarily impaired AFS securities		$	51,973,129			$	(128,727	)		$	16,337,918			$	(107,435	)		$	68,311,047			$	(236,162	)
Held-to-maturity (HTM):
U.S. government agencies		$	21,103,829			$	(57,582	)		$	—			$	—			$	21,103,829			$	(57,582	)
Mortgage-backed securities			103,466,760				(720,939	)			—				—				103,466,760				(720,939	)
State and political subdivisions			14,775,799				(135,158	)			5,502,541				(238,048	)			20,278,340				(373,206	)
Total temporarily impaired HTM securities		$	139,346,388			$	(913,679	)		$	5,502,541			$	(238,048	)		$	144,848,929			$	(1,151,727	)

 

19

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

		December 31, 2010
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Available-for-sale (AFS):
U.S. Treasury securities		$	18,964,200			$	(1,200,968	)		$	—			$	—			$	18,964,200			$	(1,200,968	)
U.S. government agencies			29,012,277				(1,347,085	)			—				—				29,012,277				(1,347,085	)
Mortgage-backed securities			29,119,030				(274,561	)			—				—				29,119,030				(274,561	)
State and political subdivisions			9,294,633				(713,394	)			—				—				9,294,633				(713,394	)
Total temporarily impaired AFS securities		$	86,390,140			$	(3,536,008	)		$	—			$	—			$	86,390,140			$	(3,536,008	)
Held-to-maturity (HTM):
U.S. government agencies		$	20,456,206			$	(366,835	)		$	—			$	—			$	20,456,206			$	(366,835	)
Mortgage-backed securities			69,543,084				(801,975	)			—				—				69,543,084				(801,975	)
State and political subdivisions			61,116,789				(2,106,624	)			462,978				(230	)			61,579,767				(2,106,854	)
Total temporarily impaired HTM securities		$	151,116,079			$	(3,275,434	)		$	462,978			$	(230	)		$	151,579,057			$	(3,275,664	)

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

 

		2011				2010
Real estate:
Residential		$	179,635,454			$	167,777,960
Agriculture			51,714,678				40,703,938
Construction			87,574,921				170,279,018
Other			485,335,703				359,205,127
Agriculture			42,466,450				47,125,621
Commercial			298,218,919				247,037,242
Consumer:
Credit cards			7,786,800				7,694,794
Other			59,156,968				60,203,466
Total loans			1,211,889,893				1,100,027,166
Less
Allowance for loan losses			24,500,000				18,450,000
Net loans		$	1,187,389,893			$	1,081,577,166

 

20

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Management believes that the current level of allowance for loan losses is an adequate estimate of probable losses within the loan portfolio at December 31, 2011 and 2010. This determination of adequacy is based upon factors previously mentioned and requires the use of judgments that may change in the future. Any changes in the factors used by management or the availability of new information could cause the allowance for loan losses to be adjusted in future periods.

The following table shows an analysis of the allowance for loan losses by portfolio segment for the years ended December 31, 2011 and 2010:

December 31, 2011

 

		Real Estate				Agriculture				Commercial				Consumer				Unallocated				Total
Beginning Balance		$	6,621,098			$	685,022			$	5,275,527			$	348,321			$	5,520,032			$	18,450,000
Provision for Loan Losses			(682,969	)			(22,612	)			587,376				72,101				4,138,181				4,092,077
Charge Offs			(507,628	)			(307,302	)			(540,210	)			(120,376	)			—				(1,475,516	)
Recoveries			3,102,961				53,305				174,087				103,086				—				3,433,439
Net Loan Losses			2,595,333				(253,997	)			(366,123	)			(17,290	)			—				1,957,923
Ending Balance		$	8,533,462			$	408,413			$	5,496,780			$	403,132			$	9,658,213			$	24,500,000
Portion of Allowance Ending Balance Allocated to:
Individually Evaluated for Impairment		$	1,301,602			$	6,054			$	66,566			$	6,000			$	—			$	1,380,222
Collectively Evaluated for Impairment			7,231,860				402,359				5,430,214				397,132				9,658,213				23,119,778
Ending Balance		$	8,533,462			$	408,413			$	5,496,780			$	403,132			$	9,658,213			$	24,500,000
Portion of Loans Ending Balance Allocated to:
Individually Evaluated for Impairment		$	7,031,748			$	522,022			$	47,439			$	16,839			$	—			$	7,618,048
Collectively Evaluated for Impairment			797,229,008				41,944,428				298,171,480				66,926,929				—				1,204,271,845
Ending Balance		$	804,260,756			$	42,466,450			$	298,218,919			$	66,943,768			$	—			$	1,211,889,893

 

21

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

December 31, 2010

 

		Real Estate				Agriculture				Commercial				Consumer				Unallocated				Total
Beginning Balance		$	3,660,294			$	1,075,295			$	3,988,745			$	311,311			$	6,464,355			$	15,500,000
Provision for Loan Losses			4,136,627				(455,771	)			1,702,332				159,526				(944,323	)			4,598,391
Loan Losses:
Charge Offs			(1,514,710	)			(65,508	)			(752,389	)			(196,875	)			—				(2,529,482	)
Recoveries			338,887				131,006				336,839				74,359				—				881,091
Net Loan Losses			(1,175,823	)			65,498				(415,550	)			(122,516	)			—				(1,648,391	)
Ending Balance		$	6,621,098			$	685,022			$	5,275,527			$	348,321			$	5,520,032			$	18,450,000
Portion of Allowance Ending Balance Allocated to:
Individually Evaluated for Impairment		$	1,033,333			$	66,667			$	25,000			$	—			$	—			$	1,125,000
Collectively Evaluated for Impairment			5,587,765				618,355				5,250,527				348,321				5,520,032				17,325,000
Ending Balance		$	6,621,098			$	685,022			$	5,275,527			$	348,321			$	5,520,032			$	18,450,000
Portion of Loans Ending Balance Allocated to:
Individually Evaluated for Impairment		$	4,726,399			$	422,224			$	3,369,657			$	—			$	—			$	8,518,280
Collectively Evaluated for Impairment			733,239,872				46,703,397				243,667,355				67,898,262				—				1,091,508,886
Ending Balance		$	737,966,271			$	47,125,621			$	247,037,012			$	67,898,262			$	—			$	1,100,027,166

Activity in the allowance for loan losses for the year ended December 31, 2009 was as follows:

 

Balance, beginning of year		$	14,000,000
Provision charged to expense			10,788,761
Losses charged off, net of recoveries of $381,139			(9,288,761	)
		$	15,500,000

As needed, management may also increase the unallocated portion of the allowance for loan losses based upon economic conditions within one or several sectors of the loan portfolio. Additions of this nature are not allocated to any one loan or category of loans. During the year ended December 31, 2011, management recorded approximately $4,100,000 in such general reserve provisions for probable loan losses. A large portion of these provisions were made due to the unknown impact from the drought that has settled in across the State of Texas and for other prevailing economic conditions within the Corporation’s market area.

The following table shows the balance of all impaired loans December 31, 2011 and 2010:

December 31, 2011

 

		Unpaid Contractual Principal Balance (1)				Recorded Investment With No Specific Allowance				Recorded Investment With Specific Allowance				Total Recorded Investment  (2)				Related Allowance				Average Recorded Investment				Interest Income Recognized
Real Estate		$	7,674,042			$	668,403			$	6,363,345			$	7,031,748			$	1,301,602			$	5,264,512			$	118,869
Agriculture			537,959				434,298				87,724				522,022				6,054				460,286				16,781
Commercial			48,680				47,439				—				47,439				66,566				693,095				1,852
Consumer			—				16,839				—				16,839				6,000				3,368				—
Total		$	8,260,681			$	1,166,979			$	6,451,069			$	7,618,048			$	1,380,222			$	6,421,261			$	137,502

 

22

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

December 31, 2010

 

		Unpaid Contractual Principal Balance				Recorded Investment With No Specific Allowance				Recorded Investment With Specific Allowance				Total  Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
Real Estate		$	13,351,962			$	2,223,682			$	2,502,717			$	4,726,399			$	1,033,333			$	5,556,574			$	115,588
Agriculture			479,857				146,252				275,972				422,224				66,667				646,816				8,873
Commercial			3,423,277				—				3,369,657				3,369,657				25,000				2,898,353				—
Consumer			—				—				—				—				—				—				—
Total		$	17,255,096			$	2,369,934			$	6,148,346			$	8,518,280			$	1,125,000			$	9,101,743			$	124,461

 

1)	This represents the legal balance of the loan to the customer, including principal, accrued interest and charge offs.

2)	This represents the book balance of the loan net of any chargeoffs.

Impaired loans at December 31, 2009, were insignificant and, therefore, average balance and interest income information has not been presented.

The Corporation will place a loan in non-accrual status and cease accruing interest when the principal or interest has been delinquent for 90 days or more unless the asset is both well secured and in the process of collection. An asset may be restored to accrual status when all principal and interest amounts contractually due are current and the Corporation expects full repayment of the remaining contractual principal and interest.

The following table shows the detailed balance of non-accrual loans as of December 31, 2011 and 2010:

 

		December 31,
		2011				2010
Real estate		$	7,966,947			$	6,052,677
Agriculture			646,040				790,268
Commercial			253,941				3,529,504
Consumer			29,163				30,393
Total		$	8,896,091			$	10,402,842

An aging analysis of past due loans, including non-accrual loans at December 31, 2011 and 2010 is as follows:

December 31, 2011

 

		30-59 Days Past  Due				60-89 Days Past  Due				90+ Days Past  Due				Total Past Due				Current				Total Loans				Total Loans Accruing >90 Days
Real estate		$	856,833			$	6,414,843			$	1,638,074			$	8,909,750			$	795,351,005			$	804,260,755			$	37,138
Agriculture			13,197				—				70,000				83,197				42,383,253				42,466,450				—
Commercial			312,351				81,548				32,323				426,222				297,792,698				298,218,920				—
Consumer			194,626				10,445				4,863				209,934				66,733,834				66,943,768				—
Total		$	1,377,007			$	6,506,836			$	1,745,260			$	9,629,103			$	1,202,260,790			$	1,211,889,893			$	37,138

December 31, 2010

 

		30-59 Days Past Due				60-89 Days Past Due				90+ Days Past Due				Total Past Due				Current				Total Loans				Total Loans Accruing >90 Days
Real estate		$	2,010,828			$	1,004,968			$	1,808,261			$	4,824,057			$	733,142,214			$	737,966,271			$	—
Agriculture			8,189				21,148				592,562				621,899				46,503,722				47,125,621				—
Commercial			517,580				4,339				3,395,990				3,917,909				243,119,103				247,037,012				26,132
Consumer			150,364				30,099				2,739				183,202				67,715,060				67,898,262				—
Total		$	2,686,961			$	1,060,554			$	5,799,552			$	9,547,067			$	1,090,480,099			$	1,100,027,166			$	26,132

 

23

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

The Corporation maintains a loan review process that is carried out by the Loan Review Department (Department). The department is responsible for the review and classification of the loan portfolio under the internal risk rating system, to assist management in the identification of deterioration within the loan portfolio, and assessing the adequacy of the allowance for loan losses. The Department reports to the Audit and Compliance Committee of the Board of Directors for the Corporation. The Department assesses the adequacy of the allowance on a monthly basis. Management records, as determined, any needed charge offs or provisions on a monthly basis.

The Corporation through the Board of Directors and Management maintains a comprehensive set of loan underwriting standards supported by policies and procedures. Generally, all consumer loans are centrally underwritten. All other real estate, agricultural, and commercial loans are individually underwritten, risk rated, approved, and monitored.

Credit quality and trends in the portfolio are monitored regularly, and detailed reports are prepared and reviewed by management and the Board of Directors on a monthly basis. The Director Loan Committee of the Board of Directors meets generally twice a week with the respective loan officer to review and approve loan relationships greater than or equal to $750,000. Finally, the Loan Review Department provides ongoing independent oversight of the loan portfolio to ensure that policies and procedures over loan origination and monitoring are followed and that loans are risk rated properly.

Risk characteristics applicable to each segment of the loan portfolio are described as follows:

Real Estate—The real estate portfolio consists of residential, agricultural and commercial properties. The loans in this category are repaid primarily from the cash flow of the borrowers’ principal business operation, the sale of the real estate, or income independent of the loan purpose. Credit risk in these loans is driven by the creditworthiness of the borrower, property values, economic conditions in the oil and gas industry, and other economic conditions impacting the borrowers’ business or personal income.

Agriculture—The agriculture portfolio consists of lines of credit and term loans extended for the purpose of working capital and equipment purchases for borrowers engaged in farming operations. The loans in this category are repaid primarily from the cash flow of the farming operation. Credit risk in these loans is driven by commodity prices, weather, and creditworthiness of the borrower.

Commercial—The commercial portfolio includes commercial and industrial, representing loans to commercial customers for use in financing working capital needs, equipment purchases, and expansions. The loans in this category are repaid primarily from the cash flow of the borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of borrowers and the economic conditions that impact the cash flow stability from business operations.

Consumer—The consumer loan portfolio consists of various term and line of credit loans such as home equity, automobile and credit card. Repayment for these types of loans will come from the borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors such as unemployment and creditworthiness of the borrower.

The following describes the internal risk rating categories used in determining the credit quality of the portfolio. The categories are defined as follows:

 

•

Pass—the Corporation has three levels within this category to provide granularity between loans with exceptional (1); superior (2); and good overall (3) financial strength, stability and liquidity. Most loans in the pass category are at the third level.

 

•

Pass Watch—loans in this category require more frequent than normal management visibility due to one or more deficiencies that require monitoring.

 

24

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

•

Special Mention—loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Corporation’s credit position at some future date. Special mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

 

•

Substandard—loans in this category are inadequately protected by the current sound net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

 

•

Doubtful—loans in this category, on the basis of existing facts, conditions, and values have critical weaknesses that make collection or liquidation of the full principal balance highly questionable and improbable.

The following table is a breakdown of the loan portfolio by internal risk rating category as of December 31, 2011 and 2010:

 

December 31, 2011
		Real Estate				Agriculture				Commercial				Consumer				Total
Pass		$	721,902,575			$	32,838,604			$	250,611,920			$	57,590,122			$	1,062,943,221
Pass-Watch			44,768,518				8,246,505				16,969,866				7,803,815				77,788,704
Special Mention			3,225,579				262,790				12,237,378				—				15,725,747
Substandard			34,364,083				1,118,551				18,399,756				1,549,831				55,432,221
Doubtful			—				—				—				—				—
Total		$	804,260,755			$	42,466,450			$	298,218,920			$	66,943,768			$	1,211,889,893
December 31, 2010
		Real Estate				Agriculture				Commercial				Consumer				Total
Pass		$	652,596,147			$	36,455,982			$	179,702,508			$	67,536,865			$	936,291,502
Pass-Watch			59,170,600				7,065,166				28,281,312				290,541				94,807,619
Special Mention			7,106,997				1,388,982				23,616,651				25,079				32,137,709
Substandard			19,092,527				1,956,556				15,436,541				45,777				36,531,401
Doubtful			—				258,935				—				—				258,935
Total		$	737,966,271			$	47,125,621			$	247,037,012			$	67,898,262			$	1,100,027,166

At December 31, 2011 and 2010, the Corporation had six and three loan relationships, respectively, that qualified as troubled debt restructurings (TDR). The pre-modification recorded investment of the TDRs at December 31, 2011 and 2010 was $4,962,634 and $2,965,000, respectively, and the post modification recorded investment of the TDRs was $5,051,733 and $2,538,810, respectively. As of December 31, 2011 and 2010, there were no subsequent defaults related to these TDRs.

 

25

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

 

		2011				2010
Land		$	10,490,322			$	8,062,783
Buildings and leasehold improvements			30,889,817				29,231,804
Furniture, fixtures and equipment			33,271,330				31,992,083
			74,651,469				69,286,670
Less accumulated depreciation			(47,105,018	)			(43,698,477	)
Net premises and equipment		$	27,546,451			$	25,588,193

Note 6: Interest-bearing Deposits

At December 31, 2011, the scheduled maturities of time deposits are as follows:

 

2012		$	602,000,215
2013			48,885,029
2014			21,681,875
2015			8,593,498
2016			465,092
Thereafter			26
		$	681,625,735

Note 7: Securities Sold Under Repurchase Agreements

Securities sold under agreements to repurchase consist of obligations of the Corporation to other parties. The obligations are secured by U.S. agency and other securities and such collateral is held by a third-party safekeeping agent. The maximum amount of outstanding agreements at any month end during 2011 and 2010 totaled $335,800,000 and $268,200,000, respectively, and the monthly average of such agreements totaled $292,753,000 and $245,961,000 for 2011 and 2010, respectively. The agreements at December 31, 2011, mature within one day to 29 months.

Note 8: Income Taxes

The Corporation and its subsidiary file income tax returns in the U.S. federal jurisdiction and the state of Texas. The Corporation is not subject to U.S. federal tax examinations by tax authorities for years before 2008 and for state tax examinations for years before 2007.

The provision for income taxes includes these components:

 

		2011				2010				2009
Taxes currently payable		$	18,733,000			$	15,461,000			$	13,618,000
Deferred income taxes			(1,963,000	)			(189,000	)			(1,604,000	)
Income tax expense		$	16,770,000			$	15,272,000			$	12,014,000

 

 

26

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

A reconciliation of income tax expense at the statutory rate to the Corporation’s actual income tax expense is shown below:

 

		2011				2010				2009
Computed at the statutory rate 35%		$	20,611,000			$	17,954,000			$	14,400,000
Increase (decrease) resulting from
Tax exempt interest			(3,565,000	)			(3,221,000	)			(2,671,000	)
Increase in cash value of life insurance			(531,000	)			(664,000	)			(640,000	)
Other			255,000				1,203,000				925,000
Actual tax expense		$	16,770,000			$	15,272,000			$	12,014,000

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

 

		2011				2010
Deferred tax assets
Allowance for loan losses		$	8,575,000			$	6,458,000
Bank premises and equipment			367,000				403,000
Deferred compensation			2,774,000				2,647,000
Other			501,000				607,000
			12,217,000				10,115,000
Deferred tax liabilities
Unrealized gains on available-for-sale securities			6,311,000				1,107,000
Discount accretion on securities			1,504,000				1,518,000
Other			1,986,000				1,833,000
			9,801,000				4,458,000
Net deferred tax asset		$	2,416,000			$	5,657,000

Note 9: Other Comprehensive Income

Other comprehensive income components and related taxes were as follows:

 

		2011				2010				2009
Unrealized gains on available-for-sale securities		$	16,010,543			$	2,566,444			$	127,614
Less reclassification adjustment for realized gains included in income			(1,141,697	)			(1,009,374	)			(938,358	)
Other comprehensive income (loss) before tax effect			14,868,846				1,557,070				(810,744	)
Tax expense (benefit)			5,204,000				545,000				(259,000	)
Other comprehensive income (loss)		$	9,664,846			$	1,012,070			$	(551,744	)

 

27

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Note 10: Regulatory Matters

The Corporation (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Bank must meet specific capital guidelines that involve quantitative measures of the Corporation’s and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s and Bank’s capital amounts and classification 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 Corporation and Bank to maintain minimum amounts and ratios (set forth in the table on the following page) of total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I Capital to average assets (as defined). Management believes, as of December 31, 2011 and 2010, that the Corporation and Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2011, the most recent notification from the Bank’s regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Corporation’s and Bank’s actual capital amounts and ratios are also presented in the table.

 

		Actual								Minimum Ratios under Prompt Corrective Action Provisions to be:
										Adequately Capitalized								Well Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2011
Total Capital (to Risk Weighted Assets)
American State Financial Corporation		$	265,098,000				16.3	%		$	130,220,000				³8	%			N/A
American State Bank			261,407,000				16.1	%			130,007,000				³8	%		$	162,509,000				³10	%
Tier I Capital (to Risk Weighted Assets)
American State Financial Corporation			244,700,000				15.0	%			65,110,000				³4	%			N/A
American State Bank			241,042,000				14.8	%			65,003,000				³4	%			97,506,000				³6	%
Tier I Capital (to Average Assets)
American State Financial Corporation			244,700,000				8.2	%			120,136,000				³4	%			N/A
American State Bank			241,042,000				8.0	%			120,011,000				³4	%			150,014,000				³5	%
As of December 31, 2010
Total Capital (to Risk Weighted Assets)
American State Financial Corporation		$	242,688,000				17.6	%		$	110,206,000				³8	%			N/A
American State Bank			236,073,000				17.2	%			109,901,000				³8	%		$	137,376,000				³10	%
Tier I Capital (to Risk Weighted Assets)
American State Financial Corporation			225,453,000				16.4	%			55,103,000				³4	%			N/A
American State Bank			218,885,000				15.9	%			54,950,000				³4	%			82,426,000				³6	%
Tier I Capital (to Average Assets)
American State Financial Corporation			225,453,000				8.8	%			102,287,000				³4	%			N/A
American State Bank			218,885,000				8.6	%			102,121,000				³4	%			127,651,000				³5	%

 

28

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

There are certain regulatory guidelines on the amount of dividends that can be paid by the Bank to the Corporation and by the Corporation to its stockholders. These guidelines do not currently have a significant effect on the amount of dividends paid by either the Bank or the Corporation.

Note 11: Related Party Transactions

At December 31, 2011 and 2010, the Corporation had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties), in the amount of $592,000 and $929,000, respectively. In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

Deposits and securities sold under repurchase agreements from related parties held by the Corporation at December 31, 2011 and 2010, totaled $67,270,104 and $58,674,270, respectively.

Note 12: Employee Benefits

The Corporation has a discretionary noncontributory profit sharing plan covering substantially all employees. Employer contributions charged to expense for 2011, 2010 and 2009 were $2,100,000, $1,875,000 and $1,700,000, respectively.

The Corporation has a management security plan with certain officers whereby the Bank is beneficiary of key man life insurance policies on the officers’ lives. Under the plan, the officers will be provided specific amounts of annual retirement income. Generally, the officer or the designated beneficiary receives benefits for a period between 15 and 20 years to life. The present value of such retirement benefits is being accrued to the individual’s normal retirement date and totaled approximately $7,927,000 and $7,564,000 at December 31, 2011 and 2010, respectively. Such amounts are included in “other liabilities” in the consolidated balance sheets. The amounts charged to expense in 2011, 2010 and 2009 were approximately $744,000, $747,000 and $750,000, respectively.

Note 13: Stock Option Plans

The Corporation’s 1998 Qualified Incentive Stock Option Plan and the 1998 Non-Qualified Stock Option Plan (the Plans), which are approved by the board of directors and stockholders, permit the grant of share options and shares to its employees for up to 80,000 shares of common stock. The Plans provide for granting of options to buy common stock intended either to qualify as “incentive stock options” under the Internal Revenue Code or “non-statutory stock options” not intended to so qualify. Under the Plans, options expire 10 years following the date of grant. The purchase price of the shares under the Plans is equal to or greater than the fair market value of the shares at the time of the grant of the option.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The ability of the Corporation to grant options under the Plans has expired.

 

29

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

A summary of option activity under the Plans as of December 31, 2011, 2010 and 2009, and changes during the years then ended, is presented below:

 

						Weighted Average
		Shares				Exercise Price				Remaining Contractual Term (Years)
Outstanding at December 31, 2008			53,848			$	102				8.3
Exercised			(1,500	)			101
Forfeited or expired			—				—
Outstanding at December 31, 2009			52,348			$	102				7.2
Exercised			(22,148	)			101
Forfeited or expired			(250	)			105
Outstanding at December 31, 2010			29,950			$	103				6.4
Exercised			—				—
Forfeited or expired			(500	)			105
Outstanding at December 31, 2011			29,450			$	103				5.4
Exercisable at December 31, 2011			10,610

The total intrinsic value of options exercised during the years ended December 31, 2010 and 2009, was $283,000 and $53,300. There were no options exercised during the year ended December 31, 2011. As of December 31, 2011, the amount of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans was not considered material.

In 2010, the Corporation accelerated the vesting period on 23,748 shares of outstanding non-qualified stock options. Cash received from options exercised under the Plans for the year ended December 31, 2010, was $2,247,600. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $283,000 and $62,000 for the years ended December 31, 2010 and 2009. The Corporation issues shares from treasury stock to satisfy share option exercises.

Note 14: Disclosures about Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements, 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 at the measurement date. Topic 820 also specifies a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

 

 

30

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agency debt and mortgage-backed securities and securities issued by state and political subdivisions. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the financial institution industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Matrix pricing is utilized in the valuation of the U.S. government agency debt and mortgage-backed securities as well as securities issued by state and political subdivisions.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010:

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2011
Available-for-sale securities:
U.S. government agencies		$	245,916,559			$	—			$	245,916,559			$	—
Mortgage-backed securities			49,815,875				—				49,815,874				—
State and political subdivisions			32,487,965				—				32,487,965				—
		$	328,220,399			$	—			$	328,220,398			$	—
December 31, 2010
Available-for-sale securities:
U.S. Treasury securities		$	23,652,021			$	—			$	23,652,021			$	—
U.S. government agencies			206,177,475				—				206,177,475				—
Mortgage-backed securities			29,375,684				—				29,375,684				—
State and political subdivisions			26,542,628				—				26,542,628				—
		$	285,747,808			$	—			$	285,747,808			$	—

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents

The carrying amount approximates fair value.

 

31

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Held-to-maturity Securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Interest Receivable

The carrying amount approximates fair value.

Deposits

Deposits include demand deposits, savings accounts, interest-bearing demand accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Repurchase Agreements and Interest Payable

The carrying amount approximates fair value.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The carrying values and related fair values of commitments to originate loans, letters of credit and lines of credit were not material at December 31, 2011 and 2010.

 

		December 31, 2011								December 31, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets
Cash and cash equivalents		$	170,071,430			$	170,071,430			$	248,117,710			$	248,117,710
Held-to-maturity securities
U.S. government agencies			368,815,320				392,481,162				340,752,143				359,372,286
Mortgage-backed securities			600,210,892				617,246,390				339,770,902				351,506,335
State and political subdivisions			290,562,902				306,106,310				258,824,014				262,678,976
Loans, net of allowance for loan losses			1,187,389,893				1,191,251,000				1,081,577,166				1,092,672,000
Accrued interest receivable			17,350,559				17,350,559				15,823,248				15,823,248
Financial liabilities
Deposits			(2,459,528,682	)			(2,460,389,000	)			(2,157,096,370	)			(2,158,133,000	)
Short-term borrowings
Securities sold under repurchase agreements			(323,076,357	)			(323,076,357	)			(265,133,404	)			(265,133,404	)
Accrued interest payable			(362,907	)			(362,907	)			(603,689	)			(603,689	)

 

32

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Note 15: Loan Commitments and Credit Risk

The Corporation grants real estate, agribusiness and commercial (including oil and gas related) loans to customers primarily in the South Plains and West Texas areas of the State of Texas. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the real estate, agribusiness, oil and gas, healthcare and higher education economic sectors.

Loan Commitments

Commitments to originate loans and lines of 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. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount. Management does not anticipate any losses as a result of these transactions.

At December 31, 2011 and 2010, the Corporation had outstanding commitments to originate loans aggregating approximately $345,545,000 and $295,317,000, respectively.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Corporation be obligated to perform under the standby letters of credit, the Corporation may seek recourse from the customer for reimbursement of amounts paid. Management does not anticipate any losses as a result of these transactions.

The Corporation had total outstanding standby letters of credit amounting to $11,637,000 and $10,606,000, at December 31, 2011 and 2010, respectively, with terms ranging from one to 10 years.

Note 16: Leases and Contingencies

The Corporation has several non-cancellable operating leases, primarily for banking premises and equipment, that expire over the next several years. These leases generally contain renewal options for periods ranging from five to 40 years. Rental expense for these leases was $758,000, $836,000 and $909,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Future minimum lease payments under operating leases are:

 

2012		$	730,000
2013			658,000
2014			628,000
2015			555,000
2016			115,000
Thereafter			29,000
Total minimum lease payments		$	2,715,000

The Corporation is self-insured for employee medical claims up to a predetermined ceiling of $135,000 per employee. Monthly premiums are paid into an account from which claims are paid by the administrator of the plan. Total amounts charged to expense by the Corporation during the years ended December 31, 2011, 2010 and 2009 were approximately $2,497,000, $3,889,000 and $2,038,000, respectively.

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the financial statements.

Note 17: Parent Company Only Financial Statements

Condensed Balance Sheets

 

		2011				2010
Assets
Cash		$	1,650,019			$	3,413,153
Loans			2,612,061				3,761,671
Accrued interest receivable			13,428				11,246
Investment in American State Bank			276,054,566				244,282,401
Total assets		$	280,330,074			$	251,468,471
Liabilities and Stockholders’ Equity
Liabilities—Dividends Payable		$	617,521			$	618,949
Stockholders’ Equity
Common stock			40,246,250				40,246,250
Additional paid-in capital			41,695,500				41,665,500
Retained earnings			249,255,177				229,367,664
Accumulated other comprehensive income			11,718,891				2,054,045
			342,915,818				313,333,459
Treasury stock, at cost			(63,203,265	)			(62,483,937	)
Total stockholders’ equity			279,712,553				250,849,522
Total liabilities and stockholders’ equity		$	280,330,074			$	251,468,471

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Condensed Statements of Income

 

		2011				2010				2009
Income
Dividends from American State Bank		$	20,000,000			$	20,000,000			$	25,500,000
Interest income			98,980				104,012				82,649
Other income			577,584				5,175				7,850
Total income			20,676,564				20,109,187				25,590,499
Expenses
Compensation expense			92,181				783,406				392,804
Other expenses			551,005				165,470				178,314
Total expenses			643,186				948,876				571,118
Income Before Income Tax and Equity in Undistributed Net Income of American State Bank			20,033,378				19,160,311				25,019,381
Income Tax Expense (Benefit)			22,000				(143,000	)			(71,000	)
Income Before Equity in Undistributed Net Income of American State Bank			20,011,378				19,303,311				25,090,381
Equity in Undistributed Net Income of American State Bank			22,107,319				16,723,072				4,039,271
Net Income		$	42,118,697			$	36,026,383			$	29,129,652

Condensed Statements of Cash Flows

 

		2011				2010				2009
Operating Activities
Net income		$	42,118,697			$	36,026,383			$	29,129,652
Item not providing (requiring) cash:
Equity in undistributed net income of American State Bank			(22,107,319	)			(16,723,072	)			(4,039,271	)
Stock option compensation expense			30,000				716,000				340,000
Changes in:
Accrued interest and other assets			(3,610	)			6,689				14,229
Dividends payable and other liabilities			(1,428	)			2,661				(25,342	)
Net cash provided by operating activities			20,036,340				20,028,661				25,419,268
Financing Activities
Net change in loans			1,149,610				(1,306,396	)			419,594
Purchases of treasury stock			(719,328	)			(1,187,273	)			(13,199,047	)
Proceeds from sales of treasury stock			—				2,247,600				151,500
Dividends paid			(22,229,756	)			(19,811,828	)			(13,584,152	)
Net cash used in financing activities			(21,799,474	)			(20,057,897	)			(26,212,105	)
Net Decrease in Cash			(1,763,134	)			(29,236	)			(792,837	)
Cash, Beginning of Year			3,413,153				3,442,389				4,235,226
Cash, End of Year		$	1,650,019			$	3,413,153			$	3,442,389

 

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American State Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

 

Note 18: Subsequent Events

Subsequent events have been evaluated through February 7, 2012, which is the date the financial statements were available to be issued.

 

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