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8-K - FORM 8-K - PROSPERITY BANCSHARES INCd476781d8k.htm
EX-99.2 - UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL INFORMATION OF PROSPERITY - PROSPERITY BANCSHARES INCd476781dex992.htm

Exhibit 99.1

American State Financial Corporation

Consolidated Balance Sheet

June 30, 2012

(Unaudited)

Assets

 

     June 30, 2012  

Cash and due from banks

   $ 98,719,687   

Excess deposits with Federal Reserve and federal funds sold

     202,810,000   
  

 

 

 

Cash and cash equivalents

     301,529,687   
  

 

 

 

Available-for-sale securities

     1,523,199,921   
  

 

 

 

Loans

     1,252,603,594   

Less: Allowance for loan losses

     (26,000,000
  

 

 

 

Loans, net

     1,226,603,594   
  

 

 

 

Bank premises and equipment, net

     26,284,228   

Accrued interest receivable

     11,773,947   

Net deferred income taxes

     664,000   

Foreclosed assets held for sale, net

     1,232,004   

Goodwill

     23,252,610   

Bank owned life insurance

     54,417,133   

Other assets

     11,779,165   
  

 

 

 

Total assets

   $ 3,180,736,289   
  

 

 

 

See Notes to Consolidated Financial Statements.

 

1


American State Financial Corporation

Consolidated Balance Sheet

June 30, 2012

(Unaudited)

Liabilities and Stockholders’ Equity

 

     June 30, 2012  

Liabilities

  

Deposits

  

Demand - noninterest bearing

   $ 632,649,902   

Demand - interest bearing

     616,629,053   

Savings

     643,636,892   

Time deposits of $100,000 or more

     370,029,621   

Time deposits of less than $100,000

     232,706,519   
  

 

 

 

Total deposits

     2,495,651,987   

Securities sold under repurchase agreements

     318,692,009   

Accrued interest payable

     238,109   

Federal income taxes payable

     14,672,296   

Other liabilities

     30,464,880   
  

 

 

 

Total liabilities

     2,859,719,281   
  

 

 

 

Stockholders’ Equity

  

Common stock, $10 par value; authorized 10,000,000 shares; issued and outstanding 4,024,625 shares

     40,246,250   

Additional paid-in capital

     41,695,500   

Retained earnings

     274,642,388   

Accumulated other comprehensive income

     24,639,555   
  

 

 

 
     381,223,693   
  

 

 

 

Treasury stock, at cost

  

Common; 1,525,342 shares

     (60,206,685
  

 

 

 

Total stockholders’ equity

     321,017,008   
  

 

 

 

Total liabilities and stockholders’ equity

   $ 3,180,736,289   
  

 

 

 

See Notes to Consolidated Financial Statements.

 

2


American State Financial Corporation

Consolidated Statements of Income

Six-Month Periods Ended June 30, 2012 and 2011

(Unaudited)

 

     June 30, 2012      June 30, 2011  

Interest Income

     

Interest and fees on loans

   $ 32,159,028       $ 30,453,093   

Interest on investment securities

     

U.S. Government obligations

     10,349         132,894   

Other U.S. government agency obligations

     9,894,535         10,302,864   

State and political subdivision obligations

     5,165,999         4,933,823   

Mortgage-backed securities

     7,279,841         7,155,182   

Other

     89,383         93,353   

Interest on excess deposits with Federal Reserve and federal funds sold

     103,990         133,033   
  

 

 

    

 

 

 

Total interest income

     54,703,125         53,204,242   
  

 

 

    

 

 

 

Interest Expense

     

Interest on deposits

     4,295,298         6,635,495   

Interest on securities sold under repurchase agreements

     621,527         1,121,175   
  

 

 

    

 

 

 

Total interest expense

     4,916,825         7,756,670   
  

 

 

    

 

 

 

Net Interest Income

     49,786,300         45,447,572   

Provision for Loan Loss

     1,575,553         (2,481,736
  

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     48,210,747         47,929,308   
  

 

 

    

 

 

 

Noninterest Income

     

Service charges

     9,405,810         9,526,090   

Mortgage loan sales

     2,099,225         1,367,920   

Investment securities gains, net

     45,888,930         1,586,613   

Income from fiduciary duties

     1,910,944         1,777,479   

Other

     7,353,199         6,684,652   
  

 

 

    

 

 

 

Total noninterest income

     66,658,108         20,942,754   
  

 

 

    

 

 

 

Noninterest Expense

     

Salaries and employee benefits

     32,134,099         19,358,475   

Occupancy expense

     1,403,682         1,279,579   

Depreciation

     1,730,405         1,890,000   

Repairs and maintenance

     9,739,122         3,083,644   

Advertising and promotions

     3,148,638         1,582,041   

Federal Deposit Insurance Corporation premiums

     830,078         1,099,555   

Professional fees

     11,998,758         1,541,290   

Supplies, stationary and printing

     595,591         572,811   

Taxes other than on income and salaries

     518,475         504,950   

Other

     5,031,602         3,989,420   
  

 

 

    

 

 

 

Total noninterest expense

     67,130,450         34,901,765   
  

 

 

    

 

 

 

Income Before Income Taxes

     47,738,405         33,970,297   

Provision for Income Taxes

     16,115,000         9,985,000   
  

 

 

    

 

 

 

Net Income

   $ 31,623,405       $ 23,985,297   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

3


American State Financial Corporation

Consolidated Statements of Stockholders’ Equity

Six-Month Periods Ended June 30, 2012 and 2011

(Unaudited)

 

                            Accumulated Other              
    Common Stock    

Additional Paid-In

   

Retained

   

Comprehensive

    Treasury        
    Shares     Amount     Capital     Earnings     Income     Stock     Total  

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

          23,985,297            23,985,297   

Other comprehensive income, net of tax

             

Change in unrealized appreciation on available-for-sale securities, net of taxes

            1,554,599          1,554,599   
             

 

 

 

Total comprehensive income

                25,539,896   
             

 

 

 

Stock option compensation expense

        30,000              30,000   

Dividends on common stock, $0.50 per share

          (1,235,478         (1,235,478

Purchases of 5,637 shares of treasury stock

              (719,328     (719,328
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011 (unaudited)

    4,024,625        40,246,250        41,695,500        252,117,483        3,608,644        (63,203,265     274,464,612   

Comprehensive income

             

Net income

          18,133,400            18,133,400   

Other comprehensive income, net of tax

             

Change in unrealized appreciation on available-for-sale securities, net of taxes

            8,110,247          8,110,247   
             

 

 

 

Total comprehensive income

                26,243,647   
             

 

 

 

Dividends on common stock, $8.50 per share

          (20,995,706         (20,995,706
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   

Comprehensive income

             

Net income

          31,623,405            31,623,405   

Other comprehensive income, net of tax

             

Change in unrealized appreciation on available-for-sale securities, net of taxes

            12,920,664          12,920,664   
             

 

 

 

Total comprehensive income

                44,544,069   
             

 

 

 

Dividends on common stock, $2.50 per share

          (6,236,194         (6,236,194

Sales of 29,200 shares of treasury stock

              2,996,580        2,996,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012 (unaudited)

    4,024,625      $ 40,246,250      $ 41,695,500      $ 274,642,388      $ 24,639,555      $ (60,206,685   $ 321,017,008   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

4


American State Financial Corporation

Consolidated Statements of Cash Flows

Six-Month Periods Ended June 30, 2012 and 2011

(Unaudited)

 

     June 30, 2012     June 30, 2011  

Operating Activities

    

Net Income

   $ 31,623,405      $ 23,985,297   

Items not requiring (providing) cash

    

Depreciation

     1,730,405        1,890,000   

Deferred income taxes

     (5,205,000     (53,000

Provision (recovery) for loan losses

     1,575,553        (2,481,736

Net gain on sales of investment securities

     (45,888,930     (1,586,613

Loss (gain) on sales of foreclosed assets

     (9,454     282   

Write-down on foreclosed assets

     35,000        159,997   

Amortization of premium relating to investment securities, net

     7,663,311        4,175,003   

Gain on disposal of bank premises and equipment

     (93,809     (30,317

Stock option compensation expense

     —          30,000   

Changes in

    

Accrued interest receivable

     5,576,612        (501,778

Other assets

     (635,877     3,401,267   

Accrued interest payable

     (124,798     (180,355

Federal income taxes payable

     11,993,907        571,994   

Other liabilities

     14,752,410        651,402   
  

 

 

   

 

 

 

Net cash provided by operating activities

     22,992,735        30,031,443   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from maturities of held-to-maturity securities

     100,438,185        119,679,857   

Proceeds from maturities of available-for-sale securities

     16,427,878        17,947,454   

Proceeds from the sales of available-for-sale securities

     760,296,646        53,750,670   

Proceeds from the sales of held-to-maturity securities

     379,765,633        13,550,371   

Purchase of held-to-maturity securities

     (78,517,765     (53,329,425

Purchase of available-for-sale securities

     (1,055,697,703     (286,558,341

Net change in loans

     (41,866,254     (57,463,745

Proceeds from the sale of foreclosed assets

     111,454        253,718   

Expenditures for bank premises and equipment

     (944,543     (4,048,302

Proceeds from sales of bank premises and equipment

     570,170        38,253   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     80,583,701        (196,179,490
  

 

 

   

 

 

 

Financing Activities

    

Net increase in deposits

     36,123,305        38,557,207   

Net increase (decrease) in securities sold under repurchase agreements

     (4,384,348     14,726,555   

Proceeds from sales of treasury stock

     2,996,580        —     

Dividends paid

     (6,853,716     (1,236,907

Purchase of treasury stock

     —          (719,328
  

 

 

   

 

 

 

Net cash provided by financing activities

     27,881,821        51,327,527   
  

 

 

   

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

     131,458,257        (114,820,520

Cash and Cash Equivalents, Beginning of Year

     170,071,430        248,117,710   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 301,529,687      $ 133,297,190   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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.

 

6


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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 June 30, 2012. As discussed in Note 2, the Corporation transferred all remaining held-to-maturity securities to available-for-sale during the six month period ended June 30, 2012. The Corporation had no held-to-maturity securities at June 30, 2012. 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.

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 six month periods ended June 30, 2012 and 2011.

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 six month periods ended June 30, 2012 and 2011. 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.

 

7


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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 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.

 

8


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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.

Treasury Stock

Common stock shares repurchased are recorded at cost.

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 June 30, 2012 and 2011, a valuation allowance was not considered necessary.

 

9


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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.

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.

 

10


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

Note 2: Securities

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

 

     Amortized Cost      Gross
Unrealized
Gain
     Gross
Unrealized
Losses
    Approximate
Fair  Value
 

Available-for-sale

          

June 30, 2012

          

U.S. treasury securities

   $ 524,959,434       $ —         $ —        $ 524,959,434   

U.S. agency securities

     4,224,103         340,719         —          4,564,822   

Mortgage-backed securities

     626,194,695         20,152,956         (514,115     645,833,536   

State and political subdivisions

     329,914,134         18,211,742         (283,747     347,842,129   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,485,292,366       $ 38,705,417       $ (797,862   $ 1,523,199,921   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of available-for-sale securities at June 30, 2012, 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  
     Amortized Cost      Fair Value  

Within one year

   $ 539,511,294       $ 539,629,622   

One to five years

     108,837,910         113,052,390   

Five to ten years

     336,026,367         351,230,895   

After ten years

     500,916,795         519,287,014   
  

 

 

    

 

 

 

Totals

   $ 1,485,292,366       $ 1,523,199,921   
  

 

 

    

 

 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $919,628,414 at June 30, 2012, and $850,933,564 at June 30, 2011.

Gross gains of $22,540,337 and $2,281,116 and gross losses of ($1,970) and ($1,261,737) resulting from sales of available-for-sale securities were realized for the six months ended June 30, 2012 and 2011, respectively.

Year-to-date June 30, 2012, the Corporation sold a total of $356,415,070 of held-to-maturity securities for $379,765,633, resulting in a realized gain of $23,350,563. Year-to-date June 30, 2011, the Corporation sold a total $12,983,137 of held-to-maturity securities for $13,550,371, resulting in a realized gain of $567,234.

 

11


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

The sales of held-to-maturity securities during the six month period ended June 30, 2011 were permissible under investment accounting guidance as the Corporation had collected greater than 85% of the principal outstanding at acquisition. The sales of held-to-maturity securities during the six month period ended June 30, 2012 did not qualify for one of the exceptions in investment accounting guidance. As a result, the Corporation reclassified all remaining held-to-maturity securities as available-for-sale as of June 30, 2012. The carrying amount of securities transferred from held-to-maturity to available-for-sale was $864,059,515 and the fair value of the securities was $899,819,382. Unrealized gains of $35,759,867 related to the securities were recorded in other comprehensive income during the six month period ended June 30, 2012.

Certain investments in debt securities have fair values that are less than their historical cost. Total fair value of these investments at June 30, 2012 was $82,553,429, which is approximately 5% of the Corporation’s available-for-sale 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 June 30, 2012:

 

     June 30, 2012  
     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):

               

Mortgage-backed securities

   $ 58,125,916       $ (514,115   $ —         $ —        $ 58,125,916       $ (514,115

State and political subdivisions

     18,815,344         (215,076     5,612,169         (68,671     24,427,513         (283,747
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired AFS securities

   $ 76,941,260       $ (729,191   $ 5,612,169       $ (68,671   $ 82,553,429       $ (797,862
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

12


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

Note 3: Loans and Allowance for Loan Losses

Categories of loans at June 30, 2012 include:

 

Real Estate:

  

Residential

   $ 206,033,511   

Agriculture

     52,898,523   

Construction

     70,027,187   

Commercial

     504,753,556   

Agriculture

     51,508,231   

Commercial and Industrial

     305,163,161   

Consumer

  

Credit Cards

     7,980,588   

Other

     54,238,837   
  

 

 

 

Total Loans

     1,252,603,594   

Less

  

Allowance for Loan Losses

     26,000,000   
  

 

 

 
   $ 1,226,603,594   
  

 

 

 

Management believes that the current level of allowance for loan losses is an adequate estimate of probable losses within the loan portfolio at June 30, 2012. 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.

 

13


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

The following table shows an analysis of the allowance for loan losses by portfolio segment for the six month period ended June 30, 2012:

 

     Real Estate     Agriculture     Commercial     Consumer     Unallocated     Total  

Beginning Balance

   $ 8,533,462      $ 408,413      $ 5,496,780      $ 403,132      $ 9,658,213      $ 24,500,000   

Provision for Loan Losses

     3,989,858        (9,488     336,826        (71,967     (2,669,676     1,575,553   

Loan Losses:

            

Charge offs

     (238,000     (3,000     (53,000     (33,923     —          (327,923

Recoveries

     114,000        72,000        51,000        15,370        —          252,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Losses

   $ (124,000   $ 69,000      $ (2,000   $ (18,553   $ —        $ (75,553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 12,399,320      $ 467,925      $ 5,831,606      $ 312,612      $ 6,988,537      $ 26,000,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portion of Allowance Ending Balance Allocated to:

            

Individually Evaluated for Impairment

   $ 3,729,126      $ —        $ 2,739,837      $ 65,849      $ —        $ 6,534,812   

Collectively Evaluated for Impairment

     8,670,194        467,925        3,091,769        246,763        6,988,537        19,465,188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 12,399,320      $ 467,925      $ 5,831,606      $ 312,612      $ 6,988,537      $ 26,000,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portion of Loans Ending Balance Allocated to:

            

Individually Evaluated for Impairment

   $ 9,614,779      $ 87,724      $ 11,414,768      $ 327,447      $ —        $ 21,444,718   

Collectively Evaluated for Impairment

     824,097,998        51,420,507        293,748,393        61,891,978        —          1,231,158,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 833,712,777      $ 51,508,231      $ 305,163,161      $ 62,219,425      $ —        $ 1,252,603,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows an analysis of the allowance for loan losses in total for the six month period ended June 30, 2011:

 

     Total  

Beginning Balance as of December 31, 2010

   $ 18,450,000   

Provision for Loan Losses

     (2,481,736

Loan Losses:

  

Charge offs

     (670,926

Recoveries

     3,152,662   
  

 

 

 

Net Loan Losses

   $ 2,481,736   
  

 

 

 

Ending Balance as of June 30, 2011

   $ 18,450,000   
  

 

 

 

As needed, management may also increase or decrease the unallocated portion of the allowance for loan losses based upon economic conditions within one or several sectors of the loan portfolio. Additions or reductions of this nature are not allocated to any one loan or category of loans. During the six month period ended June 30, 2012, management recorded approximately $2,670,000 in such general reserve reductions. A large portion of these reductions were made due to the allocation of the general reserve to specific loans.

 

14


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

The following table shows the balance of all impaired loans at June 30, 2012:

 

     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

   $ 10,071,313       $ 797,951       $ 8,816,828       $ 9,614,779       $ 3,729,126       $ 9,729,875       $ 38,332   

Agriculture

     103,661         21,351         66,373         87,724         —           87,724         —     

Commercial

     11,394,797         —           11,414,768         11,414,768         2,739,837         11,486,624         312,189   

Consumer

     364,571         —           327,447         327,447         65,849         331,808         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,934,342       $ 819,302       $ 20,625,416       $ 21,444,718       $ 6,534,812       $ 21,636,031       $ 350,521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 charge offs.

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 June 30, 2012:

 

Real Estate

   $  10,839,823   

Agriculture

     127,258   

Commercial

     11,523,663   

Consumer

     21,106   
  

 

 

 

Total

   $ 22,511,850   
  

 

 

 

 

15


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

An aging analysis of past due loans, including non-accrual loans, at June 30, 2012 is as follows:

 

     30-89
Days Past  Due
     90+
Days Past  Due
     Total Past Due      Current      Total Loans      Total Loans
Accruing
>90 Days
 

Real Estate

   $ 2,925,972       $ 503,546       $ 3,429,518       $ 830,283,259       $ 833,712,777       $ —     

Agriculture

     —           87,724         87,724       $ 51,420,507         51,508,231         —     

Commercial

     286,176         —           286,176       $ 304,876,985         305,163,161         —     

Consumer

     848,048         2,132         850,180       $ 61,369,245         62,219,425         2,132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,060,196       $ 593,402       $ 4,653,598       $ 1,247,949,996       $ 1,252,603,594       $ 2,132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

16


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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.

 

   

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.

 

17


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

The following table is a breakdown of the loan portfolio by internal risk rating category as of June 30, 2012:

 

     Real Estate      Agriculture      Commercial      Consumer      Total  

Pass

   $ 757,456,673       $ 45,679,036       $ 269,030,623       $ 62,032,803       $ 1,134,199,135   

Pass-Watch

     28,053,272         4,318,258         21,379,859         76,477         53,827,866   

Special Mention

     8,267,006         1,340,630         335,379         —           9,943,015   

Substandard

     39,935,826         170,307         14,417,300         110,145         54,633,578   

Doubtful

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 833,712,777       $ 51,508,231       $ 305,163,161       $ 62,219,425       $ 1,252,603,594   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, the Corporation had six loan relationships that qualified as troubled debt restructurings (TDR). The premodification recorded investment of the TDRs at June 30, 2012 was $4,962,634, and the post modification recorded investment of the TDRs was $4,783,913. As of June 30, 2012, there were no subsequent defaults related to these TDRs.

 

18


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

Note 4: 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.

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.

 

19


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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 June 30, 2012:

 

             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)
 

June 30, 2012

           

Available-for-sale securities:

           

U.S. Treasury securities

   $ 524,959,434       $ —         $ 524,959,434       $ —     

U.S. government agencies

     4,564,822         —           4,564,822         —     

Mortgage-backed securities

     645,833,536         —           645,833,536         —     

State and political subdivisions

     347,842,129         —           347,842,129         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,523,199,921       $ —         $ 1,523,199,921       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheet at June 30, 2012 at amounts other than fair value.

Cash and Cash Equivalents

The carrying amount approximates fair value.

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.

 

20


American State Financial Corporation

Notes to Consolidated Financial Statements

June 30, 2012 and 2011

(Unaudited)

 

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 June 30, 2012.

 

     Carrying
Amount
    Fair Value  

Financial assets

    

Cash and cash equivalents

   $ 301,529,687      $ 301,529,687   

Loans, net of allowance for loan losses

     1,226,603,594        1,227,997,000   

Accrued interest receivable

     11,773,947        11,773,947   

Financial liabilities

    

Deposits

     (2,495,651,987     (2,494,711,000

Short-term borrowings

    

Securities sold under repurchase agreements

     (318,692,009     (318,692,009

Accrued interest payable

     (238,109     (238,109

 

21