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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34605
OMNIAMERICAN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
     
Maryland   27-0983595
     
(State or Other Jurisdiction of   (I.R.S. Employer Identification No.)
Incorporation or Organization)    
     
1320 S. University Drive, Fort Worth, Texas   76107
     
(Address of Principal Executive Offices)   (Zip Code)
(817) 367-4640
 
(Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 11,272,375 shares of Common Stock, par value $0.01 per share, issued and outstanding as of November 4, 2011.
 
 

 

 


 

         
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
 
               
Cash and due from financial institutions
  $ 15,668     $ 12,842  
Short-term interest-earning deposits in other financial institutions
    15,430       11,755  
 
           
Total cash and cash equivalents
    31,098       24,597  
 
               
Investments:
               
Securities available for sale
    527,768       317,806  
Other
    13,577       3,060  
Loans held for sale
    975       861  
 
               
Loans, net of deferred fees and discounts
    673,970       669,357  
Less allowance for loan losses
    (8,489 )     (8,932 )
 
           
Loans, net
    665,481       660,425  
Premises and equipment, net
    45,118       47,665  
Bank-owned life insurance
    20,796       20,078  
Other real estate owned
    9,318       14,793  
Mortgage servicing rights
    1,180       1,242  
Deferred tax asset, net
    1,212       6,935  
Accrued interest receivable
    3,869       3,469  
Other assets
    6,765       7,488  
 
           
 
               
Total assets
  $ 1,327,157     $ 1,108,419  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Deposits:
               
Noninterest-bearing
  $ 75,602     $ 74,583  
Interest-bearing
    730,320       726,575  
 
           
Total deposits
    805,922       801,158  
 
               
Federal Home Loan Bank advances
    247,000       41,000  
Other secured borrowings
    58,000       58,000  
Accrued expenses and other liabilities
    14,188       9,634  
 
           
Total liabilities
    1,125,110       909,792  
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Common stock, par value $0.01 per share; 100,000,000 shares authorized; 11,272,375 shares issued and outstanding at September 30, 2011 and 11,902,500 shares issued and outstanding at December 31, 2010
    113       119  
Additional paid-in capital
    106,588       115,470  
Unallocated Employee Stock Ownership Plan (“ESOP”) shares; 885,546 shares at September 30, 2011 and 914,112 shares at December 31, 2010
    (8,856 )     (9,141 )
Retained earnings
    94,981       92,212  
Accumulated other comprehensive income (loss):
               
Unrealized gain on securities available for sale, net of income taxes
    10,409       1,155  
Unrealized loss on pension plan, net of income taxes
    (1,188 )     (1,188 )
 
           
Total accumulated other comprehensive income (loss)
    9,221       (33 )
 
           
Total stockholders’ equity
    202,047       198,627  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 1,327,157     $ 1,108,419  
 
           
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                               
Interest income:
                               
Loans, including fees
  $ 9,806     $ 10,705     $ 29,696     $ 32,022  
Securities — taxable
    3,886       2,831       10,974       8,106  
Securities — nontaxable
          6             31  
 
                       
Total interest income
    13,692       13,542       40,670       40,159  
 
                               
Interest expense:
                               
Deposits
    1,755       2,393       5,603       7,269  
Borrowed funds
    1,519       1,183       4,256       3,280  
 
                       
Total interest expense
    3,274       3,576       9,859       10,549  
 
                       
 
                               
Net interest income
    10,418       9,966       30,811       29,610  
 
                               
Provision for loan losses
    550       2,750       1,550       5,000  
 
                       
 
                               
Net interest income after provision for loan losses
    9,868       7,216       29,261       24,610  
 
                       
 
                               
Noninterest income:
                               
Service charges and other fees
    2,280       2,578       7,047       7,747  
Net gains on sales of loans
    380       455       563       1,080  
Net gains on sales and calls of securities available for sale
          13       11       104  
Net losses on sales of premises and equipment
    (1 )           (6 )      
Net losses on sales of repossessed assets
    (413 )     (40 )     (391 )     (15 )
Commissions
    246       162       615       483  
Increase in cash surrender value of bank-owned life insurance
    242             718        
Other income
    159       283       658       747  
 
                       
Total noninterest income
    2,893       3,451       9,215       10,146  
 
                               
Noninterest expense:
                               
Salaries and benefits
    5,815       4,971       17,457       16,013  
Software and equipment maintenance
    596       575       1,803       2,200  
Depreciation of furniture, software and equipment
    638       793       2,136       2,384  
FDIC insurance
    190       434       863       1,282  
Net loss on write-down of other real estate owned
    714       48       2,226       67  
Real estate owned expense
    176       255       387       567  
Service fees
    125       150       374       548  
Communications costs
    230       165       694       637  
Other operations expense
    868       941       2,745       2,740  
Occupancy
    911       917       2,675       2,844  
Professional and outside services
    823       989       2,459       2,831  
Loan servicing
    94       71       311       199  
Marketing
    130       201       446       669  
 
                       
Total noninterest expense
    11,310       10,510       34,576       32,981  
 
                       
 
                               
Income before income tax expense
    1,451       157       3,900       1,775  
Income tax expense (benefit)
    418       (44 )     1,131       434  
 
                       
Net income
  $ 1,033     $ 201     $ 2,769     $ 1,341  
 
                       
 
                               
Earnings per share:
                               
Basic
  $ 0.10     $ 0.02     $ 0.26     $ 0.11 (1)
 
                       
Diluted
  $ 0.10     $ 0.02     $ 0.26     $ 0.11 (1)
 
                       
     
(1)   The Company completed its mutual to stock conversion on January 20, 2010. The earnings per share for the nine months ended September 30, 2010 is calculated as if the conversion had been completed prior to January 1, 2010.
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(Dollars in thousands, except share data)
                                                 
                                    Accumulated        
            Additional     Unallocated             Other     Total  
    Common     Paid-in     ESOP     Retained     Comprehensive     Stockholders’  
    Stock     Capital     Shares     Earnings     Income (Loss)     Equity  
 
Balances at January 1, 2011
  $ 119     $ 115,470     $ (9,141 )   $ 92,212     $ (33 )   $ 198,627  
ESOP shares allocated, 28,566 shares
          138       285                   423  
Stock purchased at cost, 630,125 shares
    (6 )     (9,179 )                       (9,185 )
Share-based compensation expense
          159                         159  
Comprehensive income:
                                               
Net income
                      2,769             2,769  
Change in fair value of securities available for sale, net of reclassification to earnings of $(11) and income tax effect of $4,767
                            9,254       9,254  
 
                                             
Total comprehensive income
                                            12,023  
 
                                   
 
                                               
Balances at September 30, 2011
  $ 113     $ 106,588     $ (8,856 )   $ 94,981     $ 9,221     $ 202,047  
 
                                   
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flow (Unaudited)
(In thousands)
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
Cash flows from operating activities:
               
Net income
  $ 2,769     $ 1,341  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    3,349       3,632  
Provision for loan losses
    1,550       5,000  
Amortization of net premium on investments
    2,895       1,651  
Amortization and impairment of mortgage servicing rights
    322       294  
Net gains on sales of securities available for sale
    (11 )     (104 )
Net gains on sales of loans
    (563 )     (1,080 )
Proceeds from sales of loans held for sale
    7,370       11,915  
Loans originated for sale
    (7,484 )     (12,100 )
Net losses on write-down of other real estate owned
    2,226       67  
Net losses on sales of premises and equipment
    6        
Net losses on sales of repossessed assets
    391       15  
Increase in cash surrender value of bank-owned life insurance
    (718 )      
Federal Home Loan Bank stock dividends
    (18 )     (12 )
ESOP compensation expense
    423       325  
Share-based compensation
    159        
Changes in operating assets and liabilities:
               
Accrued interest receivable
    (400 )     (231 )
Other assets
    1,380       5,499  
Accrued interest payable and other liabilities
    4,554       7,566  
 
           
Net cash provided by operating activities
    18,200       23,778  
 
               
Cash flows from investing activities:
               
Securities available for sale:
               
Purchases
    (340,814 )     (231,383 )
Proceeds from sales
    71,782       1,734  
Proceeds from maturities, calls and principal repayments
    70,207       79,892  
Purchases of other investments
    (11,105 )      
Redemptions of other investments
    606       258  
Purchases of loans held for investment
          (1,108 )
Net increase in loans held for investment
    (32,980 )     (19,468 )
Proceeds from sales of loans held for investment
    22,634       37,892  
Purchases of premises and equipment
    (838 )     (1,045 )
Proceeds from sales of premises and equipment
    30        
Proceeds from sales of foreclosed assets
    1,944       1,569  
Proceeds from sales of other real estate owned
    5,256       2,421  
 
           
Net cash used in investing activities
    (213,278 )     (129,238 )
 
               
Cash flows from financing activities:
               
Net increase (decrease) in deposits
    4,764       (110,095 )
Net increase (decrease) in Federal Home Loan Bank advances
    206,000       (15,400 )
Net increase in other secured borrowings
          75  
Proceeds from issuance of common stock
          106,004  
Purchase of common stock
    (9,185 )      
 
           
Net cash provided by (used in) financing activities
    201,579       (19,416 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    6,501       (124,876 )
Cash and cash equivalents, beginning of period
    24,597       140,144  
 
           
Cash and cash equivalents, end of period
  $ 31,098     $ 15,268  
 
           
 
               
Supplemental cash flow information:
               
Interest paid
  $ 9,790     $ 10,398  
Non-cash transactions:
               
Loans transferred to other real estate owned
  $ 2,417     $ 6,916  
Loans transferred to foreclosed assets
  $ 1,886     $ 1,369  
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements
NOTE 1 — Basis of Financial Statement Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of OmniAmerican Bancorp, Inc. (referred to herein as “the Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2011. In management’s opinion, the interim data as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. References to the Company include, where appropriate, OmniAmerican Bank.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments are particularly subject to change.
NOTE 2 — Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, which was codified as ASC Topic 820, “Fair Value Measurements and Disclosures.” The guidance requires companies to disclose transfers in and out of levels 1 and 2, and to expand the reconciliation of level 3 fair value measurements by presenting separately information about purchases, sales, issuances and settlements. The updated guidance also clarifies existing disclosure requirements on the level of disaggregation (provide fair value measurement disclosures for each class of assets and liabilities) and inputs and valuation techniques (disclose for fair value measurements that fall in either level 2 or level 3). This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the reconciliation of level 3 fair value measurements. Those disclosures are effective for periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of the amendments in this update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered to be a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The guidance in this ASU is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires that additional information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. As a result, companies must disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a rollforward of the allowance for loan losses, the related recorded investment in such loans, the non-accrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU No. 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The additional disclosures required under this ASU have been included in Note 4 — Loans and Allowance for Loan Losses.
In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. ASU 2011-02 is effective for periods ending on or after December 15, 2011, for loan modifications that occur on or after September 1, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2011, the FASB issued ASU No. 2011-03, “Transfer and Servicing: Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for the periods beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820, and requires additional fair value disclosures. ASU 2011-04 is effective for periods beginning after December 15, 2011. The amendments in this update are to be applied prospectively and early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of stockholders’ equity and requires that all nonowner changes in stockholders’ equity be 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. ASU 2011-05 is effective for periods beginning after December 15, 2011. The amendments in this update are to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
NOTE 3 — Investment Securities
The amortized cost and estimated fair values of investment securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of September 30, 2011 and December 31, 2010 were as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
    (In thousands)  
September 30, 2011
                               
U. S. government sponsored mortgage-backed securities
  $ 258,529     $ 7,559     $     $ 266,088  
U. S. government sponsored collateralized mortgage obligations
    248,468       7,949       (6 )     256,411  
Other equity securities
    5,000       269             5,269  
 
                       
Total investment securities available for sale
  $ 511,997     $ 15,777     $ (6 )   $ 527,768  
 
                       
 
                               
December 31, 2010
                               
U. S. government sponsored mortgage-backed securities
  $ 150,678     $ 4,614     $ (678 )   $ 154,614  
U. S. government sponsored collateralized mortgage obligations
    149,336       1,914       (458 )     150,792  
Private-label collateralized mortgage obligations (residential)
    3,349       47             3,396  
Trust preferred securities
    7,693             (3,773 )     3,920  
Other equity securities
    5,000       84             5,084  
 
                       
Total investment securities available for sale
  $ 316,056     $ 6,659     $ (4,909 )   $ 317,806  
 
                       

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Investment securities available for sale with gross unrealized losses at September 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, were as follows:
                                                 
    Continuous Unrealized Losses Existing for        
    Less Than 12 Months     Greater Than 12 Months     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (In thousands)  
September 30, 2011
                                               
U. S. government sponsored collateralized mortgage obligations
  $     $     $ 1,128     $ (6 )   $ 1,128     $ (6 )
 
                                   
 
  $       $       $ 1,128     $ (6 )   $ 1,128     $ (6 )
 
                                   
 
                                               
December 31, 2010
                                               
U. S. government sponsored mortgage-backed securities
  $ 40,582     $ (678 )   $     $     $ 40,582     $ (678 )
U. S. government sponsored collateralized mortgage obligations
    36,704       (458 )                 36,704       (458 )
Trust preferred securities
                3,920       (3,773 )     3,920       (3,773 )
 
                                   
 
  $ 77,286     $ (1,136 )   $ 3,920     $ (3,773 )   $ 81,206     $ (4,909 )
 
                                   
At September 30, 2011, the Company owned 205 investments of which one had an unrealized loss. At December 31, 2010, the Company owned 238 investments of which 39 had unrealized losses. Unrealized losses generally result from interest rate levels differing from those existing at the time of purchase of the securities and, as to mortgage-backed securities, estimated prepayment speeds. These unrealized losses are considered to be temporary as they reflect fair values on September 30, 2011 and December 31, 2010, and are subject to change daily as interest rates fluctuate. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell prior to recovery. Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to sell or whether it would be more likely than not required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
The amortized cost and fair value of securities available for sale by contractual maturity at September 30, 2011 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or earlier redemptions that may occur.
                 
    Amortized Cost     Fair Value  
    (In thousands)  
Due in one year or less
  $     $  
Due from one to five years
    566       566  
Due from five to ten years
    15,519       16,407  
Due after ten years
    490,912       505,526  
Equity securities
    5,000       5,269  
 
           
Total
  $ 511,997     $ 527,768  
 
           

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Investment securities with an amortized cost of $443.8 million and $242.5 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure Federal Home Loan Bank advances. In addition, investment securities with a fair value of $63.7 million and $66.2 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure other borrowings.
Sales activity of securities available for sale for the three and nine months ended September 30, 2011 and 2010 was as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
Proceeds from sales of investment securities
  $     $     $ 71,782     $ 1,734  
Gross gains from sales of investment securities
                2,922       91  
Gross losses from sales of investment securities
                (2,911 )      
Proceeds from calls of investment securities
          19,395             22,595  
Gross gains from calls of investment securities
          13             13  
Gains or losses on the sales of securities are recognized at the trade date utilizing the specific identification method.

 

9


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
NOTE 4 — Loans and Allowance for Loan Losses
The composition of the loan portfolio was as follows at the dates indicated:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Residential Real Estate Loans:
               
One- to four-family
  $ 263,803     $ 271,792  
Home equity
    22,496       26,670  
 
           
Total residential real estate loans
    286,299       298,462  
 
           
 
               
Commercial Loans:
               
Commercial real estate
    87,341       87,887  
Real estate construction
    46,918       34,502  
Commercial business
    40,510       48,733  
 
           
Total commercial loans
    174,769       171,122  
 
           
 
               
Consumer Loans:
               
Automobile, indirect
    170,383       156,708  
Automobile, direct
    23,365       24,523  
Unsecured
    12,944       13,416  
Other
    5,199       5,287  
 
           
Total consumer loans
    211,891       199,934  
 
           
 
               
Total loans
    672,959       669,518  
 
           
 
               
Plus (less):
               
Deferred fees and discounts
    1,011       (161 )
Allowance for loan losses
    (8,489 )     (8,932 )
 
           
Total loans receivable, net
  $ 665,481     $ 660,425  
 
           
The Company originates one- to four-family residential real estate loans which are sold in the secondary market. The Company retains the servicing for residential real estate loans that are sold to the Federal National Mortgage Association (“FNMA”). Residential real estate loans serviced for FNMA are not included as assets on the consolidated balance sheets. The principal balances of the loans sold at September 30, 2011 and December 31, 2010 were $131.3 million and $122.5 million, respectively. Mortgage servicing rights associated with the mortgage loans serviced for FNMA totaled $1.2 million at September 30, 2011 and December 31, 2010.

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The following table presents loans identified as impaired by class of loans as of September 30, 2011 and December 31, 2010:
                                         
            Unpaid             Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Balance     Balance     Allowance     Balance     Recognized  
    (In thousands)  
September 30, 2011
                                       
With no related allowance recorded:
                                       
One- to four-family
  $ 6,412     $ 6,412     $     $ 5,845     $ 162  
Home equity
    510       510             318       2  
Commercial real estate
    11,967       11,967             12,703       189  
Real estate construction
                      239        
Commercial business
    1,559       1,559             1,448       45  
Automobile, indirect
    407       407             428       17  
Automobile, direct
    82       82             103       6  
Unsecured
    5       5             5       1  
Other consumer
                             
 
                             
Impaired loans with no related allowance recorded
    20,942       20,942             21,089       422  
 
                             
With an allowance recorded:
                                       
One- to four-family
  $ 3,217     $ 3,217     $ 131     $ 3,247     $ 88  
Home equity
                             
Commercial real estate
                             
Real estate construction
    8,900       8,900       951       10,107       181  
Commercial business
    1,658       1,658       1,242       1,645       16  
Automobile, indirect
                             
Automobile, direct
                             
Unsecured
                             
Other consumer
                             
 
                             
Impaired loans with an allowance recorded
    13,775       13,775       2,324       14,999       285  
 
                             
 
                                       
Total
  $ 34,717     $ 34,717     $ 2,324     $ 36,088     $ 707  
 
                             
 
                                       
December 31, 2010
                                       
With no related allowance recorded:
                                       
One- to four-family
  $ 5,045     $ 5,045     $     $ 4,732     $ 276  
Home equity
    210       210             222       13  
Commercial real estate
    9,241       9,241             10,441       141  
Real estate construction
    1,126       1,126             590       36  
Commercial business
    1,296       1,296             1,372       77  
Automobile, indirect
    628       628             748       46  
Automobile, direct
    123       123             180       18  
Unsecured
    6       6             6       1  
Other consumer
    1       1             1        
 
                             
Impaired loans with no related allowance recorded
    17,676       17,676             18,292       608  
 
                             
With an allowance recorded:
                                       
One- to four-family
  $ 3,272     $ 3,272     $ 131     $ 3,306     $ 85  
Home equity
                             
Commercial real estate
                             
Real estate construction
    10,352       10,352       701       1,546       24  
Commercial business
    2,025       2,025       1,477       978       46  
Automobile, indirect
                             
Automobile, direct
                             
Unsecured
                             
Other consumer
                             
 
                             
Impaired loans with an allowance recorded
    15,649       15,649       2,309       5,830       155  
 
                             
 
                                       
Total
  $ 33,325     $ 33,325     $ 2,309     $ 24,122     $ 763  
 
                             
As of September 30, 2011 and December 31, 2010, no additional funds were committed to be advanced in connection with impaired loans.

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The following table presents the recorded investment in non-accrual loans by class of loans as of September 30, 2011 and December 31, 2010:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Residential Real Estate Loans:
               
One- to four-family
  $ 2,109     $ 2,294  
Home equity
    477       230  
Commercial Loans
               
Commercial real estate
    5,765       5,587  
Real estate construction
    863        
Commercial business
    2,271       1,051  
Consumer Loans:
               
Automobile, indirect
    158       78  
Automobile, direct
          11  
 
           
Total
  $ 11,643     $ 9,251  
 
           
There were no loans greater than 90 days past due that continued to accrue interest at September 30, 2011 or December 31, 2010.
The following table presents the aging of the recorded investment in past due loans as of September 30, 2011 and December 31, 2010 by class of loans:
                                                 
                    Greater                    
    30-59     60-89     than                    
    Days     Days     90 Days     Total     Loans Not        
    Past Due     Past Due     Past Due     Past Due     Past Due     Total  
    (In thousands)  
September 30, 2011
                                               
Residential real estate loans:
                                               
One- to four-family
  $     $ 801     $ 2,109     $ 2,910     $ 260,893     $ 263,803  
Home equity
    10       8       477       495       22,001       22,496  
Commercial loans:
                                               
Commercial real estate
          50       233       283       87,058       87,341  
Real estate construction
    364                   364       46,554       46,918  
Commercial business
    41                   41       40,469       40,510  
Consumer loans:
                                               
Automobile, indirect
    1,319       419       158       1,896       168,487       170,383  
Automobile, direct
    41       16             57       23,308       23,365  
Unsecured
    63       44             107       12,837       12,944  
Other
    8       1             9       5,190       5,199  
 
                                   
 
                                               
Total loans
  $ 1,846     $ 1,339     $ 2,977     $ 6,162     $ 666,797     $ 672,959  
 
                                   

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
                                                 
                    Greater                    
    30-59     60-89     than                    
    Days     Days     90 Days     Total     Loans Not        
    Past Due     Past Due     Past Due     Past Due     Past Due     Total  
    (In thousands)  
December 31, 2010
                                               
Residential real estate loans:
                                               
One- to four-family
  $ 2,499     $     $ 2,294     $ 4,793     $ 266,999     $ 271,792  
Home equity
    46             230       276       26,394       26,670  
Commercial loans:
                                               
Commercial real estate
    4,105       149       1,568       5,822       82,065       87,887  
Real estate construction
                            34,502       34,502  
Commercial business
          359             359       48,374       48,733  
Consumer loans:
                                               
Automobile, indirect
    1,434       204       78       1,716       154,992       156,708  
Automobile, direct
    45       9       11       65       24,458       24,523  
Unsecured
    96       40             136       13,280       13,416  
Other
    78                   78       5,209       5,287  
 
                                   
 
                                               
Total loans
  $ 8,303     $ 761     $ 4,181     $ 13,245     $ 656,273     $ 669,518  
 
                                   
Our methodology for evaluating the adequacy of the allowance for loan losses consists of:
    a specific loss component which is the allowance for impaired loans and
 
    a general loss component for all other loans not individually evaluated for impairment but that, on a portfolio basis, are believed to have some inherent but unidentified loss.
The specific component of the allowance for loan losses relates to loans that are considered impaired, which are generally classified as doubtful or substandard. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Company 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, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous loans, including one- to four-family residential real estate loans with balances in excess of $1 million, commercial real estate, real estate construction, and commercial business 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 homogeneous loans are collectively evaluated for impairment. Accordingly, consumer and one- to four-family residential real estate loans with balances less than $1 million are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.

 

13


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The general component of the allowance for loan losses covers unimpaired loans and is based on the historical loss experience adjusted for other qualitative factors. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss potential characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio. The other qualitative factors considered by management include, but are not limited to, the following:
    changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
 
    changes in national and local economic and business conditions and developments, including the condition of various market segments;
 
    changes in the nature and volume of the loan portfolio;
 
    changes in the experience, ability, and depth of knowledge of the management of the lending staff;
 
    changes in the trend of the volume and severity of past due and classified loans; and trends in the volume of non-accrual loans, troubled debt restructurings, and other loan modifications;
 
    changes in the quality of our loan review system and the degree of oversight by the board of directors;
 
    the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
 
    the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current portfolio.
Consumer loans generally have greater risk of loss or default than one- to four-family residential real estate loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles, or loans that are unsecured. In these cases, a risk exists that the collateral, if any, for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the ability to recover on consumer loans.
Commercial real estate loans generally have greater credit risks compared to one- to four-family residential real estate loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Commercial business loans involve a greater risk of default than residential real estate loans of like duration since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of collateral, if any. Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential real estate loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Real estate construction loans generally have greater credit risk than traditional one- to four-family residential real estate loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event a loan is made on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Real estate construction loans also expose the Company to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
When establishing the allowance for loan losses, management categorizes loans into risk categories based on the class of loans — residential real estate, commercial or consumer — and relevant information about the ability of the borrowers to repay the loans, such as the current economic conditions, historical payment experience, the nature and volume of the loan portfolio, the financial strength of the borrower and the estimated value of any underlying collateral, among other factors. Management classifies the loans individually analyzed for impairment as to credit risk. This analysis includes residential real estate loans with an outstanding balance in excess of $1 million and non-homogeneous loans, such as commercial real estate, real estate construction, and commercial business loans. The following definitions for the credit risk ratings are used for such loans:
Special mention. Special mention loans 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 asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Substandard. Substandard loans have well defined weaknesses where a payment default and/or a loss is possible, but not yet probable. Loans so classified are inadequately protected by the current net worth and repayment capacity of the obligor or of the collateral pledged, if any. If deficiencies are not corrected quickly, there is a possibility of loss.
Doubtful. Doubtful loans have the weaknesses and characteristics of Substandard loans, but the available information suggests that collection or liquidation in its entirety, on the basis of currently existing facts, conditions and values, is highly improbable. The possibility of a loss is exceptionally high, but certain identifiable contingencies could possibly arise (proposed merger, acquisition, capital injection, refinancing plans, and pledging of additional collateral) that may strengthen the loan, such that it is reasonable to defer its classification as a loss until a more exact status is determined.
Loans not meeting the criteria described above are considered to be pass-rated loans. The following table presents the risk category of loans by class for loans individually analyzed for impairment as of September 30, 2011 and December 31, 2010:
                                         
    Commercial Real     Real Estate     Commercial     One- to Four-        
    Estate     Construction     Business     Family     Total  
    (In thousands)  
September 30, 2011:
                                       
Pass
  $ 70,636     $ 38,007     $ 33,493     $ 19,149     $ 161,285  
Special Mention
    1,225             84             1,309  
Substandard
    15,480       8,911       6,933       3,217       34,541  
Doubtful
                             
 
                             
 
  $ 87,341     $ 46,918     $ 40,510     $ 22,366     $ 197,135  
 
                             
 
                                       
December 31, 2010:
                                       
Pass
  $ 67,237     $ 23,024     $ 35,848     $ 24,282     $ 150,391  
Special Mention
    4,940             4,377             9,317  
Substandard
    15,710       11,478       8,508       3,272       38,968  
Doubtful
                             
 
                             
 
  $ 87,887     $ 34,502     $ 48,733     $ 27,554     $ 198,676  
 
                             

 

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Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The Company classifies residential real estate loans that are not analyzed individually for impairment (less than $1 million) as prime or subprime. The Company defines a subprime residential real estate loan as any loan to a borrower who has no credit score or a credit score of less than 661 along with at least one of the following at the time of funding:
    Two or more 30 day delinquencies in the past 12 months;
 
    1 or more 60 day delinquencies in the past 24 months;
 
    Bankruptcy filing within the past 60 months;
 
    Judgment or unpaid charge-off of $500,000 or more in the last 24 months; and
 
    Foreclosure or repossession in the past 24 months.
All other residential real estate loans not individually analyzed for impairment are classified as prime.
The following table presents the prime and subprime residential real estate loans collectively evaluated for impairment as of September 30, 2011 and December 31, 2010:
                         
    One-to              
    Four-     Home        
    Family     Equity     Total  
    (In thousands)  
September 30, 2011:
                       
Prime
  $ 200,564     $ 21,967     $ 222,531  
Subprime
    40,873       529       41,402  
 
                 
 
  $ 241,437     $ 22,496     $ 263,933  
 
                 
 
                       
December 31, 2010:
                       
Prime
  $ 206,277     $ 25,879     $ 232,156  
Subprime
    37,961       791       38,752  
 
                 
 
  $ 244,238     $ 26,670     $ 270,908  
 
                 
The Company evaluates consumer loans based on the credit score for each borrower when the loan is originated. The Company defines a subprime consumer loan as any loan to a borrower who has a credit score of less than 660 at the time of funding. The following table presents the credit score for each of the classes of consumer loans as of September 30, 2011 and December 31, 2010:
                                             
        Automobile,     Automobile,                    
Risk Tier   Credit Score   indirect     direct     Unsecured     Other     Total  
    (In thousands)  
September 30, 2011:
                                           
A
  720+   $ 73,598     $ 17,778     $ 9,738     $ 4,303     $ 105,417  
B
  690–719     45,865       2,471       1,799       395       50,530  
C
  660–689     33,885       1,741       992       348       36,966  
D
  659 and under     17,035       1,375       415       153       18,978  
 
                                 
 
      $ 170,383     $ 23,365     $ 12,944     $ 5,199     $ 211,891  
 
                                 
 
                                           
December 31, 2010:
                                           
A
  720+   $ 81,868     $ 18,853     $ 10,233     $ 4,510     $ 115,464  
B
  690–719     39,006       2,557       1,638       363       43,564  
C
  660–689     23,762       1,646       1,103       272       26,783  
D
  659 and under     12,072       1,467       442       142       14,123  
 
                                 
 
      $ 156,708     $ 24,523     $ 13,416     $ 5,287     $ 199,934  
 
                                 

 

16


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The following table presents the activity in the allowance for loan losses by portfolio segment based on impairment method for the three and nine months ended September 30, 2011 and 2010:
                                 
    Residential                    
    Real Estate     Commercial     Consumer     Total  
    (In thousands)  
September 30, 2011:
                               
Allowance for loan losses for the three months ended:
                               
Beginning balance
  $ 1,311     $ 4,268     $ 3,059     $ 8,638  
Charge-offs
    (71 )     (241 )     (505 )     (817 )
Recoveries of loans previously charged-off
    12       8       98       118  
Provision for loan losses
    (80 )     338       292       550  
 
                       
Ending balance
  $ 1,172     $ 4,373     $ 2,944     $ 8,489  
 
                       
 
                               
Allowance for loan losses for the nine months ended:
                               
Beginning balance
  $ 1,365     $ 4,901     $ 2,666     $ 8,932  
Charge-offs
    (161 )     (422 )     (1,760 )     (2,343 )
Recoveries of loans previously charged-off
    13       68       269       350  
Provision for loan losses
    (45 )     (174 )     1,769       1,550  
 
                       
Ending balance
  $ 1,172     $ 4,373     $ 2,944     $ 8,489  
 
                       
 
                               
Ending balance attributable to loans:
                               
Individually evaluated for impairment
  $ 131     $ 2,193     $     $ 2,324  
Collectively evaluated for impairment
    1,041       2,180       2,944       6,165  
 
                       
Total ending balance
  $ 1,172     $ 4,373     $ 2,944     $ 8,489  
 
                       
 
                               
September 30, 2010:
                               
Allowance for loan losses for the three months ended:
                               
Beginning balance
  $ 1,776     $ 3,808     $ 2,419     $ 8,003  
Charge-offs
    (290 )     (649 )     (603 )     (1,542 )
Recoveries of loans previously charged-off
    1       9       85       95  
Provision for loan losses
    264       1,909       577       2,750  
 
                       
Ending balance
  $ 1,751     $ 5,077     $ 2,478     $ 9,306  
 
                       
 
                               
Allowance for loan losses for the nine months ended:
                               
Beginning balance
  $ 1,477     $ 4,000     $ 2,851     $ 8,328  
Charge-offs
    (380 )     (2,316 )     (1,600 )     (4,296 )
Recoveries of loans previously charged-off
    2       15       257       274  
Provision for loan losses
    652       3,378       970       5.000  
 
                       
Ending balance
  $ 1,751     $ 5,077     $ 2,478     $ 9,306  
 
                       
 
                               
Ending balance attributable to loans:
                               
Individually evaluated for impairment
  $ 131     $ 2,777     $     $ 2,908  
Collectively evaluated for impairment
    1,620       2,300       2,478       6,398  
 
                       
Total ending balance
  $ 1,751     $ 5,077     $ 2,478     $ 9,306  
 
                       

 

17


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The Company’s recorded investment in loans as of September 30, 2011, December 31, 2010 and September 30, 2010 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology is as follows:
                                 
    Residential                    
    Real Estate     Commercial     Consumer     Total  
    (In thousands)  
September 30, 2011:
                               
Loans individually evaluated for impairment
  $ 10,139     $ 24,084     $ 494     $ 34,717  
Loans collectively evaluated for impairment
    276,160       150,685       211,397       638,242  
 
                       
Total ending balance
  $ 286,299     $ 174,769     $ 211,891     $ 672,959  
 
                       
 
                               
December 31, 2010:
                               
Loans individually evaluated for impairment
  $ 8,527     $ 24,040     $ 758     $ 33,325  
Loans collectively evaluated for impairment
    289,935       147,082       199,176       636,193  
 
                       
Total ending balance
  $ 298,462     $ 171,122     $ 199,934     $ 669,518  
 
                       
 
                               
September 30, 2010:
                               
Loans individually evaluated for impairment
  $ 8,256     $ 19,742     $ 109     $ 28,107  
Loans collectively evaluated for impairment
    285,582       158,586       204,970       649,138  
 
                       
Total ending balance
  $ 293,838     $ 178,328     $ 205,079     $ 677,245  
 
                       
A loan is considered a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in the interest rate at less than a current market rate of interest or an extension of a loan’s stated maturity date. Loans classified as TDR’s are designated as impaired.
A summary of the Company’s loans classified as TDRs at September 30, 2011 and December 31, 2010 is presented below:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
TDR
               
Residential Real Estate
  $ 8,325     $ 8,362  
Commercial
    21,149       10,211  
Consumer
    336       923  
 
           
Total TDR
  $ 29,810     $ 19,496  
Less:
               
TDR in non-accrual status
               
Residential Real Estate
  $ 773     $ 325  
Commercial
    6,774       5,671  
Consumer
          1  
 
           
Total performing TDR
  $ 22,263     $ 13,499  
 
           

 

18


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The Company may grant concessions through a number of different restructuring methods. The following table presents the outstanding principal balance of loans by class and by method of concession that were the subject of a TDR during the three and nine months ended September 30, 2011:
                                 
    Residential                    
    Real Estate     Commercial     Consumer     Total  
    (In thousands)  
For the three months ended September 30, 2011:
                               
Interest rate reduction
  $     $     $ 25     $ 25  
Loan maturity extension
          350             350  
Forbearance
                       
Principal reduction
                11       11  
 
                       
Total
  $     $ 350     $ 36     $ 386  
 
                       
 
                               
For the nine months ended September 30, 2011:
                               
Interest rate reduction
  $ 127     $ 11,329     $ 41     $ 11,497  
Loan maturity extension
          1,427       3       1,430  
Forbearance
    646       408             1,054  
Principal reduction
                24       24  
 
                       
Total
  $ 773     $ 13,164     $ 68     $ 14,005  
 
                       
The following table presents the number of loans modified and the balances before and after modification for the nine months ended September 30, 2011:
                         
            Pre-Modification     Post-Modification  
    Number of     Outstanding     Outstanding  
    Loans     Recorded Balance     Recorded Balance  
    (Dollar amounts in thousands)  
Residential Real Estate
    3     $ 810     $ 810  
Commercial
    9       14,867       14,867  
Consumer
    7       81       76  
 
                 
Total
    19     $ 15,758     $ 15,753  
 
                 
TDR loans which had payment defaults during the nine months ended September 30, 2011, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.
                 
    Number of     Recorded  
    Loans     Balance  
    (In thousands)  
Residential Real Estate
    2     $ 646  
Commercial
    2       793  
Consumer
           
 
           
Total
    4     $ 1,439  
 
           
Included in the impaired loans as of September 30, 2011 were TDRs of $29.8 million. The Company has allocated $1.6 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2011. As of September 30, 2011, no additional funds were committed to be advanced in connection with TDRs.

 

19


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The Company’s other real estate owned and foreclosed assets represent properties and personal collateral acquired through customer loan defaults. The property is recorded at fair value less the estimated costs to sell at the date acquired. Any difference between the book value and estimated market value is recognized as a charge-off through the allowance for loan losses. Subsequently, should the fair market value of an asset less the estimated cost to sell decline to less than the carrying amount of the asset, the deficiency is recognized in the period in which it becomes known and is included in noninterest expense.
At September 30, 2011 and December 31, 2010, the Company had balances in non-performing assets consisting of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (Dollar amounts in thousands)  
Other real estate owned and foreclosed assets
               
Residential Real Estate
  $ 1,773     $ 2,196  
Commercial
    7,545       12,597  
Consumer
    169       207  
 
           
Total other real estate owned and foreclosed assets
    9,487       15,000  
Total non-accrual loans
    11,643       9,251  
 
           
Total non-performing assets
  $ 21,130     $ 24,251  
 
           
Non-performing loans/Total loans
    1.73 %     1.38 %
Non-performing assets/Total assets
    1.59 %     2.19 %
NOTE 5 — Other Secured Borrowings
On July 24, 2007, the Company entered into a sale of securities under agreement to repurchase (“Repurchase Agreement”) with PNC Bank, N.A. (“PNC”). The Repurchase Agreement is structured as the sale of a specified amount of identified securities to PNC which the Company has agreed to repurchase five years after the initial sale. The Repurchase Agreement is treated as financing and the obligation to repurchase securities sold is included in other secured borrowings in the consolidated balance sheets. The underlying securities continue to be carried as assets of the Company and the Company is entitled to receive interest and principal payments on the underlying securities. The Company had $58.0 million in repurchase agreements outstanding at September 30, 2011 and December 31, 2010. These repurchase agreements were secured by investment securities with a fair value of $63.7 million and $66.2 million at September 30, 2011 and December 31, 2010, respectively.
NOTE 6 — Contingent Liabilities
In August 2011, the Chapter 11 Trustee for Taylor, Bean & Whitaker filed a complaint against the Company seeking to recover payments totaling $1.5 million made by Taylor, Bean & Whitaker to the Company as allegedly preferential transfers paid to the Company during the 90 days preceding the filing of the bankruptcy petition of Taylor, Bean & Whitaker. The Company asserts that the payments do not constitute preferences and has engaged outside legal counsel to assist in the matter. At the present time, the Company cannot determine the probability of a material adverse result or reasonably estimate a range of potential exposures, if any.
Aside from the litigation discussed above, the Company is involved in routine legal actions that are considered ordinary routine litigation incidental to the business of the Company. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a materially adverse effect on the Company’s financial condition, results of operations or cash flows.
NOTE 7 — Employee Benefit Plans
Employee Stock Ownership Plan
OmniAmerican Bank adopted an Employee Stock Ownership Plan (“ESOP”) effective January 1, 2010. The ESOP enables all eligible employees of the Bank to share in the growth of the Company through the acquisition of Company common stock. Employees are generally eligible to participate in the ESOP after completion of one year of service and attaining age 21.
The ESOP purchased eight percent of the shares sold in the initial public offering of the Company (952,200 shares). This purchase was facilitated by a note payable to the Company from the ESOP in the amount of $9.5 million. The note is secured by a pledge of the ESOP shares. The shares pledged as collateral are reported as unallocated ESOP shares in the accompanying consolidated balance sheets. The corresponding note is to be paid back in 25 approximately equal annual payments of $561,000 on the last day of each fiscal year, beginning December 31, 2010, including interest at an adjustable rate equal to the Wall Street Journal prime rate (3.25% as of September 30, 2011 and December 31, 2010). The note payable and the corresponding note receivable have been eliminated for consolidation purposes.

 

20


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The Company may make discretionary contributions to the ESOP in the form of debt service. If dividends are received on the unallocated ESOP shares they would be utilized to service the debt. Shares are released for allocation to plan participants based on principal and interest payments of the note. Compensation expense is recognized based on the number of shares allocated to plan participants each year and the average market price of the stock for the current year. Released ESOP shares become outstanding for earnings per share computations.
As compensation expense is incurred, the unallocated ESOP shares account is reduced based on the original cost of the stock. The difference between the cost and average market price of shares released for allocation is applied to additional paid-in capital. Compensation expense recognized from the release of shares from the ESOP was $423,000 and $325,000 for the nine months ended September 30, 2011 and 2010, respectively.
The ESOP shares as of September 30, 2011 were as follows:
         
Allocated shares
    66,654  
Unearned shares
    885,546  
 
     
Total ESOP shares
    952,200  
 
       
Fair value of unearned shares (in thousands)
  $ 12,088  
Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Pension Plan”) that provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and compensation levels at retirement. Effective December 31, 2006, the Company froze benefits under the Pension Plan, so that no further benefits would be earned by employees after that date. In addition, no new participants may be added to the Pension Plan after December 31, 2006.
The net periodic pension cost for the three and nine months ended September 30, 2011 and 2010 includes the following components:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Interest cost on projected benefit obligation
  $ 63     $ 60     $ 187     $ 179  
Expected return on assets
    (63 )     (48 )     (188 )     (144 )
Amortization of net loss
    16       19       49       58  
 
                       
Net periodic pension cost
  $ 16     $ 31     $ 48     $ 93  
 
                       
Share-Based Compensation
At its annual meeting held May 24, 2011, the Company’s shareholders approved the OmniAmerican Bancorp, Inc. 2011 Equity Incentive Plan (the “Plan”) which provides for the grant of stock-based and other incentive awards to officers, employees and directors of the Company. The Plan provides the board or a committee thereof with the flexibility to award no less than half the eligible awards, constituting 7% of the shares issued in the Company’s initial public offering, in the form of stock options and up to 7% of the shares issued in the initial public offering in the form of restricted stock. By resolution by the board of directors, the board confirmed that restricted stock awards will not exceed 4% of the common stock sold in the Company’s initial public offering. Pursuant to board resolution, 1,190,250 options to purchase shares of common stock and 476,100 restricted shares of common stock were made available. Share-based compensation expense for the three and nine months ended September 30, 2011 was $117,000 and $160,000, respectively.

 

21


Table of Contents

OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Restricted Stock
Compensation expense for restricted stock is recognized over the vesting period of the awards based on the fair value of the stock at grant date, which is determined using the last sale price as quoted on the NASDAQ Stock Market. Awarded shares to employees vest at a rate of 20% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Awarded shares to Directors vest at a rate of 33.3% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Under the terms of the Plan, awarded shares are restricted as to transferability and may not be sold, assigned, or transferred prior to vesting. The vesting period is subject to acceleration of vesting upon a change in control of the Company or upon the termination of the award recipient’s service due to death or disability. Total restricted shares issuable pursuant to board resolution are 476,100 at September 30, 2011, of which 118,738 shares had been issued under the Plan through September 30, 2011.
A summary of changes in the Company’s nonvested restricted shares for the nine months ended September 30, 2011 follows:
                 
            Weighted-  
            Average Grant  
            Date Fair Value  
    Shares     Per Share  
Non-vested at January 1, 2011
        $  
Granted
    118,738       14.15  
Vested
           
Forfeited
           
 
           
 
               
Non-vested at September 30, 2011
    118,738     $ 14.15  
 
             
As of September 30, 2011, the Company had $936,000 of unrecognized compensation expense related to non-vested shares of restricted stock awarded under the Plan. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 3.54 years. At the grant date, the Company applied an estimated forfeiture rate of 33.91% to employees’ and 3.33% to Directors’ shares based on the historical turnover rates.
Stock Options
Under the terms of the Plan, stock options may not be granted with an exercise price less than the fair market value of the Company’s common stock on the date the option is granted and may not be exercised later than ten years after the grant date. The fair market value is the last sale price as quoted on the NASDAQ Stock Market on the date of grant. All stock options granted must vest over at least three and not over five years, subject to acceleration of vesting upon a change in control, death or disability.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option in effect at the time of the grant. Although the contractual term of the stock options granted is 10 years, the expected term of the stock options is less because option restrictions do not permit recipients to sell or hedge their options. Management believes these restrictions encourage exercise of the option before the end of the contractual term. The Company does not have sufficient historical information about its own employees’ vesting behavior; therefore, the expected term of stock options is estimated using the average of the vesting period and contractual term. The Company does not have sufficient historical information about its own stock volatility; therefore the expected volatility is based on an average volatility of peer banks.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The weighted average fair value of each stock option granted during the nine months ended September 30, 2011 was $5.64. The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
         
Risk-free interest rate
    2.30 %
Expected term of stock options — for officers and employees (years)
    7.50  
 
       
Expected term of stock options — for Directors (years)
    6.50  
Expected stock price volatility
    32.94 %
Expected dividends
    0 %
Forfeiture rate — for officers and employees
    33.91 %
Forfeiture rate — for Directors
    3.33 %
A summary of activity in the stock option portion of the Plan for the nine months ended September 30, 2011 follows:
                                 
                    Weighted-        
                    Average        
            Weighted     Remaining     Aggregate  
            Average     Contractual Term     Intrinsic  
    Shares     Exercise Price     (years)     Value  
 
                               
Outstanding at January 1, 2011
        $           $  
Granted
    373,552       14.15       9.71        
Exercised
                       
Forfeited
                       
 
                           
Outstanding at September 30, 2011
    373,552     $ 14.15       9.71     $  
 
                           
 
                               
Fully vested and expected to vest
    183,950     $ 14.15       9.71     $  
 
                           
 
                               
Exercisable at September 30, 2011
        $           $  
 
                           
As of September 30, 2011, the Company had $972,000 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 4.04 years. The intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the market price of our common stock as of September 30, 2011.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
NOTE 8 — Earnings Per Share
The table below presents the information used to compute basic and diluted earnings per share:
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2011  
    (Dollars in thousands, except per share data)  
 
               
Basic
               
Earnings:
               
Net income
  $ 1,033     $ 2,769  
 
           
 
               
Shares:
               
Weighted average common shares outstanding
    11,454,290       11,702,117  
Less: Average unallocated ESOP shares
    (888,720 )     (899,829 )
 
           
Average shares for basic earnings per share
    10,565,570       10,802,288  
 
           
 
               
Net income per common share, basic
  $ 0.10     $ 0.26  
 
           
 
               
Diluted
               
Earnings:
               
Net income
  $ 1,033     $ 2,769  
 
           
 
               
Shares:
               
Weighted average common shares outstanding for basic earnings per common share
    10,565,570       10,802,288  
Add: Dilutive effects of share-based compensation plan
    4,338       2,839  
 
           
Average shares for diluted earnings per share
    10,569,908       10,805,127  
 
           
 
               
Net income per common share, diluted
  $ 0.10     $ 0.26  
 
           

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2010     September 30, 2010(1)  
    (Dollars in thousands, except per share data)  
 
               
Basic and diluted
               
Earnings:
               
Net income
  $ 201     $ 1,341  
 
           
 
               
Shares:
               
Weighted average common shares outstanding
    11,902,500       11,902,500  
Less: Average unallocated ESOP shares
    (926,808 )     (936,330 )
 
           
Average shares
    10,975,692       10,966,170  
 
           
 
               
Net income per common share, basic and diluted
  $ 0.02     $ 0.11  
 
           
 
     
(1)   The Company completed its mutual to stock conversion on January 20, 2010. The earnings per share for the nine months ended September 30, 2010 is calculated as if the conversion had been completed prior to January 1, 2010.
NOTE 9 — Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures,” establishes 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 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
    Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
 
    Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy, is set forth below.
Securities available for sale are valued at fair value on a recurring basis. The fair values of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Level 3 investments consisted of trust preferred securities, at December 31, 2010, which are issued by financial institutions and insurance companies. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. There are currently very few market participants who are willing and/or able to transact for these securities.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized below:
                                 
          Total Fair Value at  
    Fair Value Measurements at September 30, 2011, Using     September 30, 2011  
    Level 1 Inputs     Level 2 Inputs     Level 3 Inputs        
    (In thousands)  
Measured on a recurring basis:
                               
Assets:
                               
U. S. government sponsored mortgage-backed securities
  $     $ 266,088     $     $ 266,088  
U. S. government sponsored collateralized mortgage obligations
          256,411             256,411  
Other equity securities
          5,269             5,269  
 
                               
                                 
          Total Fair Value at  
    Fair Value Measurements at December 31, 2010, Using     December 31, 2010  
    Level 1 Inputs     Level 2 Inputs     Level 3 Inputs        
    (In thousands)  
Measured on a recurring basis:
                               
Assets:
                               
U.S. government sponsored mortgage-back securities
  $     $ 154,614     $     $ 154,614  
U.S. government sponsored collateralized mortgage obligations
          150,792             150,792  
Private-label collateralized mortgage obligations (residential)
          3,396             3,396  
Trust preferred securities
                3,920       3,920  
Other equity securities
          5,084             5,084  

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
The table below presents a reconciliation and income statement classification of gains and losses for trust preferred securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2011:
         
    Securities  
    Available for Sale  
    (In thousands)  
 
       
Beginning balance, January 1, 2011
  $ 3,920  
Sale of trust preferred securities
    (7,673 )
Total gains or losses (realized / unrealized):
       
Included in earnings:
       
Loss on sales of securities available for sale
    2,911  
Included in other comprehensive income
       
Change in unrealized gain on securities available for sale
    862  
Interest income on securities
    2  
Settlements
    (22 )
 
     
Ending balance, September 30, 2011
  $  
 
     
The table below presents a reconciliation and income statement classification of gains and losses for trust preferred securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010:
         
    Securities  
    Available for Sale  
    (In thousands)  
 
       
Beginning balance, January 1, 2010
  $ 5,604  
Total gains or losses (realized / unrealized):
       
Included in other comprehensive income
       
Change in unrealized gain on securities available for sale
    (218 )
Interest income on securities
    17  
Settlements
    (65 )
 
     
Ending balance, September 30, 2010
  $ 5,338  
 
     
No changes in unrealized gains or losses were recorded through earnings for the nine months ended September 30, 2010 for the assets measured using significant unobservable inputs (Level 3 Inputs).
In accordance with ASC Topic 820, certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets or liabilities required to be measured at fair value on a nonrecurring basis include impaired loans and mortgage servicing rights.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. A significant portion of the Company’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. Therefore, the Company has categorized its impaired loans as Level 3. The following table presents impaired loans that were remeasured and reported at fair value through a specific reserve of the allowance for loan losses based upon the fair value of the underlying collateral during the nine months ended September 30, 2011 and 2010.
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands)  
 
               
Carrying value of impaired loans
  $ 9,085     $ 8,169  
Specific reserve
    (1,492 )     (2,598 )
 
           
Fair Value
  $ 7,593     $ 5,571  
 
           
Mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. The estimated fair values of mortgage servicing rights are obtained through independent third-party valuations through an analysis of cash flows, incorporating estimates of assumptions market participants would use in determining fair value, including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market-driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. At September 30, 2011 and December 31, 2010 the Company’s mortgage servicing rights were recorded at $1.2 million.
Non-financial assets measured at fair value on a non-recurring basis are limited to other real estate owned. Other real estate owned is carried at fair value less estimated selling costs (as determined by independent appraisal) within Level 3 of the fair value hierarchy. At the time of foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. The fair value is reviewed periodically and subsequent write downs are recorded accordingly. The following table represents other real estate that was remeasured and reported at fair value as of September 30, 2011 and December 31, 2010.
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
 
               
Carrying value of other real estate owned prior to remeasurement
  $ 16,721     $ 13,590  
Less: charge-offs recognized in the allowance for loan losses at initial acquisition
    (234 )     (2,168 )
Less: subsequent write-downs included in net loss on write-down of other real estate owned
    (2,226 )     (128 )
Less: sales of other real estate owned
    (5,667 )     (2,913 )
 
           
Carrying value of remeasured other real estate owned at end of period
  $ 8,594     $ 8,381  
 
           
The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for the other financial assets and financial liabilities are discussed below:
Cash and cash equivalents: The carrying amounts for cash and cash equivalents approximate fair values.
Accrued interest receivable and payable: The carrying amounts for accrued interest receivable and payable approximate fair values.

 

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OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)
Other investments: The carrying amount for other investments, which consist primarily of Federal Home Loan Bank stock, approximates fair values.
Loans: The estimated fair value for all fixed rate loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities. The estimated fair value for variable rate loans is the carrying amount. The impact of delinquent loans on the estimation of the fair values described above is not considered to have a material effect and, accordingly, delinquent loans have been disregarded in the valuation methodologies employed.
Deposits: The estimated fair value of demand deposit accounts is the carrying amount. The fair value of fixed-maturity certificates is estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued.
Borrowed Funds: The estimated fair value for borrowed funds is determined by discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar ratings and maturities.
Off-balance sheet financial instruments: The fair values for the Company’s off-balance sheet commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the members. The estimated fair value of these commitments is not significant.
The carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2011 and December 31, 2010 were summarized as follows:
                                 
    September 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
    (In thousands)  
Financial assets:
                               
Cash and cash equivalents
  $ 31,098     $ 31,098     $ 24,597     $ 24,597  
Securities available for sale
    527,768       527,768       317,806       317,806  
Other investments
    13,577       13,577       3,060       3,060  
Loans held for sale
    975       975       861       861  
Loans, net
    665,481       685,853       660,425       675,641  
Mortgage servicing rights
    1,180       1,180       1,242       1,242  
Accrued interest receivable
    3,869       3,869       3,469       3,469  
 
                               
Financial liabilities:
                               
Deposits
  $ 805,922     $ 811,035     $ 801,158     $ 804,998  
Federal Home Loan Bank advances
    247,000       249,796       41,000       42,244  
Other secured borrowings
    58,000       60,038       58,000       61,125  
Accrued interest payable
    1,000       1,000       930       930  
 
                               
Off-balance sheet financial instruments:
                               
Loan commitments
  $     $     $     $  
Letters of credit
                       

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
  statements of our goals, intentions and expectations;
  statements regarding our business plans, prospects, growth and operating strategies;
  statements regarding the asset quality of our loan and investment portfolios; and
  estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
  general economic conditions, either nationally or in our market areas, that are worse than expected;
  competition among depository and other financial institutions;
  inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
  adverse changes in the securities markets;
  changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
  our ability to enter new markets successfully and capitalize on growth opportunities;
  our ability to successfully integrate acquired entities, if any;
  changes in consumer spending, borrowing and savings habits;
  changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
  changes in our organization, compensation and benefit plans;
  changes in our financial condition or results of operations that reduce capital available to pay dividends;

 

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  changes in the financial condition or future prospects of issuers of securities that we own; and
  changes resulting from intense compliance and regulatory cost associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act and the transition from the Office of Thrift Supervision to the Office of the Comptroller of the Currency as our primary regulator.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a more detailed discussion of these and other factors that may affect our business, see the discussion under the caption “Risk Factors” in our Annual Report on Form 10-K and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
OmniAmerican Bancorp, Inc. (referred to herein as “we,” “us,” “our,” or the “Company”) is the Maryland corporation that owns all of the outstanding shares of common stock of OmniAmerican Bank (the “Bank”) following the January 20, 2010 completion of the mutual-to-stock conversion of OmniAmerican Bank and initial public stock offering of OmniAmerican Bancorp, Inc. OmniAmerican Bancorp, Inc. has no significant assets other than all of the outstanding shares of common stock of OmniAmerican Bank and the net proceeds that it retained in connection with the offering.
Until July 21, 2011, OmniAmerican Bancorp, Inc. and OmniAmerican Bank were regulated by the Office of Thrift Supervision. As of July 21, 2011, OmniAmerican Bancorp’s primary federal regulator is the Federal Reserve and OmniAmerican Bank’s primary federal regulator is the Office of the Comptroller of the Currency. While we don’t anticipate that the change in primary regulators will have a material impact on our operations, the interpretation by these agencies of the regulations governing our business may be different than the Office of Thrift Supervision’s, which may affect the manner in which we conduct our business in the future.
The Bank was originally chartered in 1956 as a federal credit union serving the active and retired military personnel of Carswell Air Force Base. The Bank converted from a Texas credit union charter to a federal mutual savings bank charter on January 1, 2006. The objective of the charter conversion was to convert to a savings bank charter in order to carry out our business strategy of broadening our banking services into residential real estate and commercial lending, selling loans and servicing loans for others. Broadening the services offered has allowed the Bank to better serve the needs of its customers and the local community.
Our principal business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in mortgage loans secured by residential real estate, consumer loans, consisting primarily of indirect automobile loans (automobile loans referred to us by automobile dealerships), and to a lesser extent, commercial real estate, real estate construction, commercial business and direct automobile loans. Since we completed our conversion from a credit union to a savings bank, we have increased our residential real estate, real estate construction, commercial real estate and commercial business lending while deemphasizing our consumer lending activities. Loans are originated from our main office in Fort Worth, Texas, and from our branch network in the Dallas-Fort Worth Metroplex and surrounding communities in North Texas. We retain in our portfolio all adjustable-rate loans that we originate, as well as fixed-rate one- to four-family residential mortgage loans with terms of 15 years or less. We generally sell the long-term, fixed-rate one- to four-family residential mortgage loans (terms greater than 15 years) that we originate either to Fannie Mae on a servicing-retained basis or into the secondary mortgage market on a servicing-released basis, in order to generate fee income and for interest rate risk management purposes.

 

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In addition to loans, we invest in a variety of investments, primarily government sponsored mortgage-backed securities and government sponsored collateralized mortgage obligations, and to a lesser extent municipal obligations, agency bonds and equity securities. We have in the past invested in trust preferred securities issued by third parties and private-label collateralized mortgage obligations. On March 22, 2011, we sold our trust preferred securities and private-label collateralized mortgage obligations. We do not expect to invest in these types of securities in the future. At September 30, 2011, our investment securities portfolio had an amortized cost of $512.0 million.
We attract retail deposits from the general public in the areas surrounding our main office and our branch offices. We offer a variety of deposit accounts, including noninterest-bearing and interest-bearing demand accounts, savings accounts, money market accounts and certificates of deposit.
Our revenues are derived primarily from interest on loans, mortgage-backed securities and other investment securities. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, principal and interest payments on securities and loans, and borrowings.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2011.
Comparison of Financial Condition at September 30, 2011 and December 31, 2010
Assets. Total assets increased $218.7 million, or 19.7%, to $1.33 billion at September 30, 2011 from $1.11 billion at December 31, 2010. The increase was primarily the result of increases in securities classified as available for sale of $210.0 million, other investments of $10.5 million, total cash and cash equivalents of $6.5 million and loans net of the allowance for loan losses and deferred fees and discounts of $5.1 million, partially offset by decreases in deferred tax assets of $5.7 million and other real estate owned of $5.5 million.
Cash and Cash Equivalents. Total cash and cash equivalents increased $6.5 million, or 26.4%, to $31.1 million at September 30, 2011 from $24.6 million at December 31, 2010. The increase in total cash and cash equivalents reflects $206.0 million in cash received from Federal Home Loan Bank advances, $170.7 million in cash received from loan principal repayments, $142.0 million of proceeds from sales, principal repayments, and maturities of securities, and $30.0 million of proceeds from the sales of loans. The sales of loans consisted of longer term (greater than 15 years) one- to four-family residential real estate loans, a real estate construction loan and a commercial business loan during the nine months ended September 30, 2011. These increases were partially offset by decreases of $340.8 million in cash used to purchase securities classified as available for sale, $206.0 million in cash used to originate loans, $11.1 million in cash used to purchase other investments, and $9.2 million in cash used for the repurchase of common stock.
Securities. Securities classified as available for sale increased $210.0 million, or 66.1%, to $527.8 million at September 30, 2011 from $317.8 million at December 31, 2010. The increase in securities classified as available for sale reflected purchases of $340.8 million during the nine months ended September 30, 2011, of which $205.4 million was related to the implementation of an investment strategy which allowed us to utilize our excess capital to generate interest income. Due to the steepening of the yield curve, we were able to achieve a favorable interest rate margin between mortgage-backed securities investments and laddered maturity advances from the Federal Home Loan Bank, which is intended to provide increased earnings at a time when the relatively weak economy and our conservative underwriting standards resulted in an environment where it would not be prudent to aggressively originate loans. The investments purchased as part of the investment strategy are relatively short term fixed rate investments with an average duration of 3.46 years. In addition, $71.8 million in proceeds was generated from sales of securities, including the entire portfolio of trust preferred securities and private-label collateralized mortgage obligations. Principal repayments and maturities totaled $70.2 million. At September 30, 2011, securities classified as available for sale consisted primarily of government sponsored mortgage-backed securities, government sponsored collateralized mortgage obligations, and other equity securities.

 

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Other Investments. Other investments increased $10.5 million, or 338.7%, to $13.6 million at September 30, 2011 from $3.1 million at December 31, 2010. The increase in other investments during the nine months ended September 30, 2011 reflected purchases of $9.4 million in Federal Home Loan Bank stock as a required investment associated with the additional $206.0 million in Federal Home Loan Bank advances incurred during the same time period. As part of our Community Reinvestment Act program, we purchased $1.8 million in qualified investments. The increase in other investments due to purchases was partially offset by redemptions of Federal Home Loan Bank stock of $606,000.
Loans. Loans, net of the allowance for loan losses and deferred fees and discounts, increased $5.1 million, or 0.8%, to $665.5 million at September 30, 2011 from $660.4 million at December 31, 2010. Automobile loans (consisting of direct and indirect loans) increased $12.5 million, or 6.9%, to $193.7 million at September 30, 2011 from $181.2 million at December 31, 2010, related primarily to our refocused sales initiatives and competitive rate structure. Real estate construction loans increased $12.4 million, or 35.9%, to $46.9 million at September 30, 2011 from $34.5 million at December 31, 2010, as new construction borrowing demand increased. Commercial business loans decreased $8.2 million, or 16.8%, to $40.5 million at September 30, 2011 from $48.7 million at December 31, 2010, as loans are maturing and paying off. One- to four-family residential real estate loans decreased $8.0 million, or 2.9%, to $263.8 million at September 30, 2011 from $271.8 million at December 31, 2010. The decrease in one- to four-family residential real estate loans was primarily due to continued weakness in the housing market in our market area. We continue to monitor the composition of our loan portfolio and seek to obtain a reasonable return while containing the potential for risk of loss.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. We monitor these loans closely and review their performance on a regular basis. As of September 30, 2011, we had one loan of this type which was not included in either of the non-accrual or 90 days past due loan categories. This loan had a balance of $1.1 million and was secured by closely held unlisted stock. Weakness in the borrower’s cash flow has caused us to heighten the attention given to this credit.
Allowance for Loan Losses. The allowance for loan losses decreased $443,000, or 5.0%, to $8.5 million at September 30, 2011 from $8.9 million at December 31, 2010. The allowance for loan losses represented 1.26% and 1.33% of total loans at September 30, 2011 and at December 31, 2010, respectively. The decrease in the allowance for loan losses attributable to commercial business and commercial real estate loans was partially offset by an increase in the allowance for loan losses related to automobile loans. Included in the allowance for loan losses at September 30, 2011 were specific allowances for loan losses of $2.3 million related to 11 impaired loans with balances totaling $13.8 million. Impaired loans with balances totaling $20.9 million did not require specific allowances for loan losses at September 30, 2011. The allowance for loan losses at December 31, 2010 included specific allowances for loan losses of $2.3 million related to eight impaired loans with balances totaling $15.6 million. Impaired loans with balances totaling $17.7 million did not require specific allowances for loan losses at December 31, 2010. The balance of unimpaired loans increased $2.0 million, or 0.3%, to $638.2 million at September 30, 2011 from $636.2 million at December 31, 2010. The allowance for loan losses related to unimpaired loans decreased $208,000, or 3.2%, to $6.4 million at September 30, 2011 from $6.6 million at December 31, 2010.

 

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The significant changes in the amount of the allowance for loan losses during the nine months ended September 30, 2011 related to: (i) a $446,000 decrease in the allowance for loan losses attributable to commercial business loans primarily due to the charge-off of two impaired commercial business loans in the nine months ended September 30, 2011 with specific allowances for loan losses of $255,000 at December 31, 2010 and a $211,000 decrease in the general allowance for loan losses on unimpaired commercial business loans reflecting a decrease of $8.1 million, or 17.8%, in the total outstanding balance of unimpaired commercial business loans to $37.3 million at September 30, 2011 from $45.4 million at December 31, 2010, (ii) a $197,000 decrease in the general allowance for loan losses on unimpaired commercial real estate loans reflecting a decrease of $3.3 million, or 4.2%, in the total outstanding balance of unimpaired commercial real estate loans to $75.3 million at September 30, 2011 from $78.6 million at December 31, 2010; and (iii) a $301,000 increase in the general allowance for loan losses on automobile loans primarily due to an increase of $12.5 million, or 6.9%, in the total outstanding balance of automobile loans to $193.7 million at September 30, 2011 from $181.2 million at December 31, 2010. Management also considered local economic factors and unemployment as well as the higher risk profile of commercial real estate loans when evaluating the adequacy of the allowance for loan losses as it pertains to these types of loans.
Other Real Estate Owned. Other real estate owned decreased $5.5 million, or 37.2%, to $9.3 million at September 30, 2011 from $14.8 million at December 31, 2010, primarily due to the sales of ten properties totaling $5.7 million, consisting of two units of a condominium project, three commercial properties, four single-family properties, and a residential real estate development project with a book value of $2.7 million that was sold at a $300,000 loss. Write-downs of other real estate owned to their current fair values less estimated costs to sell during the nine month period totaled $2.2 million. Partially offsetting these decreases were additions due to the reclassification of five commercial real estate loans totaling $1.8 million and three one- to-four family residential real estate loans totaling $659,000 to other real estate owned.
Deposits. Deposits increased $4.8 million, or 0.6%, to $805.9 million at September 30, 2011 from $801.2 million at December 31, 2010. The increase in deposits was primarily attributable to an increase in money market deposits, partially offset by a decrease in certificates of deposits. Money market deposits increased $28.9 million, or 28.7%, to $129.7 million at September 30, 2011 from $100.8 million at December 31, 2010. Certificates of deposit decreased $25.5 million, or 7.4%, to $317.5 million at September 30, 2011 from $343.0 million at December 31, 2010. The decrease in certificates of deposits resulted from certificates of deposit that matured and were not renewed.
Borrowings. Federal Home Loan Bank borrowings increased $206.0 million, or 502.4%, to $247.0 million at September 30, 2011 from $41.0 million at December 31, 2010. Additional borrowings were utilized in an investment strategy which allowed us to leverage our excess capital and benefit from the steep yield curve which provided a favorable interest rate margin between investment securities yields and rates on laddered maturity Federal Home Loan Bank advances. Other secured borrowings remained at $58.0 million at September 30, 2011 and December 31, 2010.
Stockholders’ Equity. At September 30, 2011, our stockholders’ equity was $202.0 million, an increase of $3.4 million, or 1.7%, from $198.6 million at December 31, 2010. This increase primarily reflected an increase of $9.3 million in accumulated other comprehensive income (loss) to a gain of $9.2 million at September 30, 2011 compared to a loss of $33,000 at December 31, 2010, net income of $2.8 million for the nine months ended September 30, 2011, and the amortization of $159,000 of share-based compensation. Partially offsetting this increase in stockholders’ equity was a decrease of $9.2 million resulting from the repurchase of 630,125 shares of the Company’s common stock.
Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010
General. Net income increased $832,000, or 413.9%, to $1.0 million for the three months ended September 30, 2011 from $201,000 for the prior year period. The increase in net income for the three months ended September 30, 2011 reflected a decrease in the provision for loan losses of $2.2 million and an increase in net interest income of $452,000, partially offset by an increase in noninterest expense of $800,000, an increase in income tax expense of $462,000, and a decrease in noninterest income of $558,000.

 

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Interest Income. Interest income increased $150,000, or 1.1%, to $13.7 million for the three months ended September 30, 2011 from $13.5 million for the three months ended September 30, 2010. The increase resulted from a $168.6 million, or 15.9%, increase in the average balance of interest-earning assets to $1.22 billion for the three months ended September 30, 2011 from $1.06 billion for the three months ended September 30, 2010. Partially offsetting the increase in the average balance of interest-earning assets was a decrease of 66 basis points in our average yield on interest-earning assets to 4.47% for the three months ended September 30, 2011 from 5.13% for the three months ended September 30, 2010. The decrease in our average yield on interest-earning assets during the three months ended September 30, 2011 as compared to the prior year period was due to the continuing low short-term market interest rate environment which has existed during the past two years.
Interest income on loans decreased $899,000, or 8.4%, to $9.8 million for the three months ended September 30, 2011 from $10.7 million for the three months ended September 30, 2010. The decrease resulted primarily from a decrease in the average balance of loans of $12.7 million, or 1.9%, to $668.0 million for the three months ended September 30, 2011 from $680.7 million for the three months ended September 30, 2010. In addition, the average yield on our loan portfolio decreased by 42 basis points to 5.87% for the three months ended September 30, 2011 from 6.29% for the three months ended September 30, 2010.
Interest income on investment securities increased $1.1 million, or 39.3%, to $3.9 million for the three months ended September 30, 2011 from $2.8 million for the three months ended September 30, 2010. The increase resulted primarily from a $184.7 million, or 52.0%, increase in the average balance of our securities portfolio to $539.9 million for the three months ended September 30, 2011 from $355.2 million for the three months ended September 30, 2010, due to purchases of securities, primarily U.S. government sponsored mortgage-backed securities and collateralized mortgage obligations. Partially offsetting the increase in the average balance of our securities portfolio was a decrease in the average yield on our securities portfolio (excluding nontaxable investment securities) of 34 basis points to 2.86% for the three months ended September 30, 2011 from 3.20% for the three months ended September 30, 2010.
Interest Expense. Interest expense decreased by $302,000, or 8.4%, to $3.3 million for the three months ended September 30, 2011 from $3.6 million for the three months ended September 30, 2010. The decrease resulted primarily from a decrease in interest expense on deposits of $638,000, partially offset by an increase in interest expense on borrowed funds of $336,000. The decrease in interest expense on deposits reflected decreases in the average rate we paid on deposits and in the average balance of deposits. The average rate we paid on deposits decreased 33 basis points to 0.97% for the three months ended September 30, 2011 from 1.30% for the three months ended September 30, 2010. The decrease in the average balance of deposits was primarily due to a decrease in the average balance of certificates of deposit.
Interest expense on certificates of deposit decreased $349,000, or 18.4%, to $1.5 million for the three months ended September 30, 2011 from $1.9 million for the three months ended September 30, 2010. The average rate paid on certificates of deposit decreased 17 basis points to 1.94% for the three months ended September 30, 2011 from 2.11% for the three months ended September 30, 2010, reflecting the continuing low market interest rate environment. In addition, the average balance of certificates of deposit decreased $39.7 million, or 11.1%, to $317.8 million for the three months ended September 30, 2011 from $357.5 million for the three months ended September 30, 2010.
Interest expense on borrowed funds increased by $336,000, or 28.1%, to $1.5 million for the three months ended September 30, 2011 from $1.2 million for the prior year period, primarily due to a $196.1 million increase in the average balance of Federal Home Loan Bank borrowings to $249.6 million for the three months ended September 30, 2011 from $53.5 million for the three months ended September 30, 2010. Partially offsetting the increase in the average balance was a decrease in the average rate paid on borrowed funds of 229 basis points to 1.95% for the three months ended September 30, 2011 from 4.24% for the three months ended September 30, 2010.

 

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Net Interest Income. Net interest income increased by $452,000, or 4.5%, to $10.4 million for the three months ended September 30, 2011 from $10.0 million for the prior year period. The increase resulted primarily from a $184.7 million, or 52.0%, increase in the average balance of our securities portfolio to $539.9 million for the three months ended September 30, 2011 from $355.2 million for the three months ended September 30, 2010. The increase in income was partially offset by a 24 basis point decrease in our interest rate spread to 3.20% for the three months ended September 30, 2011 from 3.44% for the three months ended September 30, 2010. Our net interest margin decreased 38 basis points to 3.40% for the three months ended September 30, 2011 from 3.78% for the three months ended September 30, 2010. This decrease in the net interest margin resulted primarily from a change in the asset composition. The average yield on our securities portfolio was 2.86% for the three months ended September 30, 2011 and the average yield on our loan portfolio was 5.87% for the three months ended September 30, 2011. The average yield of the securities portfolio was 301 basis points less than the average yield of the loan portfolio, therefore as the average balance of our securities portfolio increased in relation to the average balance of our loan portfolio, the combined interest yield decreased. Partially offsetting the decrease in the yield on interest-earning assets was a decrease in our average yield on interest-bearing liabilities of 42 basis points to 1.27% for the three months ended September 30, 2011 from 1.69% for the three months ended September 30, 2010.
Provision for Loan Losses. We recorded a provision for loan losses of $550,000 for the three months ended September 30, 2011 compared to a provision for loan losses of $2.8 million for the three months ended September 30, 2010. The provision for loan losses is charged to operations to bring the allowance for loan losses to a level that reflects management’s best estimate of the losses inherent in the portfolio. An evaluation of the loan portfolio, current economic conditions and other factors is performed at each balance sheet date. Total loans decreased $4.2 million, or 0.6%, to $673.0 million at September 30, 2011 from $677.2 million at September 30, 2010. Net charge-offs decreased $748,000, to $699,000 for the three months ended September 30, 2011 from $1.4 million for the three months ended September 30, 2010. Net charge-offs as a percentage of average loans outstanding was 0.42% for the three months ended September 30, 2011 compared to 0.85% for the three months ended September 30, 2010. The allowance for loan losses to total loans receivable decreased to 1.26% at September 30, 2011 from 1.37% at September 30, 2010.
Non-performing loans include loans on non-accrual status or loans delinquent 90 days or greater and still accruing interest. None of our loans were delinquent 90 days or greater and still accruing interest at either September 30, 2011 or September 30, 2010. At September 30, 2011, non-performing loans totaled $11.6 million, or 1.73% of total loans, compared to $11.0 million, or 1.62% of total loans, at September 30, 2010. The allowance for loan losses as a percentage of non-performing loans decreased to 72.91% at September 30, 2011 from 84.93% at September 30, 2010.
Noninterest Income. Noninterest income decreased $558,000, or 15.9%, to $2.9 million for the three months ended September 30, 2011 from $3.5 million for the three months ended September 30, 2010. The decrease was primarily attributable to a $373,000 increase in net losses on sales of repossessed assets, a $298,000 decrease in service charges and other fees, due primarily to a decrease in insufficient funds fee income, a $124,000 decrease in other income, primarily due to a decrease in net earnings from the lease of our headquarters building, and a $74,000 decrease in net gains on the sales of loans. Partially offsetting these decreases in noninterest income was an increase in the cash surrender value of bank-owned life insurance of $242,000 from the purchase of life insurance policies on certain key employees in November 2010.

 

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Noninterest Expense. Noninterest expense increased $800,000, or 7.6%, to $11.3 million for the three months ended September 30, 2011 from $10.5 million for the three months ended September 30, 2010. The increase was primarily attributable to an $844,000 increase in salaries and benefits expense and a $666,000 increase in net loss on write-down of other real estate owned, partially offset by a $244,000 decrease in FDIC insurance premium expense, a $166,000 decrease in professional and outside services and a $155,000 decrease in depreciation of furniture, software and equipment. The increase in salaries and benefits expense is primarily due to increases in lending staff and incentive compensation expense. The increase in net loss on write-down of other real estate owned was primarily due to decreases in the valuation of the properties held as real estate owned. The decrease in professional and outside services expense is primarily due to expenses incurred during the three months ended September 30, 2010 for professional services related to the implementation of Sarbanes-Oxley controls over financial reporting. The decrease in the FDIC insurance premium expense resulted primarily from a change in the FDIC’s assessment methodology to base assessments on the average total consolidated assets less average tangible equity as required by the Dodd-Frank Act. The decrease in depreciation of furniture, software and equipment is primarily attributable to certain assets being fully depreciated.
Income Tax Expense (Benefit). Income tax expense was $417,000 for the three months ended September 30, 2011 compared to an income tax benefit of $44,000 for the same period in 2010. Our effective tax rate was 28.8% for the three months ended September 30, 2011. The income tax benefit for the three months ended September 30, 2010 arose from the reversal of $178,000 of expense recorded in prior years resulting from a change in the application of the Texas margin tax law as it relates to the calculation of the in-state taxable margin.
Analysis of Net Interest Income — Three Months Ended September 30, 2011 and 2010
Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

 

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Average Balances and Yields
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
                                                 
    For the Three Months Ended September 30,  
    2011     2010  
    Average                     Average                
    Outstanding             Yield/     Outstanding             Yield/  
    Balance     Interest     Rate (1)     Balance     Interest     Rate (1)  
    (Dollars in thousands)  
Interest-earning assets:
                                               
Loans
  $ 668,004     $ 9,806       5.87 %   $ 680,668     $ 10,705       6.29 %
Taxable investment securities available for sale
    539,886       3,856       2.86       351,732       2,816       3.20  
Nontaxable investment securities available for sale
                      3,433       6       0.70 (2)
Cash and cash equivalents
    3,061       10       1.31       16,460       12       0.29  
Other
    13,566       20       0.59       3,600       3       0.33  
 
                                       
Total interest-earning assets
    1,224,517       13,692       4.47       1,055,893       13,542       5.13  
Noninterest-earning assets
    97,805                       80,032                  
 
                                           
Total assets
  $ 1,322,322                     $ 1,135,925                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 81,627     $ 24       0.12 %   $ 74,994     $ 56       0.30 %
Savings accounts
    209,635       98       0.19       209,104       245       0.47  
Money market accounts
    111,046       93       0.33       94,922       203       0.86  
Certificates of deposit
    317,804       1,540       1.94       357,506       1,889       2.11  
 
                                       
Total interest-bearing deposits
    720,112       1,755       0.97       736,526       2,393       1.30  
Federal Home Loan Bank advances
    249,554       777       1.25       53,530       502       3.75  
Other secured borrowings
    62,086       742       4.78       58,001       681       4.70  
 
                                       
Total interest-bearing liabilities
    1,031,752       3,274       1.27       848,057       3,576       1.69  
Noninterest-bearing liabilities(3)
    88,367                       85,401                  
 
                                           
Total liabilities
    1,120,119                       933,458                  
Equity
    202,203                       202,467                  
 
                                           
Total liabilities and equity
  $ 1,322,322                     $ 1,135,925                  
 
                                           
Net interest income
          $ 10,418                     $ 9,966          
 
                                           
Interest rate spread (4)
                    3.20 %                     3.44 %
Net interest-earning assets (5)
  $ 192,765                     $ 207,836                  
 
                                           
Net interest margin (6)
                    3.40 %                     3.78 %
Average interest-earning assets to interest-bearing liabilities
    118.68 %                     124.51 %                
 
     
(1)   Annualized.
 
(2)   The tax equivalent yield of nontaxable investment securities was 1.06% for the three months ended September 30, 2010, assuming a marginal tax rate of 34%.
 
(3)   Includes noninterest-bearing deposits.
 
(4)   Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
 
(5)   Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
 
(6)   Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by later volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
                         
    Three Months Ended September 30,  
    2011 vs. 2010  
    Increase (Decrease)     Total  
    Due to     Increase  
    Volume     Rate     (Decrease)  
    (In thousands)  
Interest-earning assets:
                       
Loans
  $ (199 )   $ (700 )   $ (899 )
Taxable investment securities available for sale
    1,506       (466 )     1,040  
Nontaxable investment securities available for sale
    (6 )           (6 )
Cash and cash equivalents
    (10 )     8       (2 )
Other
    8       9       17  
 
                 
 
                       
Total interest-earning assets
  $ 1,299     $ (1,149 )   $ 150  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
  $ 5     $ (37 )   $ (32 )
Savings accounts
    1       (148 )     (147 )
Money market accounts
    34       (144 )     (110 )
Certificates of deposit
    (210 )     (139 )     (349 )
 
                 
Total interest-bearing deposits
    (170 )     (468 )     (638 )
Federal Home Loan Bank advances
    1,838       (1,563 )     275  
Other secured borrowings
    48       13       61  
 
                 
 
                       
Total interest-bearing liabilities
  $ 1,716     $ (2,018 )   $ (302 )
 
                 
 
                       
Change in net interest income
  $ (417 )   $ 869     $ 452  
 
                 
Comparison of Operating Results for the Nine Months Ended September 30, 2011 and 2010
General. Net income increased $1.5 million, or 115.4%, to $2.8 million for the nine months ended September 30, 2011 from $1.3 million for the prior year period. The increase in net income for the nine months ended September 30, 2011 reflected a decrease in the provision for loan losses of $3.5 million and an increase in net interest income of $1.2 million, partially offset by an increase in noninterest expense of $1.6 million, a decrease in noninterest income of $931,000, and an increase in income tax expense of $697,000.
Interest Income. Interest income increased $511,000, or 1.3%, to $40.7 million for the nine months ended September 30, 2011 from $40.2 million for the nine months ended September 30, 2010. The increase resulted from a $137.8 million, or 13.4%, increase in the average balance of interest-earning assets to $1.17 billion for the nine months ended September 30, 2011 from $1.03 billion for the nine months ended September 30, 2010. Partially offsetting the increase in the average balance on interest-earning assets was a decrease of 56 basis points in our average yield on interest-earning assets to 4.63% for the nine months ended September 30, 2011 from 5.19% for the nine months ended September 30, 2010. The decrease in our average yield on interest-earning assets during the nine months ended September 30, 2011 as compared to the prior year period was primarily attributable to the continuing short-term market interest rate environment.

 

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Interest income on loans decreased $2.3 million, or 7.2%, to $29.7 million for the nine months ended September 30, 2011 from $32.0 million for the nine months ended September 30, 2010. The decrease resulted primarily from a decrease in the average balance of loans of $22.8 million, or 3.3%, to $666.7 million for the nine months ended September 30, 2011 from $689.5 million for the nine months ended September 30, 2010. In addition, the average yield on our loan portfolio decreased by 25 basis points to 5.94% for the nine months ended September 30, 2011 from 6.19% for the nine months ended September 30, 2010.
Interest income on investment securities increased $2.9 million, or 35.8%, to $11.0 million for the nine months ended September 30, 2011 from $8.1 million for the nine months ended September 30, 2010. The increase resulted primarily from a $169.5 million, or 54.3%, increase in the average balance of our securities portfolio to $481.5 million for the nine months ended September 30, 2011 from $312.0 million for the nine months ended September 30, 2010, due to purchases of securities, primarily U.S. government sponsored mortgage-backed securities and collateralized mortgage obligations. Partially offsetting the increase in the average balance of our securities portfolio was a decrease in the average yield on our securities portfolio (excluding nontaxable investment securities) of 46 basis points to 3.02% for the nine months ended September 30, 2011 from 3.48% for the nine months ended September 30, 2010.
Interest Expense. Interest expense decreased by $690,000, or 6.6%, to $9.9 million for the nine months ended September 30, 2011 from $10.5 million for the nine months ended September 30, 2010. The decrease resulted primarily from decreases in interest expense on deposits of $1.7 million, partially offset by an increase in interest expense on borrowed funds of $976,000. The decrease in interest expense on deposits reflected decreases in the average rate we pay on deposits, partially offset by an increase in the average balance of interest-bearing deposits. The average rate we paid on deposits decreased 32 basis points to 1.03% for the nine months ended September 30, 2011 from 1.35% for the nine months ended September 30, 2010. The average balance of interest-bearing deposits increased $8.5 million, or 1.2%, to $725.1 million for the nine months ended September 30, 2011 from $716.6 million for the nine months ended September 30, 2010.
Interest expense on certificates of deposit decreased $808,000, or 14.4%, to $4.8 million for the nine months ended September 30, 2011 from $5.6 million for the nine months ended September 30, 2010. The average rate paid on certificates of deposit decreased 21 basis points to 1.94% for the nine months ended September 30, 2011 from 2.15% for the nine months ended September 30, 2010, reflecting the continuing low market interest rate environment. In addition, the average balance of certificates of deposit decreased by $17.5 million, to $327.6 million for the nine months ended September 30, 2011 from $345.1 million for the nine months ended September 30, 2010.
Interest expense on borrowed funds increased by $976,000, or 29.6%, to $4.3 million for the nine months ended September 30, 2011 from $3.3 million for the prior year period primarily due to a $143.5 million increase in the average balance of Federal Home Loan Bank borrowings to $199.5 million for the nine months ended September 30, 2011 from $56.0 million for the nine months ended September 30, 2010. Partially offsetting the increase in the average balance of Federal Home Loan Bank borrowings was a decrease on the average rate paid on borrowed funds of 166 basis points to 2.18% for the nine months ended September 30, 2011 from 3.84% for the nine months ended September 30, 2010.

 

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Net Interest Income. Net interest income increased by $1.2 million, or 4.1%, to $30.8 million for the nine months ended September 30, 2011 from $29.6 million for the prior year period. The increase resulted primarily from a $169.5 million, or 54.3%, increase in the average balance of our securities portfolio to $481.5 million for the nine months ended September 30, 2011 from $312.0 million for the nine months ended September 30, 2010. This increase in income was partially offset by a 20 basis point decrease in our interest rate spread to 3.30% for the nine months ended September 30, 2011 from 3.50% for the nine months ended September 30, 2010. Our net interest margin decreased 31 basis points to 3.51% for the nine months ended September 30, 2011 from 3.82% for the nine months ended September 30, 2010. This decrease in the net interest margin resulted primarily from a change in the asset composition. The average yield on our securities portfolio was 3.02% for the nine months ended September 30, 2011 and the average yield on our loan portfolio was 5.94% for the nine months ended September 30, 2011. The average yield of the securities portfolio was 292 basis points less than the average yield of the loan portfolio, therefore as our securities portfolio increased in relation to our loan portfolio, the combined interest yield decreased. Partially offsetting the decrease in the yield on interest-earning assets was a decrease in our average yield on interest-bearing liabilities of 36 basis points to 1.33% for the nine months ended September 30, 2011 from 1.69% for the nine months ended September 30, 2010.
Provision for Loan Losses. We recorded a provision for loan losses of $1.6 million for the nine months ended September 30, 2011 compared to a provision for loan losses of $5.0 million for the nine months ended September 30, 2010. The provision for loan losses is charged to operations to bring the allowance for loan losses to a level that reflects management’s best estimate of the losses inherent in the portfolio. An evaluation of the loan portfolio, current economic conditions and other factors is performed at each balance sheet date. Total loans decreased $4.2 million, or 0.6%, to $673.0 million at September 30, 2011 from $677.2 million at September 30, 2010. Net charge-offs decreased $2.0 million to $2.0 million for the nine months ended September 30, 2011 from $4.0 million for the nine months ended September 30, 2010. Net charge-offs as a percentage of average loans outstanding was 0.40% for the nine months ended September 30, 2011 compared to 0.78% for the nine months ended September 30, 2010. The allowance for loan losses to total loans receivable decreased to 1.26% at September 30, 2011 from 1.37% at September 30, 2010.
Non-performing loans include loans on non-accrual status or loans delinquent 90 days or greater and still accruing interest. None of our loans were delinquent 90 days or greater and still accruing interest at either September 30, 2011 or September 30, 2010. At September 30, 2011, non-performing loans totaled $11.6 million, or 1.73% of total loans, compared to $11.0 million, or 1.62% of total loans, at September 30, 2010. The allowance for loan losses as a percentage of non-performing loans decreased to 72.91% at September 30, 2011 from 84.93% at September 30, 2010.
Noninterest Income. Noninterest income decreased $931,000, or 9.2%, to $9.2 million for the nine months ended September 30, 2011 from $10.1 million for the nine months ended September 30, 2010. The decrease was primarily attributable to a $700,000 decrease in service charges and other fees, due primarily to a decrease in insufficient funds fee income, a $517,000 decrease in net gains on the sale of loans, and a $376,000 increase in net losses on sales of repossessed assets. Partially offsetting these decreases in noninterest income was an increase in the cash surrender value of bank-owned life insurance of $718,000 from the purchase of life insurance policies on certain key employees in November 2010.
Noninterest Expense. Noninterest expense increased $1.6 million, or 4.8%, to $34.6 million for the nine months ended September 30, 2011 from $33.0 million for the nine months ended September 30, 2010. The increase was primarily attributable to increases in net loss on write-down of other real estate owned of $2.2 million and salaries and benefits expense of $1.4 million, partially offset by decreases in the FDIC insurance assessment of $419,000, software and equipment maintenance of $397,000, professional and outside services expense of $372,000, depreciation of furniture, software and equipment of $248,000, and marketing expense of $222,000. The increase in net loss on write-down of other real estate owned was primarily due to decreases in the valuation of the properties held as real estate owned. The increase in salaries and benefits expense is primarily due to an increase in lending staff, an increase in incentive compensation expense, and higher health insurance expense. The decrease in the FDIC insurance premium expense is primarily attributable to a decrease in the general assessment rate applied to our insured deposits and the change in the FDIC’s assessment methodology to base assessments on the average total consolidated assets less average tangible equity as

 

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required by the Dodd-Frank Act. The decrease in software and equipment maintenance expense related primarily to savings from a new annual contract negotiated with our ATM servicing contractor. The decrease in professional and outside services related primarily to refunds received and a reduction in rates charged for services provided by our debit card vendor as a result of a contract renegotiation and expenses for professional services related to the implementation of Sarbanes-Oxley controls over financial reporting during the nine months ended September 30, 2010. The decrease in depreciation of furniture, software and equipment is primarily attributable to certain assets being fully depreciated. The decrease in marketing expense is primarily due to the discontinuance of our debit card reward program on December 31, 2010.
Income Tax Expense. Income tax expense was $1.1 million for the nine months ended September 30, 2011 compared to $434,000 for the same period in 2010. Our effective tax rate was 29.0% for the nine months ended September 30, 2011 compared to 24.5% for the nine months ended September 30, 2010. The increase in the effective tax rate is attributable to an increase in expense related to the Texas state margin tax, partially offset by an increase in nontaxable income from the increase in the cash surrender value of bank-owned life insurance.
Analysis of Net Interest Income — Nine Months Ended September 30, 2011 and 2010
Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

 

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Average Balances and Yields
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
                                                 
    For the Nine Months Ended September 30,  
    2011     2010  
    Average                     Average                
    Outstanding             Yield/     Outstanding             Yield/  
    Balance     Interest     Rate (1)     Balance     Interest     Rate (1)  
    (Dollars in thousands)  
Interest-earning assets:
                                               
Loans
  $ 666,681     $ 29,696       5.94 %   $ 689,505     $ 32,022       6.19 %
Taxable investment securities available for sale
    481,456       10,922       3.02       307,879       8,030       3.48  
Nontaxable investment securities available for sale
                      4,135       31       1.00 (2)
Cash and cash equivalents
    11,697       25       0.28       27,433       57       0.28  
Other
    10,600       27       0.34       3,709       19       0.68  
 
                                       
Total interest-earning assets
    1,170,434       40,670       4.63       1,032,661       40,159       5.19  
Noninterest-earning assets
    102,321                       83,471                  
 
                                           
Total assets
  $ 1,272,755                     $ 1,116,132                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 79,207     $ 115       0.19 %   $ 73,514     $ 215       0.39 %
Savings accounts
    213,474       405       0.25       206,224       847       0.55  
Money market accounts
    104,735       325       0.41       91,736       641       0.93  
Certificates of deposit
    327,663       4,758       1.94       345,148       5,566       2.15  
 
                                       
Total interest-bearing deposits
    725,079       5,603       1.03       716,622       7,269       1.35  
Federal Home Loan Bank advances
    199,531       2,055       1.37       56,031       1,565       3.72  
Other secured borrowings
    60,465       2,201       4.85       58,000       1,715       3.94  
 
                                       
Total interest-bearing liabilities
    985,075       9,859       1.33       830,653       10,549       1.69  
Noninterest-bearing liabilities(3)
    87,182                       97,108                  
 
                                           
Total liabilities
    1,072,257                       927,761                  
Equity
    200,498                       188,371                  
 
                                           
Total liabilities and equity
  $ 1,272,755                     $ 1,116,132                  
 
                                           
Net interest income
          $ 30,811                     $ 29,610          
 
                                           
Interest rate spread (4)
                    3.30 %                     3.50 %
Net interest-earning assets (5)
  $ 185,359                     $ 202,008                  
 
                                           
Net interest margin (6)
                    3.51 %                     3.82 %
Average interest-earning assets to interest-bearing liabilities
    118.82 %                     124.32 %                
 
     
(1)   Annualized.
 
(2)   The tax equivalent yield of nontaxable investment securities was 1.51% for the nine months ended September 30, 2011, assuming a marginal tax rate of 34%.
 
(3)   Includes noninterest-bearing deposits.
 
(4)   Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
 
(5)   Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
 
(6)   Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by later volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
                         
    Nine Months Ended September 30,  
    2011 vs. 2010  
    Increase (Decrease)     Total  
    Due to     Increase  
    Volume     Rate     (Decrease)  
    (In thousands)  
Interest-earning assets:
                       
Loans
  $ (1,060 )   $ (1,266 )   $ (2,326 )
Taxable investment securities available for sale
    4,527       (1,635 )     2,892  
Nontaxable investment securities available for sale
    (31 )           (31 )
Cash and cash equivalents
    (33 )     1       (32 )
Other
    35       (27 )     8  
 
                 
 
                       
Total interest-earning assets
  $ 3,438     $ (2,927 )   $ 511  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
  $ 17     $ (117 )   $ (100 )
Savings accounts
    30       (472 )     (442 )
Money market accounts
    91       (407 )     (316 )
Certificates of deposit
    (282 )     (526 )     (808 )
 
                 
Total interest-bearing deposits
    (144 )     (1,522 )     (1,666 )
Federal Home Loan Bank advances
    4,008       (3,518 )     490  
Other secured borrowings
    73       413       486  
 
                 
 
                       
Total interest-bearing liabilities
  $ 3,937     $ (4,627 )   $ (690 )
 
                 
 
                       
Change in net interest income
  $ (499 )   $ 1,700     $ 1,201  
 
                 
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Dallas, and maturities and sales of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We monitor our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand;
(ii) expected deposit flows and borrowing maturities;

 

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(iii) yields available on interest-earning deposits and securities; and
(iv) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by our operating, financing, lending and investing activities during any given period. At September 30, 2011, cash and cash equivalents totaled $31.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $527.8 million at September 30, 2011. On that date, we had $247.0 million in Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $397.6 million.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our consolidated financial statements.
At September 30, 2011, we had $50.9 million in commitments to extend credit. Included in these commitments to extend credit were $39.9 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2011 totalled $185.8 million, or 23.1% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2011. We believe, however, based on past experience, a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Generally, our primary investing activity is originating loans. During the nine months ended September 30, 2011, we originated $206.0 million of loans. In addition, we purchased $340.8 million of securities classified as available for sale during the nine months ended September 30, 2011.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. Total deposits increased $4.8 million for the nine months ended September 30, 2011. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, we may utilize our borrowing agreements with the Federal Home Loan Bank of Dallas, which provides an additional source of funds. Federal Home Loan Bank advances increased by $206.0 million for the nine months ended September 30, 2011. At September 30, 2011, we had the ability to borrow up to $644.6 million from the Federal Home Loan Bank of Dallas. In addition, we maintained $35.0 million in federal funds lines with other financial institutions at September 30, 2011. We also have a line of credit with the Federal Reserve Bank of Dallas which allows us to borrow on a collateralized basis at a fixed term with pledged assignments. At September 30, 2011, the borrowing limit for this line of credit was $185.1 million.

 

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The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2011, the Bank exceeded all regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. The table below presents the capital required as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained at September 30, 2011 and December 31, 2010.
                                                 
                    Minimum     Capitalized Under  
          For Capital     Prompt Corrective  
    Actual     Adequacy Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in thousands)  
Consolidated as of September 30, 2011
                                               
Total risk-based capital to risk-weighted assets
  $ 193,280       25.66 %   $ 60,254       8.00 %   $ 75,318       10.00 %
Tier I risk-based capital to risk-weighted assets
    186,865       24.81 %     30,127       4.00 %     45,191       6.00 %
Tier I (Core) capital to adjusted total assets
    186,865       14.24 %     52,479       4.00 %     65,599       5.00 %
OmniAmerican Bank as of September 30, 2011
                                               
Total risk-based capital to risk-weighted assets
  $ 175,658       23.32 %   $ 60,265       8.00 %   $ 75,332       10.00 %
Tier I risk-based capital to risk-weighted assets
    169,243       22.47 %     30,133       4.00 %     45,199       6.00 %
Tier I (Core) capital to adjusted total assets
    169,243       12.90 %     52,485       4.00 %     65,606       5.00 %
Consolidated as of December 31, 2010
                                               
Total risk-based capital to risk-weighted assets
  $ 198,366       27.86 %   $ 56,958       8.00 %   $ 71,197       10.00 %
Tier I risk-based capital to risk-weighted assets
    191,743       26.93 %     28,479       4.00 %     42,718       6.00 %
Tier I (Core) capital to adjusted total assets
    191,743       17.40 %     44,078       4.00 %     55,097       5.00 %
OmniAmerican Bank as of December 31, 2010
                                               
Total risk-based capital to risk-weighted assets
  $ 170,526       23.95 %   $ 56,965       8.00 %   $ 71,207       10.00 %
Tier I risk-based capital to risk-weighted assets
    163,903       23.02 %     28,483       4.00 %     42,724       6.00 %
Tier I (Core) capital to adjusted total assets
    163,903       14.88 %     44,065       4.00 %     55,082       5.00 %
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

 

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The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2011. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
                                         
    Payments Due by Period  
            More than     More than              
    One year or     one year to     three years to     More than        
    less     three years     five years     five years     Total  
    (In thousands)  
Contractual obligations:
                                       
Long-term debt (1)
  $ 180,000     $ 106,000     $ 19,000     $     $ 305,000  
Operating leases
    486       918       853       971       3,228  
Certificates of deposit
    185,791       103,235       28,501       1       317,528  
 
                             
Total contractual obligations
  $ 366,277     $ 210,153     $ 48,354     $ 972     $ 625,756  
 
                             
 
                                       
Off-balance sheet loan commitments:
                                       
Undisbursed portion of loans closed
  $ 10,993     $     $     $     $ 10,993  
Unused lines of credit (2)
                            39,526  
 
                             
Total loan commitments
  $ 10,993     $     $     $     $ 50,519  
 
                             
 
                                       
Total contractual obligations and loan commitments
  $ 377,270     $ 210,153     $ 48,354     $ 972     $ 676,275  
 
                             
 
     
(1)   Includes Federal Home Loan Bank advances and securities sold under agreements to repurchase.
 
(2)   Because lines of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:
  (i)   sell the long-term, fixed-rate one- to four-family residential mortgage loans (terms greater than 15 years) that we originate into the secondary mortgage market;
  (ii)   lengthen the weighted average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding sources such as fixed-rate advances from the Federal Home Loan Bank of Dallas;
  (iii)   invest in shorter- to medium-term securities;
  (iv)   originate commercial business and consumer loans, which tend to have shorter terms and higher interest rates than residential mortgage loans, and which generate customer relationships that can result in larger noninterest-bearing demand deposit accounts;
  (v)   maintain adequate levels of capital; and
  (vi)   evaluate the performance of the leveraging strategy by utilizing our internal measuring and monitoring systems which includes interest rate sensitivity analysis.

 

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We have not engaged in hedging through the use of derivatives.
Net Portfolio Value. Prior to merging with the Office of the Comptroller of the Currency, the Office of Thrift Supervision required the computation of amounts by which the net present value of an institution’s cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provided all institutions that filed a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio value. The Office of Thrift Supervision simulation model used a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the Office of Thrift Supervision model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points was not prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The Office of Thrift Supervision provided us the results of the interest rate sensitivity model, which is based on information we provided to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.

 

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The table below sets forth, as of June 30, 2011 (the most recent date available), the Office of Thrift Supervision’s calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the United States Treasury yield curve.
                                         
At June 30, 2011  
                            NPV as a Percentage of Present  
Change in                           Value of Assets(3)  
Interest Rates           Estimated Increase             Increase  
(basis points)   Estimated     (Decrease) in NPV             (Decrease)  
(1)   NPV(2)     Amount     Percent     NPV Ratio(4)     (basis points)  
    (Dollars in thousands)  
+300
    151,848       (70,651 )     (31.75 )%     11.80 %     (427 )
+200
    178,112       (44,387 )     (19.95 )%     13.47 %     (260 )
+100
    201,969       (20,530 )     (9.23 )%     14.91 %     (116 )
0
    222,499                   16.07 %      
-100
    238,991       16,492       7.41 %     16.97 %     90  
 
     
(1)   Assumes an instantaneous uniform change in interest rates at all maturities.
 
(2)   NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
 
(3)   Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
 
(4)   NPV Ratio represents NPV divided by the present value of assets.
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. The Office of Thrift Supervision model illustrates the change in the economic value of our assets and liabilities at June 30, 2011 assuming an immediate change in interest rates. The table above indicates that at June 30, 2011, under the Office of Thrift Supervision model, in the event of a 200 basis point increase in interest rates, we would experience a 19.95% decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 7.41% increase in net portfolio value.
In addition to the Office of Thrift Supervision’s calculations with respect to the effects of changes in interest rates on net portfolio value, we prepare our own internal calculations of the estimated changes in our net portfolio value that would result from the designated immediate changes in the United States Treasury yield curve. We also analyze our sensitivity to changes in interest rates through our net interest income model. The model assumes loan prepayment rates, reinvestment rates and deposit decay rates based on historical experience and current economic conditions.

 

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The following table presents our internal calculations of the estimated changes in our net portfolio value and net interest income that would result from the designated instantaneous changes in the interest rate yield curve as of September 30, 2011:
                                                                 
At September 30, 2011  
                            NPV as a Percentage of     Net Interest Income  
Change in                           Present Value of Assets(3)             Increase (Decrease) in  
Interest Rates           Estimated Increase             Increase     Estimated     Estimated Net Interest  
(basis points)   Estimated     (Decrease) in NPV           (Decrease)     Net Interest     Income  
(1)   NPV(2)     Amount     Percent     NPV Ratio(4)     (basis points)     Income     Amount     Percent  
    (Dollars in thousands)  
+300
  $ 186,420     $ (45,583 )     (18.95 )%     14.15 %     (249 )   $ 39,876     $ (2,625 )     (6.18 )%
+200
    203,619       (26,384 )     (11.47 )%     15.18 %     (146 )     41,868       (633 )     (1.49 )%
+100
    218,506       (11,497 )     (5.00 )%     16.03 %     (61 )     43,264       763       1.80 %
0
    230,003                   16.64 %           42,501              
-100
    228,944       (1,059 )     (0.46 )%     16.50 %     (14 )     38,059       (4,442 )     (10.45 )%
 
     
(1)   Assumes an instantaneous uniform change in interest rates at all maturities.
 
(2)   NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
 
(3)   Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
 
(4)   NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at September 30, 2011, in the event of a 200 basis point increase in interest rates, we would experience an 11.47% decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 0.46% decrease in net portfolio value.
Net Interest Income. As of September 30, 2011, using our internal interest rate risk model, we estimated that our net interest income for the nine months ended September 30, 2011 would decrease by 1.49% in the event of an instantaneous 200 basis point increase in market interest rates, and would decrease by 10.45% in the event of an instantaneous 100 basis point decrease in market interest rates. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a rolling forward twelve-month period using historical data for assumptions such as loan prepayment rates and deposit decay rates, the current term structure for interest rates, and current deposit and loan offering rates. We then calculate what the net interest income would be for the same period in the event of an instantaneous 200 basis point increase or a 100 basis point decrease in market interest rates.

 

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Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value and net interest income. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
ITEM 4.   CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2011. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2011, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
In August 2011, the Chapter 11 Trustee for Taylor, Bean & Whitaker filed a complaint against the Company seeking to recover payments totaling $1.5 million made by Taylor, Bean & Whitaker to the Company as allegedly preferential transfers paid to the Company during the 90 days preceding the filing of the bankruptcy petition of Taylor, Bean & Whitaker. The Company asserts that the payments do not constitute preferences and has engaged outside legal counsel to assist in the matter. At the present time, the Company cannot determine the probability of a material adverse result or reasonably estimate a range of potential exposures, if any.
Aside from the litigation discussed above, the Company is involved in routine legal actions that are considered ordinary routine litigation incidental to the business of the Company. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a materially adverse effect on the Company’s financial condition, results of operations or cash flows.
ITEM 1A.   RISK FACTORS
There are no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on March 10, 2011.
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (a)   Not applicable.
  (b)   Not applicable.
  (c)   The following table provides information with respect to purchases made by or on behalf of the Corporation or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2011.
                                 
                    (c)     (d)  
                    Total Number of     Maximum Number  
    (a)             Shares Purchased     of Shares That May  
    Total Number     (b)     as Part of Publicly     Yet Be Purchased  
    of Shares     Average Cost     Announced Plans     Under the Plans or  
Period   Purchased     Per Share     or Programs (1)     Program (1)  
July 1, 2011 through July 31, 2011
        $             354,295  
August 1, 2011 through August 31, 2011
    354,295       14.34       354,295        
September 1, 2011 through September 30, 2011
    35,000       13.95       35,000       530,369  
 
                       
Total
    389,295     $ 14.31       389,295       530,369  
 
                       
 
     
(1)   On January 25, 2011, the Company’s Board of Directors approved a stock repurchase program under which the Company could repurchase up to 595,125 shares of the Company’s common stock, from time to time, subject to market conditions. The repurchase program was completed in August 2011. On September 1, 2011, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to 565,369 shares of the Company’s common stock, from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.

 

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ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.   REMOVED AND RESERVED
ITEM 5.   OTHER INFORMATION
None
ITEM 6.   EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  OMNIAMERICAN BANCORP, INC.    
 
  (Registrant)    
 
       
Date: November 4, 2011
  /s/ Tim Carter
 
Tim Carter
   
 
  President and Chief Executive Officer    
 
       
Date: November 4, 2011
  /s/ Deborah B. Wilkinson
 
Deborah B. Wilkinson
   
 
  Senior Executive Vice President and Chief Financial Officer    

 

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INDEX TO EXHIBITS
         
Exhibit    
Number   Description
  31.1    
Certification of Tim Carter, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
       
 
  31.2    
Certification of Deborah B. Wilkinson, Senior Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
       
 
  32    
Certification of Tim Carter, President and Chief Executive Officer, and Deborah B. Wilkinson, Senior Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101+    
Interactive Data File
 
     
+   As provided in rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934

 

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