ITEM 1B.
Unresolved Staff Comments
None.
We operate from our main office in Fort Worth, Texas, and from our 14 full-service branches located in the Dallas/Fort Worth Metroplex and Hood County, Texas. The net book value of our premises, land and equipment was $47.7 million at December 31, 2010. The following tables set forth information with respect to our full-service banking offices, including the expiration date of leases with respect to leased facilities.
From time to time, we are involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business. At December 31, 2010, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.
PART II
ITEM 5.
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Market under the symbol “OABC.” The approximate number of holders of record of OmniAmerican Bancorp, Inc.’s common stock as of March 7, 2011 was 823. Certain shares of OmniAmerican Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table presents quarterly market information for OmniAmerican Bancorp, Inc.’s common stock for the period beginning January 21, 2010, the date OmniAmerican Bancorp, Inc. began trading on the NASDAQ Global Market.
The Board of Directors has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of cash dividends. In determining whether and in what amount to pay a cash dividend, the Board is expected to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any cash dividends will be paid or that, if paid, will not be reduced or eliminated in the future.
Dividend payments by OmniAmerican Bancorp, Inc. are dependent primarily on dividends it receives from OmniAmerican Bank, because OmniAmerican Bancorp, Inc. will have no source of income other than dividends from OmniAmerican Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by OmniAmerican Bancorp, Inc., and interest payments with respect to OmniAmerican Bancorp, Inc.’s loan to the Employee Stock Ownership Plan. Federal law imposes limitations on dividends by federal stock savings banks. See “Item 1. Business - Supervision and Regulation - Capital Distributions.”
At December 31, 2010, there were no compensation plans under which equity securities of OmniAmerican Bancorp, Inc. were authorized for issuance other than the Employee Stock Ownership Plan.
The performance graph below compares the cumulative stockholder return on OmniAmerican Bancorp, Inc. Common Stock between January 21, 2010 and December 31, 2010 with the cumulative total return on the equity securities of companies included in the Standard &Poor’s 500 Stock Index and the SNL Bank and Thrift Index. The graph assumes the initial value of our common stock on January 21, 2010 was the closing sales price of $11.85 per share. The graph is expressed in dollars based on an assumed investment of $100 on January 21, 2010. The performance graph represents past performance and should not be considered to be an indication of future performance.
During the fourth quarter of 2010, we did not repurchase any shares of our common stock.
The summary information presented below at the dates or for each of the years presented is derived from OmniAmerican Bancorp, Inc.’s audited consolidated financial statements. The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes beginning on page 78 of this Annual Report.
(1)
The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.
(2)
The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3)
The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
(4)
Calculated from the effective date of January 20, 2010.
ITEM 7.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our financial condition at December 31, 2010 and 2009, and our results of operations for the years ended December 31, 2010, 2009, and 2008. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this annual report. OmniAmerican Bancorp, Inc. did not exist at December 31, 2009; therefore, the information reflected in this section related to the years ended December 31, 2009 and 2008 reflects the financial performance of OmniAmerican Bank.
Overview
Our results of operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on our deposits and borrowings. Results of operations are also affected by service charges and other fees, provision for loan losses, commissions, gains (losses) on sales of securities and loans, and other income. Our noninterest expense consists primarily of salaries and benefits, software and equipment maintenance, depreciation of furniture, software and equipment, FDIC insurance, other operations, occupancy, and professional and outside services expenses.
Our results of operations are also significantly affected by general economic and competitive conditions (such as changes in energy prices which have an impact on the Texas economy), as well as changes in interest rates, government policies, and actions of regulatory authorities. Future changes in applicable law, regulations, or government policies may materially affect our financial condition and results of operations. In recent periods, increases in computer fraud affecting our operations and the operations of third party providers have increased our costs of doing business.
Prior to our conversion to a federal savings bank in 2006, we operated as a Texas chartered credit union, concentrating our lending efforts on the origination of consumer loans, primarily the origination of indirect automobile loans. Since our conversion to a federal savings bank, we have changed the relative composition of our loan portfolio by emphasizing the origination of one- to four-family residential real estate loans, commercial business loans, commercial real estate loans, and real estate construction loans. As a result, between December 31, 2006 and December 31, 2010, our consumer loans as a percentage of total loans decreased from 59.2% to 29.9%. We have significantly increased our systems and administration to support the growth of our one- to four-family residential real estate, commercial real estate, and commercial business lending activities.
Business Strategy
Our primary objective is to remain an independent, community-oriented financial institution serving customers in our primary market areas. Our board of directors has sought to accomplish this objective by adopting a business strategy designed to maintain profitability, a strong capital position, and high asset quality. This business strategy includes the following elements:
Diversifying our loan portfolio by emphasizing the origination of one- to four-family residential real estate loans, commercial real estate loans, and commercial business loans. Our strategy for increasing net income includes increasing our loan originations and diversifying our loan portfolio. We intend to continue to emphasize the origination and purchase of one- to four-family residential real estate loans, as well as commercial real estate loans and commercial business loans, which increased to 40.6%, 13.1%, and 7.3%, respectively, of our total loans at December 31, 2010, from 22.5%, 10.2%, and 1.6% of our total loans at December 31, 2006. During
2008, we also entered into a number of commercial business loan participations. At December 31, 2010, our commercial business loan participations totaled $29.3 million. In the future, we intend to focus our commercial business lending on the origination of small to medium size business loans in our local market area. By contrast, consumer loans decreased to 29.9% of our total loans at December 31, 2010, compared to 59.2% of our total loans at December 31, 2006. We anticipate the total dollar amount of our consumer loans to remain stable in the near term. The increase in our one- to four-family residential real estate loans reflects the demand for these loans in our primary market areas. The increases in commercial real estate loans and commercial business loans reflect our emphasis on this type of lending. Commercial real estate loans and commercial business loans generally are originated with higher interest rates compared to one- to four-family residential real estate loans and, therefore, have a positive effect on our interest rate spread and net interest income. In addition, the majority of these loans are originated with adjustable interest rates, which assist us in managing interest rate risk.
Continuing conservative underwriting guidelines and aggressive monitoring of our loan portfolio in order to maintain asset quality. We introduce loan products only when we are confident that our staff has the necessary expertise and that sound underwriting and collection procedures are in place. For example, a relatively high percentage of our loan portfolio consists of consumer loans which are generally considered to have higher risk than owner-occupied one- to four-family residential loans. For the years ended December 31, 2010 and 2009, our average ratio of losses from consumer loans to average total loans was 0.26% and 0.37%, respectively. Our credit and collections department actively monitors the performance of our consumer and residential real estate loan portfolios. When a loan becomes past due, we promptly contact the borrower by telephone or by written communication. During each personal contact, the borrower is required to provide updated information and is counseled on the terms of the loan and the importance of making payments on or before the due date. With respect to our commercial real estate and commercial business lending, collection efforts are carried out directly by our commercial loan officers. Commercial loan officers review past due accounts weekly and promptly contact delinquent borrowers. Past due notices are typically sent to commercial real estate customers and commercial business customers at 15 days past due.
Emphasizing lower cost core deposits to reduce the funding costs of our loan growth. We offer interest-bearing and noninterest-bearing demand accounts, money market accounts, and savings accounts (collectively referred to as core deposits), which generally are lower-cost sources of funds than certificates of deposit, and are less sensitive to withdrawal when interest rates fluctuate. For the years ended December 31, 2010, 2009, 2008, 2007, and 2006, average core deposits represented 56.96%, 55.34%, 53.71%, 57.23%, and 60.12%, respectively, of average total deposits. We intend to continue emphasizing our core deposits as a source of funding. In this regard, we generally require that commercial banking borrowers open checking accounts with us at the time they establish a borrowing relationship with us.
Managing interest rate risk. As with most financial institutions, successfully managing interest rate risk is an integral part of our business strategy. Management and the board of directors evaluate the interest rate risk inherent in our assets and liabilities, and determine the level of risk that is appropriate and consistent with our capital levels, liquidity, and performance objectives. In particular, during the current low interest rate environment, we have sought to minimize the risk of originating long-term fixed rate loans by selling such loans in the secondary market, and in particular selling to Fannie Mae all qualifying one- to four-family fixed-rate residential real estate loans with terms in excess of 15 years. In addition, a significant percentage of our loan portfolio consists of commercial business loans and consumer loans which generally have shorter terms and provide higher yields than one- to four-family residential real estate loans. We also monitor the mix of our deposits, a majority of which have been lower cost core deposits. Our strategy is to continue managing interest rate risk in response to changes in the local and national economy and to increase our assets as we deploy the proceeds from the offering.
Implementing a controlled growth strategy. We believe our infrastructure, personnel, and fixed operating base can support a substantially larger institution. We intend to use our capital to grow organically and we may use a portion of the net proceeds of our initial public offering to pursue future acquisitions of commercial banks, savings institutions, financial services companies, and branch offices of such companies, including possible supervisory acquisitions.
The successful implementation of these strategies will allow us to offer our clients a broad range of financial services and products. Our goal is to have full relationship banking with our clients.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.
Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change in the near term, due to changes in credit quality which are evidenced by trends in charge-offs and in the volume and severity of past due loans. In addition, our loan mix is changing as we increase our commercial real estate and commercial business lending. Commercial real estate and commercial business loans generally have greater credit risk than one- to four-family residential real estate and consumer loans due to these loans being larger in amount and non-homogenous.
The allowance for loan losses is maintained at a level to cover probable credit losses inherent in the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:
•
groups of loans with similar risk characteristics that we evaluate collectively for impairment pursuant to ASC 450-10, “Contingencies.”
The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results. See also “Item 1. Business - Business of OmniAmerican Bank - Allowance for Loan Losses.”
Impairment of Investment Securities. The evaluation of the investment portfolio for other-than-temporary impairment is also a critical accounting policy. In evaluating the investment portfolio for other-than-temporary impairment, management considers the issuer’s credit rating, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position and other meaningful information. If a decline in the fair value of an investment security below its cost is judged to be other-than-temporary, the cost basis of the investment security is written down to fair value as a new cost basis. The amount of the credit related impairment write-down is recognized in our earnings and the non-credit related impairment for securities not expected to be sold is recognized in other comprehensive income (loss). A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary. These factors include failure to make scheduled principal and/or interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions, and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value.
Defined Benefit Retirement Plan. Our costs and obligations related to our defined benefit pension plan are calculated using various actuarial assumptions and methodologies as prescribed under ASC Topic 715, “Employers’ Accounting for Pensions.” Management evaluates, reviews with the plan actuaries, and updates, as appropriate, the assumptions used in the determination of the pension obligation and expense and the fair value of pension assets, including the discount rate and the expected rate of return on plan assets. The discount rate and the expected rate of return on plan assets have a significant impact on the actuarially computed present value of future pension plan benefits that is recorded on the balance sheet as a liability and the corresponding pension expense. Actual experience that differs from the assumptions could have a significant effect on our financial position and results of operations.
To compute our pension expense for the year ended December 31, 2010, we used actuarial assumptions that included a discount rate and an expected long-term rate of return on plan assets. The discount rate of 6.00%, used in this calculation, is the rate used in computing the benefit obligation as of December 31, 2010. The expected long-term rate of return on plan assets of 6.50% is based on the weighted average expected long-term returns for the target allocation of plan assets as of the measurement date, December 31, 2010, and was developed through analysis of historical market returns, current market conditions and the pension plan assets’ past experience. Although we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results. See Note 11 - Employee Benefit Plans of the notes to the consolidated financial statements included in this annual report for additional information.
Income Taxes. OmniAmerican Bank became a taxable entity after converting from a credit union to a federally chartered savings bank on January 1, 2006. On that date, we established a net deferred tax asset of $6.1 million as a result of timing differences for certain items, including depreciation of premises and equipment, unrealized gains and losses on investment securities, and bad debt deductions. The calculation of our income tax provision and deferred tax asset is complex and requires the use of estimates and judgment in their determination. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information, and we maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, and newly enacted statutory, judicial, and regulatory guidance that could affect the relative merits of the tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. In addition, positions we take in preparing our federal and state tax returns are subject to the review of taxing authorities, and the review of the positions we have taken by taxing authorities could result in a material adjustment to our financial statements. On January 1, 2009, we adopted authoritative guidance under ASC Topic 740, “Income Taxes.” This authoritative guidance prescribes a “more-likely-than-not” recognition threshold and measurement attribute (the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with tax authorities) for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. See Note 13 - Income Taxes of the notes to the consolidated financial statements included in this annual report for additional information.
Comparison of Financial Condition at December 31, 2010 and 2009
Assets. Total assets decreased $25.5 million, or 2.3%, to $1.11 billion at December 31, 2010 from $1.13 billion at December 31, 2009. The decrease was primarily the result of decreases in cash and cash equivalents of $115.5 million and loans, net of the allowance for loan losses and deferred fees and discounts of $37.7 million, partially offset by increases in securities classified as available for sale of $107.4 million and bank-owned life insurance of $20.1 million.
Cash and Cash Equivalents. Total cash and cash equivalents decreased $115.5 million, or 82.4%, to $24.6 million at December 31, 2010 from $140.1 million at December 31, 2009. The decrease in total cash and cash equivalents was primarily due to $243.5 million in cash used to purchase securities classified as available for sale, $240.3 million in cash used to originate and purchase loans, $25.4 million in cash used to repay Federal Home Loan Bank advances, and $20.0 million in cash used to purchase bank-owned life insurance. These decreases were partially offset by increases due to $210.6 million in cash received from loan principal repayments, $130.3 million of proceeds from sales, principal repayments, and maturities of securities and $58.2 million of proceeds from the sales of loans, consisting of longer term (greater than 15 years) one- to four-family residential real estate loans and commercial business loans, during the year ended December 31, 2010.
Securities. Securities classified as available for sale increased $107.4 million, or 51.0%, to $317.8 million at December 31, 2010 from $210.4 million at December 31, 2009. The increase in securities classified as available for sale during the year ended December 31, 2010, reflected purchases of $243.5 million during the year ended December 31, 2010 as we invested the proceeds of the initial public stock offering and cash generated from operations in securities classified as available for sale. Partially offsetting the increase due to purchases were decreases due to principal repayments, maturities, and calls of $110.2 million and sales of $20.1 million. The proceeds from the sales of securities classified as available for sale were used to purchase bank-owned life insurance. At December 31, 2010, securities classified as available for sale consisted primarily of government-sponsored mortgage-backed securities, government-sponsored and private-label collateralized mortgage obligations, trust preferred securities, and other equity securities.
Loans. Loans, net decreased $37.7 million, or 5.4%, to $660.4 million at December 31, 2010 from $698.1 million at December 31, 2009. The decrease included a reclassification of 22 loans, consisting of four commercial real estate loans with balances totaling $7.7 million, 16 single-family residential real estate loans with balances totaling $3.3 million and two home equity loans with balances totaling $141,000 to other real estate owned during the year ended December 31, 2010. Automobile loans (consisting of direct and indirect loans) decreased $24.3 million, or 11.8%, to $181.2 million at December 31, 2010 as weakened economic conditions have reduced the demand for automobile loans. Commercial real estate loans decreased $13.1 million, or 13.0%, to $87.9 million, primarily due to the economic downturn in our market area and the reclassification of $7.7 million of commercial real estate loans to other real estate owned. Commercial business loans decreased $10.6 million, or 17.9%, to $48.7 million at December 31, 2010. The decrease in commercial business loans was primarily attributable to a $12.0 million decrease in participation interests in Shared National Credits, to $4.7 million at December 31, 2010 from $16.7 million at December 31, 2009 reflecting the Company’s efforts to reduce its exposure to Shared National Credits and to focus our commercial business lending on small- to-medium size businesses in our local market area. Real estate construction loans decreased $2.3 million, or 6.4%, to $34.5 million at December 31, 2010, as weakened economic conditions and the excess of existing home inventories have reduced the demand for new construction. One- to four-family residential real estate loans increased $14.5 million, or 5.6%, to $271.8 million at December 31, 2010 from $257.3 million at December 31, 2009, as $126.2 million in originations and purchases of one- to four-family residential real estate loans were partially offset by sales of $53.7 million, repayments of $54.5 million, and a $3.3 million reclassification to other real estate owned.
Allowance for Loan Losses. The allowance for loan losses increased $604,000, or 7.3%, to $8.9 million at December 31, 2010 from $8.3 million at December 31, 2009, while total loans decreased $38.3 million, or 5.4%, to $669.5 million at December 31, 2010 from $707.8 million at December 31, 2009. The increase in the allowance for loan losses attributable to commercial business loans was partially offset by a decrease in the allowance for loan losses related to commercial real estate loans. At December 31, 2010, the allowance for loan losses represented 1.33% of total loans compared to 1.18% of total loans at December 31, 2009. Included in the allowance for loan losses at December 31, 2010 were 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 allowance for loan losses at December 31, 2009 included specific allowance for loan losses of $687,000 related to five impaired loans with balances totaling $6.6 million. In addition, impaired loans with balances totaling $11.8 million did not require specific allowances for loan losses at December 31, 2009. The balance of unimpaired loans decreased $53.2 million, or 7.7%, to $636.2 million at December 31, 2010 from $689.4 million at December 31, 2009. The allowance for loan losses related to unimpaired loans decreased $1.0 million, or 13.2%, to $6.6 million at December 31, 2010 from $7.6 million at December 31, 2009.
The significant changes in the amount of the allowance for loan losses during the year ended December 31, 2010 related to: (i) a $1.6 million increase in the allowance for loan losses attributable to commercial business loans resulting primarily from the establishment of $1.5 million of specific allowance for loan losses related to five impaired commercial business loans with balances totaling $2.0 million; and (ii) a $589,000 decrease in the allowance for loan losses attributable to commercial real estate loans primarily due to the foreclosure in 2010 of an impaired loan with a specific allowance for loan losses of $377,000 at December 31, 2009 and a $212,000 reduction in the general allowance for loan losses on unimpaired commercial real estate loans reflecting a decrease of $13.0 million, or 14.2%, in the total outstanding balance of unimpaired commercial real estate loans to $78.6 million at December 31, 2010 from $91.6 million at December 31, 2009. Management also considered local economic factors and unemployment as well as the higher risk profile of commercial business and commercial real estate loans when evaluating the adequacy of the allowance for loan losses as it pertains to these types of loans.
Bank-Owned Life Insurance. During 2010, we purchased $20.0 million of life insurance policies on certain key employees to help offset costs associated with the Company’s compensation and benefit programs and to generate competitive investment yields. The policy premiums were invested in an insurance carrier which had a rating of A+ by Standard & Poor’s.
Deposits. Deposits decreased $108.8 million, or 12.0%, to $801.2 million at December 31, 2009 from $910.0 million at December 31, 2009. Our core deposits (consisting of interest-bearing and non-interest-bearing demand accounts, money market accounts and savings accounts) decreased $118.0 million, or 20.5%, to $458.2 million at December 31, 2010 from $576.2 million at December 31, 2009 primarily due to the effects of our initial public stock offering. The core deposit balance at December 31, 2009 included $159.5 million in subscriptions for the purchase of shares of common stock in our initial public stock offering, which was completed on January 20, 2010. Certificates of deposit increased $9.2 million, or 2.8%, to $343.0 million at December 31, 2010 from $333.8 million at December 31, 2009.
Borrowings. Federal Home Loan Bank advances decreased $25.4 million, or 38.3%, to $41.0 million at December 31, 2010 from $66.4 million at December 31, 2009. The decline was the result of scheduled maturities in 2010 and was funded with available liquidity. Securities sold under agreements to repurchase were unchanged at $58.0 million at December 31, 2010 and December 31, 2009.
Stockholders’ Equity. At December 31, 2010, our stockholders’ equity was $198.6 million, an increase of $107.4 million, or 117.8%, from $91.2 million at December 31, 2009. The increase resulted from the receipt of net proceeds totaling $106.0 million following the completion of our initial public stock offering on January 20, 2010 and net income of $1.7 million for the year ended December 31, 2010. Accumulated other comprehensive (loss) income decreased $634,000, to a loss of $33,000 at December 31, 2010 from income of $601,000 at December 31, 2009.
Comparison of Operating Results for the Years Ended December 31, 2010 and 2009
General. Net income increased $1.0 million, or 152.7%, to $1.7 million for the year ended December 31, 2010 from $655,000 for the year ended December 31, 2009. The increase in net income for the year ended December 31, 2010 reflected an increase in net interest income of $4.9 million and a decrease in income tax expense of $607,000, partially offset by a decrease in noninterest income of $2.8 million, and increases in the provision for loan losses of $1.5 million, and noninterest expense of $244,000.
Interest Income. Interest income decreased $868,000, or 1.6%, to $52.8 million for the year ended December 31, 2010 from $53.7 million for the year ended December 31, 2009. The decrease resulted from a decrease of 43 basis points in our average yield on interest-earning assets to 5.12% for the year ended December 31, 2010 from 5.55% for the year ended December 31, 2009. The decrease in our average yield on interest-earning assets during the year ended December 31, 2010 as compared to the prior year period was due to the continuing low short-term market interest rate environment. Partially offsetting the decrease in the average yield on interest-earning assets was a $63.2 million, or 6.5%, increase in the average balance of interest-earning assets to $1.03 billion for the year ended December 31, 2010 from $968.6 million for the year ended December 31, 2009.
Interest income on loans decreased $2.4 million, or 5.4%, to $42.3 million for the year ended December 31, 2010 from $44.7 million for the year ended December 31, 2009. The decrease resulted primarily from a decrease in the average balance of loans of $35.8 million, or 5.0%, to $686.3 million for the year ended December 31, 2010 from $722.1 million for the year ended December 31, 2009. In addition, the average yield on our loan portfolio decreased by two basis points to 6.17% for the year ended December 31, 2010 from 6.19% for the year ended December 31, 2009.
Interest income on investment securities increased $1.5 million, or 16.7%, to $10.5 million for the year ended December 31, 2010 from $9.0 million for the year ended December 31, 2009. The increase resulted primarily from a $116.2 million, or 57.4%, increase in the average balance of our securities portfolio to $318.6 million for the year ended December 31, 2010 from $202.4 million for the year ended December 31, 2009, due to increased purchases of securities, primarily U.S. government sponsored 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 113 basis points to 3.30% for the year ended December 31, 2010 from 4.43% for the year ended December 31, 2009.
Interest Expense. Interest expense decreased by $5.8 million, or 29.4%, to $13.9 million for the year ended December 31, 2010 from $19.7 million for the year ended December 31, 2009. The decrease resulted primarily from a $3.3 decrease in interest expense on deposits million and a $2.4 million decrease in interest expense on borrowed funds. The average rate we paid on deposits decreased 53 basis points to 1.31% for the year ended December 31, 2010 from 1.84% for the year ended December 31, 2009, as we were able to reprice our deposits lower as market interest rates declined. Partially offsetting the decrease in expense due to the decrease in the rates we paid on deposits was a $26.3 million, or 3.8%, increase in the average balance of interest-bearing deposits to $719.6 million for the year ended December 31, 2010 from $693.3 million for the year ended December 31, 2009. The increase in the average balance of our interest-bearing deposits was primarily due to an increase in the average balance of our interest-bearing core deposits (consisting of interest-bearing demand accounts, money market accounts, and savings accounts). Management believes that the increase in our core deposits resulted from increases in personal savings rates and many consumers continuing to invest in FDIC-insured deposits as the economy begins to recover from the recession.
Interest expense on certificates of deposit decreased $2.9 million, or 28.4%, to $7.3 million for the year ended December 31, 2010 from $10.2 million for the year ended December 31, 2009. The average rate paid on certificates of deposit decreased 85 basis points to 2.12% for the year ended December 31, 2010 from 2.97% for the year ended December 31, 2009, reflecting lower market interest rates. Partially offsetting the decrease in interest expense was a $2.1 million, or 0.6%, increase in the average balance of certificates of deposit to $344.7 million for the year ended December 31, 2010 from $342.6 million for the year ended December 31, 2009. Interest expense on our core deposits decreased $450,000, or 17.3%, to $2.1 million for the year ended December 31, 2010 from $2.6 million for the prior year, primarily due to a 17 basis point decrease in the average rate paid on core deposits reflecting lower market interest rates, partially offset by a $24.2 million increase in the average balance of core deposits.
Interest expense on borrowed funds decreased $2.4 million, or 34.8%, to $4.5 million for the year ended December 31, 2010 from $6.9 million for the prior year as the average balance of Federal Home Loan Bank advances were reduced. Partially offsetting the decrease in the average balances of borrowed funds was an increase in the average rate paid for borrowed funds of five basis points to 3.98% for the year ended December 31, 2010 from 3.93% for the year ended December 31, 2009, reflecting an increase in the borrowing rate of a repurchase agreement.
Net Interest Income. Net interest income increased by $4.9 million, or 14.4%, to $38.9 million for the year ended December 31, 2010 from $34.0 million for the year ended December 31, 2009. The increase in net interest income resulted from a 16 basis point improvement in our interest rate spread to 3.45% for the year ended December 31, 2010 from 3.29% for the year ended December 31, 2009. Our net interest margin increased 26 basis points to 3.77% for the year ended December 31, 2010 from 3.51% for the year ended December 31, 2009. The increase in our interest rate spread and net interest margin reflected the sloping yield curve as short-term market interest rates used to price our deposits have continued to decline in 2010, while we had significant growth in the average balance of our interest-earning assets, such as investment securities, which generally are priced based on medium and longer-term interest rates.
Provision for Loan Losses. We recorded a provision for loan losses of $6.7 million for the year ended December 31, 2010 compared to a provision for loan losses of $5.2 million for the year ended December 31, 2009. The increase in the provision is primarily due to a $3.7 million, or 9.2%, increase in loans classified as substandard, to $44.0 million at December 31, 2010 from $40.3 million at December 31, 2009, and a $1.0 million, or 19.2%, increase in net charge-offs to $6.1 million for the year ended December 31, 2010 from $5.1 for the year ended December 31, 2009. At December 31, 2010, we identified 167 impaired loans with balances totaling $33.3 million. Eight of these impaired loans with balances totaling $15.6 million had specific allowance for loan losses totaling $2.3 million. Included in the substandard loan total at December 31, 2009 were 146 impaired loans with balances totaling $18.4 million. Five of these impaired loans with balances totaling $6.6 million had a specific allowance for loan losses of $687,000. In addition, 22 loans with balances totaling $11.1 million were reclassified to other real estate owned during the year ended December 31, 2010. Net charge-offs as a percentage of average loans outstanding increased to 0.89% for the year ended December 31, 2010 from 0.71% for the year ended December 31, 2009. The allowance for loan losses to total loans receivable increased to 1.33% at December 31, 2010 from 1.18% at December 31, 2009.
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 December 31, 2010 or December 31, 2009. At December 31, 2010, non-performing loans totaled $9.3 million, or 1.38% of total loans, compared to $8.3 million, or 1.17% of total loans, at December 31, 2009. The allowance for loan losses as a percentage of non-performing loans decreased to 96.55% at December 31, 2010 from 100.66% at December 31, 2009. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at December 31, 2010 and 2009.
Noninterest Income. Noninterest income decreased $2.8 million, or 17.0%, to $13.7 million for the year ended December 31, 2010 from $16.5 million for the year ended December 31, 2009. The decrease was primarily attributable to a $2.1 million decrease in net gains on the sales and calls of securities available for sale, consisting of mortgage-backed securities and agency bonds, a $426,000 decrease in service charges and other fees due to a significant decrease in insufficient funds and overdraft fees, and a $218,000 decrease in net gains on the sale of loans, primarily one- to four-family residential real estate loans.
Noninterest Expense. Noninterest expense increased $244,000, or 0.6%, to $44.0 million for the year ended December 31, 2010 from $43.8 million for the year ended December 31, 2009. The increase was primarily attributable to increases in real estate owned expense of $827,000, professional and outside services of $811,000, and marketing expense of $319,000, partially offset by decreases in the FDIC insurance assessment of $553,000, depreciation expense on furniture, software and equipment of $525,000, occupancy expense of $261,000 and service fees expense of $237,000. The increase in real estate owned expense was due primarily to increases in property tax, repairs and maintenance, and other expenses related to other real estate owed. The increase in professional and outside services can be primarily attributed to additional accounting, legal and consulting expenses to meet the reporting and compliance requirements of being a publicly traded company. The increase in marketing expense was due primarily to a debit card rewards program offered to customers. The decrease in the FDIC insurance assessment was primarily attributable to a $478,000 special assessment incurred in the prior year period and a decrease in the general assessment rate for the year ended December 31, 2010. The decrease in depreciation expense on furniture, software and equipment for the year ended December 31, 2010 compared to the year ended December 31, 2009 was primarily attributable to assets fully depreciated at December 31, 2009. The decrease in occupancy expense was due primarily to a reduction in property tax after property values were reduced for certain administrative office and branch locations. The decrease in service fees expense was primarily due to our conversion to in-house item processing from outsourcing item processing in the prior year.
Income Tax Expense. Income tax expense was $285,000 for the year ended December 31, 2010 compared to $892,000 for the prior year. Our effective tax rate, including provisions for the Texas state margin tax was 14.7% for the year ended December 31, 2010 compared to 57.7% for the year ended December 31, 2009. The decrease in the effective tax rate is primarily attributable to a $1.1 million decrease in the Texas state margin tax, to a credit of $570,000 for 2010 from expense of $553,000 for 2009. A change in the application of the state tax law as it relates to the calculation of in-state taxable margin resulted in an overstatement of margin tax expense in the years ended December 31, 2007, 2008 and 2009.
Comparison of Operating Results for the Years Ended December 31, 2009 and 2008
General. Net income increased $11,000, or 1.7%, to $655,000 for the year ended December 31, 2009 from $644,000 for the prior year. The increase in net income for the year ended December 31, 2009 reflected increases in net interest income of $4.0 million and noninterest income of $194,000, partially offset by increases in noninterest expense of $2.7 million, the provision for loan losses of $1.4 million and income tax expense of $150,000.
Interest Income. Interest income decreased $4.0 million, or 6.9%, to $53.7 million for the year ended December 31, 2009 from $57.7 million for the year ended December 31, 2008. The decrease resulted from a $26.4 million, or 2.7%, decrease in the average balance of interest-earning assets to $968.6 million for the year ended December 31, 2009 from $995.0 million for the year ended December 31, 2008. In addition, the average yield on interest-earning assets decreased by 25 basis points to 5.55% for the year ended December 31, 2009 from 5.80% for the year ended December 31, 2008. The decrease in our average yield on interest-earning assets during the year ended December 31, 2009 as compared to the prior year was due primarily to the general decline in short-term market interest rates.
Interest income on loans decreased $409,000, or 0.9%, to $44.7 million for the year ended December 31, 2009 from $45.1 million for the year ended December 31, 2008. The decrease resulted primarily from a decrease in the average balance of loans of $9.9 million, or 1.4%, to $722.1 million for the year ended December 31, 2009 from $732.0 million for the year ended December 31, 2008. Partially offsetting the decrease in average balance of loans was an increase in the average yield on our loan portfolio of three basis points, to 6.19% for the year ended December 31, 2009 from 6.16% for the year ended December 31, 2008. During this period, we continued to change the composition of our loan portfolio to include a higher percentage of loans secured by real estate and a lower percentage of consumer loans.
Interest income on investment securities decreased $3.6 million, or 28.6%, to $9.0 million for the year ended December 31, 2009 from $12.6 million for the year ended December 31, 2008. The decrease resulted primarily from a $40.7 million, or 16.7%, decrease in the average balance of our securities portfolio to $202.4 million for the year ended December 31, 2009 from $243.1 million for the year ended December 31, 2008, due to increased sales of our securities, primarily mortgage-backed securities. The average yield on our securities portfolio (excluding nontaxable investment securities) decreased by 54 basis points to 4.43% for the year ended December 31, 2009 from 4.97% for the year ended December 31, 2008.
Interest Expense. Interest expense decreased by $8.0 million, or 28.9%, to $19.7 million for the year ended December 31, 2009 from $27.7 million for the year ended December 31, 2008. The decrease resulted primarily from a decrease in interest expense on deposits of $5.3 million and, to a lesser extent, by a $2.7 million decrease in interest expense on borrowed funds. The average rate we paid on deposits decreased 85 basis points to 1.84% for the year ended December 31, 2009 from 2.69% for the year ended December 31, 2008, as we were able to reprice our deposits lower as market interest rates declined. Partially offsetting the decrease in expense due to the decrease in the rates we paid on deposits was a $21.3 million, or 3.2%, increase in the average balance of interest-bearing deposits to $693.3 million for the year ended December 31, 2009 from $672.0 million for the year ended December 31, 2008. The increase in the average balance of our interest-bearing deposits was primarily due to an increase in the average balance of our interest-bearing core deposits (consisting of interest-bearing demand accounts, money market accounts and savings accounts). Management believes that the increase in our core deposits resulted from many consumers investing in FDIC-insured deposits during the current recession.
Interest expense on certificates of deposit decreased $3.8 million, or 27.1%, to $10.2 million for the year ended December 31, 2009 from $14.0 million for the year ended December 31, 2008. The average rate paid on certificates of deposit decreased 112 basis points to 2.97% for the year ended December 31, 2009 from 4.09% for the year ended December 31, 2008, reflecting lower market interest rates. Partially offsetting the decrease in interest expense was a $274,000, or 0.1%, increase in the average balance of certificates of deposit to $342.6 million for the year ended December 31, 2009 from $342.3 million for the year ended December 31, 2008. Interest expense on our core deposits decreased $1.5 million, or 36.6%, to $2.6 million for the year ended December 31, 2009 from $4.1 million for the prior year reflecting lower market interest rates.
Interest expense on borrowed funds decreased $2.7 million, or 28.1%, to $6.9 million for the year ended December 31, 2009 from $9.6 million for the prior year as the average balance of Federal Home Loan Bank advances and securities sold under agreements to repurchase were reduced.
Net Interest Income. Net interest income increased by $4.0 million, or 13.3%, to $34.0 million for the year ended December 31, 2009 from $30.0 million for the year ended December 31, 2008. The improvement in net interest income resulted from a 55 basis point improvement in our interest rate spread to 3.29% for the year ended December 31, 2009 from 2.74% for the year ended December 31, 2008. Our net interest margin increased 49 basis points to 3.51% for the year ended December 31, 2009 from 3.02% for the year ended December 31, 2008. The increase in our interest rate spread and net interest margin reflected the steepening yield curve as short-term market interest rates used to price our deposits continued to decline in 2009.
Provision for Loan Losses. We recorded a provision for loan losses of $5.2 million for the year ended December 31, 2009 compared to a provision for loan losses of $3.8 million for the year ended December 31, 2008. The primary reasons for the increase in the provision for loan losses were a $18.9 million increase in loans classified as substandard and a $2.2 million increase in net charge-offs to $5.1 million for the year ended December 31, 2009 from $2.9 million for the year ended December 31, 2008. Substandard loans increased to $40.3 million at December 31, 2009 from $21.4 million at December 31, 2008. Included in the December 31, 2009 substandard loan total were impaired loans totaling $18.4 million, with a specific allowance for loan losses of $687,000, while two loans with balances totaling $7.5 million and specific allowances of $683,000 were considered to be impaired at December 31, 2008. In addition, six loans with balances totaling $9.2 million were reclassified to other real estate owned during the year ended December 31, 2009. Net charge-offs increased to 0.71% of average loans outstanding for the year ended December 31, 2009 from 0.40% for the year ended December 31, 2008. The allowance for loan losses to total loans receivable increased to 1.18% at December 31, 2009 from 1.14% at December 31, 2008.
At December 31, 2009, non-performing loans totaled $8.3 million, or 1.17% of total loans, as compared to $5.7 million, or 0.79% of total loans, at December 31, 2008. The allowance for loan losses as a percentage of non-performing loans decreased to 100.66% at December 31, 2009 from 145.06% at December 31, 2008. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at December 31, 2009 and 2008.
Noninterest Income. Noninterest income increased $194,000, or 1.2%, to $16.5 million for the year ended December 31, 2009 from $16.3 million for the year ended December 31, 2008. The increase was primarily attributable to a $2.4 million increase in net gains on the sale of securities available for sale, consisting of mortgage-backed securities, and an increase of $330,000 in net gains on the sale of loans, primarily one- to four-family residential real estate loans. These gains were offset in part by a decrease in service charges and other fees of $1.9 million due to a significant decrease in insufficient funds and overdraft fees income and a decline in other noninterest income due primarily to a $416,000 one-time payment from VISA in 2008. The one-time payment was related to VISA’s redemption of a portion of its Class B shares outstanding in connection with its initial public offering that occurred in March 2008.
Noninterest Expense. Noninterest expense increased $2.7 million, or 6.6%, to $43.8 million for the year ended December 31, 2009 from $41.1 million for the year ended December 31, 2008. The increase was primarily attributable to a $1.8 million increase in salaries and benefits expense, a $1.3 million increase in the FDIC insurance assessment, a $796,000 increase in software and equipment maintenance expense, partially offset by a $1.1 million decrease in professional and outside services expense and a $722,000 decrease in other operations expense. The increase in salaries and benefits was due primarily to the $1.3 million reversal in 2008 of a salary continuation plan liability for our former Chief Executive Officer which was recorded in 2006 and extinguished in 2008. The increase in the FDIC insurance assessment for the year ended December 31, 2009 compared to the year ended December 31, 2008 was primarily a $478,000 special assessment and increases in the general assessment rate and deposits upon which the assessment is based. The increase in software and equipment maintenance expense related to expenditures incurred to enhance our network security. Professional and outside services expense decreased for the year ended December 31, 2009 compared to the prior year due primarily to $537,000 of previously capitalized initial public offering expenses relating to our terminated initial public offering in late 2007 which were charged to earnings during the year ended December 31, 2008. The decrease in other operations expense was due to higher expenses in the year ended December 31, 2008 due to $784,000 in costs related to the breach in our network security that occurred in early 2008, net of a $227,000 reimbursement received from our insurance carrier, partially offset by $335,000 of costs in 2009 resulting from the Heartland Payment Systems security breach. Heartland Payment Systems expenses consisted of fees imposed on us by VISA to process merchant reimbursements for our customers, the cost of reissuing debit cards to our customers and the expense of the insurance deductible.
Income Tax Expense. Income tax expense was $892,000 for the year ended December 31, 2009 compared to $742,000 for the same period in 2008, primarily due to a $144,000 increase in the Texas state margin tax, to $553,000 for 2009 from $409,000 for 2008. Our effective tax rate, including provisions for the Texas state margin tax was 57.7% for the year ended December 31, 2009 compared to 53.5% for the year ended December 31, 2008.
Average Balances and Yields
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the years 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.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior 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.
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 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. Our Asset/Liability Management Committee is responsible for establishing and monitoring 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 seek to maintain a liquidity ratio of 10.0% or greater. For the year ended December 31, 2010, our liquidity ratio averaged 30.0%. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2010.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i)
expected loan demand;
(ii)
expected deposit flows;
(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 December 31, 2010, cash and cash equivalents totaled $24.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $317.8 million at December 31, 2010. On that date, we had $41.0 million in Federal Home Loan Bank advances outstanding, with the ability to borrow an additional $394.9 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 December 31, 2010, we had $23.6 million in commitments to extend credit. In addition to commitments to originate loans, we had $20.1 million in undisbursed lines of credit to borrowers. Certificates of deposit due within one year of December 31, 2010 totalled $194.1 million, or 24.2% 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 December 31, 2011. We believe, however, based on past experience, that 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.
Our primary investing activity is originating loans. We originated $235.8 million, $282.9 million, and $288.9 million of loans during the years ended December 31, 2010, 2009, and 2008, respectively. In addition, we purchased $243.5 million, $106.1 million, and $73.6 million of securities during the years ended December 31, 2010, 2009, and 2008, respectively.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We had a net decrease in total deposits of $108.8 million for the year ended December 31, 2010 and a net increase in total deposits of $170.1 million for the year ended December 31, 2009, primarily due to the effects of the initial public offering. We had a net increase in total deposits of $10.0 million for the year ended December 31, 2008. 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, borrowing agreements exist with the Federal Home Loan Bank of Dallas, which provides an additional source of funds. Federal Home Loan Bank advances decreased by $25.4 million and $103.5 million for the years ended December 31, 2010 and 2009, respectively, and increased $13.0 million for the year ended December 31, 2008. Federal Home Loan Bank advances have primarily been used to fund loan demand and to purchase investment securities. At December 31, 2010, we had the ability to borrow up to $435.9 million from the Federal Home Loan Bank of Dallas. In addition, we maintained $27.5 million in federal funds lines with other financial institutions at December 31, 2010. 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 December 31, 2010, the borrowing limit for this line of credit was $174.0 million.
Banks and bank holding companies are 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 December 31, 2010, OmniAmerican Bancorp, Inc. and OmniAmerican Bank exceeded all regulatory capital requirements. OmniAmerican Bancorp, Inc. believes that, as of December 31, 2010, its bank subsidiary, OmniAmerican Bank, is considered “well capitalized” under regulatory guidelines. See “Item 1. Business - Supervision and Regulation - Federal Banking Regulation - Capital Requirements” and Note 12 - Regulatory Matters of the notes to the consolidated financial statements included in this annual report.
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. For additional information, see Note 16 - Financial Instruments with Off-Balance Sheet Risk of the notes to the consolidated financial statements included in this annual report.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, and agreements with respect to borrowed funds and deposit liabilities.
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2010. 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.
(1)
Includes Federal Home Loan Bank advances and securities sold under agreements to repurchase.
(2)
Since lines of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
Recent Accounting Pronouncements
For discussion of Recent Accounting Pronouncements, see Note 1 - Summary of Significant Accounting and Reporting Policies - Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements under Item 8 of this report.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
ITEM 7A.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Management of 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.
Our interest rate sensitivity is monitored through the use of a net interest income simulation model which generates estimates of the change in our net interest income over a range of interest rate scenarios. The model assumes loan prepayment rates, reinvestment rates, and deposit decay rates based on historical experience and current economic conditions.
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 real estate 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 real estate loans, and which generate customer relationships that can result in larger noninterest-bearing demand deposit accounts; and
(v)
maintain adequate levels of capital.
We have not engaged in hedging through the use of derivatives.
Net Portfolio Value. The Office of Thrift Supervision requires 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 provides all institutions that file 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 uses 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 has not been 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 provides us the results of the interest rate sensitivity model, which is based on information we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.
The table below sets forth, as of December 31, 2010, 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. In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our internal net interest income model which is also summarized in the table below at December 31, 2010.
(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 December 31, 2010 assuming an immediate change in interest rates. The table above indicates that at December 31, 2010, under the Office of Thrift Supervision model, in the event of a 200 basis point increase in interest rates, we would experience an 11.19% decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 4.23% increase in net portfolio value.
Net Interest Income. 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. As of December 31, 2010, using our internal interest rate risk model, we estimated that our net interest income for the year ended December 31, 2010 would decrease by 3.13% in the event of an instantaneous 200 basis point increase in market interest rates, and would decrease by 4.34% in the event of an instantaneous 100 basis point decrease in market interest rates.
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 8.
ITEM 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
OMNIAMERICAN BANCORP, INC. AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Income for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Audit Committee
OmniAmerican Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of OmniAmerican Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OmniAmerican Bancorp, Inc. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), OmniAmerican Bancorp, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2011 expressed an unqualified opinion on the effectiveness of OmniAmerican Bancorp, Inc. and Subsidiary’s internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
Dallas, Texas
March 10, 2011
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands)
See Notes to Consolidated Financial Statements.
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(In thousands)
See Notes to Consolidated Financial Statements.
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share data)
See Notes to Consolidated Financial Statements.
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Dollars in thousands)
NOTE 1 - Summary of Significant Accounting and Reporting Policies
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of OmniAmerican Bancorp, Inc. and its wholly-owned subsidiary, OmniAmerican Bank, together referred to as “OmniAmerican” or the “Company.” All significant intercompany balances and transactions have been eliminated in consolidation.
OmniAmerican Bancorp, Inc., a Maryland corporation, owns all of the outstanding shares of OmniAmerican Bank (the “Bank”). The Bank is a federally-chartered savings bank headquartered in Fort Worth, Texas that provides a variety of banking and financial services to individuals and business customers. The Bank’s operations are conducted primarily through its executive office and 15 branches located in the Dallas/Fort Worth Metroplex and Hood County.
Certain prior year amounts have been reclassified in order to conform to current year presentation. Such reclassifications had no affect on net income or equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The allowance for loan losses, realization of deferred tax assets, and fair values of financial instruments are particularly subject to change.
Segment Reporting
Operating segments are components of a business about which separate financial information is available and that are evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and assess performance. Public companies are required to report certain financial information about operating segments in interim and annual financial statements. The Company’s chief operating decision-maker uses consolidated results to make operating and strategic decisions. Therefore, the Company is considered to have one operating segment.
Cash and Cash Equivalents and Concentrations
Cash and cash equivalents consist of cash on hand, amounts due from banks, and investments with maturities of three months or less at date of purchase. Net cash flows are reported for loan and deposit transactions.
The Company maintains funds on deposit at correspondent banks which at times exceed the federally insured limits. The Company’s management monitors the balance in these accounts and periodically assesses the financial condition of correspondent banks.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Investment Securities
Investments that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available for sale and are carried at fair value. Unrealized gains and losses on investments classified as available for sale have been accounted for as accumulated other comprehensive income (loss).
Gains and losses on the sale of available for sale securities are determined using the specific-identification method. Amortization of premiums and accretion of discounts are recognized in interest income over the period to maturity. For debt securities the Company intends to sell prior to recovery or for which it is more likely than not that the Company will have to sell prior to recovery, impairment losses are considered other-than-temporary and the entire difference between the security’s cost and its fair value is recorded in earnings. For debt securities the Company does not intend to sell or for which it is more likely than not that the Company will not have to sell prior to recovery, the Company recognizes a credit loss component of an other-than-temporary impairment in earnings and the remaining portion of the impairment loss in other comprehensive income. The credit loss component of an other-than-temporary impairment is determined based upon the Company’s estimate of the present value of the cash flows expected to be collected.
The Company, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB in an amount between 0.05% and 0.30% of its assets plus between 3.50% and 5.00% of advances outstanding. No ready market exists for the FHLB stock and it has no quoted market value; however, the stock is redeemable upon proper notice given to the FHLB. The investment in FHLB stock is carried at cost and dividends are recorded as income when received. FHLB stock is included in other investments in the consolidated balance sheets.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. These loans are normally sold with servicing released. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Sales in the secondary market are recognized when full acceptance and funding has been received. Gains and losses on sales of loans are recorded as the difference between the sales price and the carrying value of the loan sold.
Loans
Loans that management intends to hold for the foreseeable future or until maturity or payoff are reported at the amount of unpaid principal, net of an allowance for loan losses and deferred loan fees and costs. Interest on loans is recognized over the terms of the loans and is calculated using the simple interest method on principal amounts outstanding. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual lives of the related loans. For loans that pay-off prior to their contractual maturity, any remaining unamortized loan fees or costs are recognized.
Premiums and discounts on purchased loans are amortized over the estimated life of the loans as an adjustment to yield using the interest method.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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 commercial 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, the Company does not separately review individual consumer and residential real estate loans for impairment, unless such loans are the subject of a restructuring agreement.
Income Recognition on Impaired and Non-accrual Loans
The accrual of interest on loans, including impaired loans, is discontinued when management believes that the borrower’s financial condition is such that collection of interest is doubtful. The Company’s policy is generally to discontinue accrual of interest when the loan becomes 90 days delinquent. Delinquency status is based on contractual terms of the loan. All interest accrued but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. Cash payments received on loans on non-accrual status reduce the principal of the loans.
Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also 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. The general component covers non-classified loans and is primarily based on the historical loss experience adjusted for relevant qualitative factors.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The allowance for loan losses includes allowance allocations calculated in accordance with Accounting Standards Codification (“ASC”) Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses in presented in Note 5 - Loans and Allowance for Loan Losses.
Premises and Equipment
Land is carried at cost. Depreciable premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets ranging from 20 to 40 years for buildings and building improvements and from three to 10 years for furniture and equipment. Maintenance and repairs are charged to noninterest expense. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any resulting gain or loss is reflected in the income and expense accounts. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the useful lives of the assets or the terms of the related leases.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes.
Other Real Estate Owned and Foreclosed Assets
Other real estate owned is recorded at fair value less the estimated costs to sell the property at the date of transfer to other real estate owned. The fair value of other real estate is determined through independent third-party appraisals. At the time a loan is transferred to other real estate owned, any carrying amount in excess of the fair value less estimated costs to sell the property is charged off to the allowance for loan losses. Subsequently, should the fair value of an asset, less the estimated costs 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. Net operating expenses of properties are also included in noninterest expense. Gains and losses realized from sales of other real estate owned are recorded in noninterest income.
Other foreclosed assets are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Foreclosed assets are included in other assets in the accompanying consolidated balance sheets. Revenues and expenses from operations and changes in the valuation allowance are included in noninterest expense.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Mortgage Servicing Rights
Mortgage servicing rights are initially recorded at cost when acquired through the sale of loans with servicing rights retained and are amortized to servicing income on loans sold in proportion to and over the period of estimated net servicing income. The value of mortgage servicing rights at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans.
The estimated fair value is evaluated at least annually by a third party firm for impairment by comparing actual cash flows and estimated cash flows from the servicing assets to those estimated at the time servicing assets were originated. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the mortgage servicing rights portfolio. The Company’s methodology for estimating the fair value of mortgage servicing rights is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on the fair value. Thus, any measurement of mortgage servicing rights’ fair value is limited by the conditions existing and assumptions as of the date made. Those assumptions may not be appropriate if they are applied at different times.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Income Taxes
The Company accounts for income taxes using the asset and liability method of accounting for income taxes as prescribed in Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2010 and 2009, after evaluating all uncertain tax positions, the Company has recorded no liability for unrecognized tax benefits at the end of the reporting period. The Company would recognize any interest accrued on unrecognized tax benefits as other interest expense and penalties as other noninterest expense, if any. During the years ended December 31, 2010, 2009, and 2008, the Company recognized no interest expense or penalties related to uncertain tax positions.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Pension Plan
The Company has a non-contributory defined benefit plan providing pension benefits covering employees who meet certain age and service requirements. The Plan was initially established through the Company’s membership in the CUNA Mutual Group. Effective December 31, 2006, the Company froze its defined benefit plan for current participants and closed the plan to new participants. The compensation cost under the defined benefit plan is recognized on the net periodic cost method over the employees’ approximate service period. The aggregate cost method is utilized for funding purposes. Effective April 1, 2007, the administration of the plan was transferred from CUNA Mutual Group to Principal Financial Group.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and the defined benefit pension plan, are reported as a separate component of the stockholders’ equity section of the balance sheet.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank of $10,674 and $9,628 was required to meet regulatory reserve and clearing requirements at December 31, 2010 and 2009, respectively.
Advertising Costs
Advertising costs are charged to earnings as incurred. Advertising costs of $719, $368, and $261 were charged to earnings during the years ended December 31, 2010, 2009, and 2008, respectively.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for unallocated ESOP shares. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards, if any.
Employee Stock Ownership Plan (ESOP)
Compensation expense for the ESOP is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. The cost of shares issued to the ESOP, but not yet allocated to participants, is shown as a reduction of stockholders’ equity in the consolidated balance sheets. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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.
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 No. 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. A company will need to 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 5 - Loans and Allowance for Loan Losses.
In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” which became effective upon issuance. This guidance delays the effective date of the disclosures about troubled debt restructurings required in ASU No. 2010-20 for public entities. The adoption of this guidance did not have a material impact on the Company’s financial statements.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 2 - Plan of Conversion and Reorganization
On June 23, 2009, the Board of Directors of OmniAmerican Bank (the “Bank”) adopted a Plan of Conversion (the “Plan”) whereby the Bank would convert from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Plan provided for the formation of a holding company, OmniAmerican Bancorp, Inc., that would sell shares of common stock to the public and would own 100% of the common stock of the Bank. OmniAmerican Bancorp, Inc. registered for offer and sale 11,902,500 shares of common stock, par value $0.01 per share, at a sales price of $10.00 per share. The shares of common stock were offered to eligible account holders, depositors as of March 31, 2008, of OmniAmerican Bank and tax-qualified employee benefit plans sponsored by the Bank. On November 12, 2009, the registration statement was declared effective by the Securities and Exchange Commission and the Plan was approved by the Office of Thrift Supervision. The Bank’s members approved the Plan on January 15, 2010.
The public stock offering closed on January 20, 2010 and the common stock began trading on the NASDAQ Global Market on January 21, 2010 under the symbol “OABC.”
The stock offering resulted in gross proceeds of $119,025 through the sale of 11,902,500 shares at $10.00 per share. Expenses related to the offering were $3,499. OmniAmerican Bancorp, Inc. received net proceeds from the initial public offering of $115,526 and loaned $9,522 to OmniAmerican Bank’s Employee Stock Ownership Plan to enable it to purchase 952,200 shares of common stock in the offering. The remaining net proceeds were $106,004, of which $86,645 was contributed to OmniAmerican Bank and the remainder was retained by OmniAmerican Bancorp, Inc. to be utilized for general corporate purposes.
NOTE 3 - Concentration of Funds
The Company had the following balances on deposit at another financial institution at the dates indicated:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 4 - 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 December 31, 2010 and 2009 were as follows:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Investment securities available for sale with gross unrealized losses at December 31, 2010 and 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
At December 31, 2010, the Company owned 238 investments of which 39 had unrealized losses. At December 31, 2009, the Company owned 168 investments of which 15 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 December 31, 2010 and 2009, and are subject to change daily as interest rates fluctuate.
Included in the investment securities available for sale are trust preferred securities with amortized costs of $7,693 and unrealized losses of $3,773 at December 31, 2010. The Company owns the highly-collateralized senior tranches of the trust preferred securities. The market for these securities is not active and markets for similar securities are also not active. The fair value of these securities was determined using a discounted cash flow model that incorporates assumptions regarding defaults on the underlying collateral.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following table provides additional information related to our trust preferred securities as of December 31, 2010:
Based on a stress analysis performed as of December 31, 2010 of the senior tranches of the trust preferred securities we own, we concluded that these investments were not other than temporarily impaired. 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 December 31, 2010 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.
Investment securities with an amortized cost of $242,514 and $130,374 at December 31, 2010 and 2009, respectively, were pledged to secure Federal Home Loan Bank advances. In addition, investment securities with fair value of $66,207 and $67,291 at December 31, 2010 and 2009, respectively, were pledged to secure other borrowings.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Sales activity of securities available for sale for the years ended December 31, 2010, 2009, and 2008 was as follows:
Gains or losses on the sales of securities are recognized at the trade date utilizing the specific identification method.
Other investments consisted of the following at the dates indicated:
The Company views its investment in the stock of the FHLB of Dallas as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The decision of whether impairment exists is a matter of judgment that should reflect the investor’s views on the FHLB of Dallas’ long term performance, which includes factors such as its operating performance, the severity and duration of declines of the market value of its net assets relative to its capital stock amount, its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance, the impact of legislative and regulation changes on the FHLB of Dallas and accordingly, on the members of the FHLB of Dallas, and its liquidity and funding position. The Company does not believe that its investment in the FHLB of Dallas was impaired at December 31, 2010 or 2009.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 5 - Loans and Allowance for Loan Losses
The composition of the loan portfolio was as follows at the dates indicated:
A large percentage of the Company’s customers work or reside in Tarrant or Dallas County, and in the surrounding areas. Although the Company has a diversified loan portfolio, borrowers’ ability to repay loans may be affected by the economic climate of the overall geographic region in which borrowers reside.
In 2008, the Bank began purchasing one- to four-family residential loans at a discounted price to the principal balance of the mortgage loans. These loans did not exhibit evidence of credit deterioration at the time of purchase. The discount on the purchased loans is accreted to interest income using the effective interest method for fixed rate loans and using the straight-line method for adjustable rate loans. As of December 31, 2010, the total outstanding loan balance of all purchased one- to four-family residential loans was $23,878, while the carrying value, net of purchase discounts was $20,354. As of December 31, 2009, the total outstanding loan balance of all purchased one- to four-family residential loans was $30,253, while the carrying value, net of purchase discounts, was $25,494.
In 2009, the Company established a line of credit with the Federal Reserve Bank. As of December 31, 2010, $24,092 of commercial loans and $149,888 of consumer loans were pledged as collateral for this line of credit.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following table presents loans identified as impaired by class of loans as of December 31, 2010 and 2009:
As of December 31, 2010 and 2009, no additional funds were committed to be advanced in connection with impaired loans.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Included in impaired loans as of December 31, 2010 and 2009 were troubled debt restructured loans of $19,496 and $18,403, respectively.
The following table presents the recorded investment in non-accrual loans by class of loans as of December 31, 2010 and 2009:
There were no loans greater than 90 days past due that continued to accrue interest at December 31, 2010 or 2009.
The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 and 2009 by class of loans:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Our methodology for evaluating the adequacy of the allowance for loan losses consists of:
•
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 in accordance with ASC 450-10, “Contingencies.”
The specific component of the allowance for loan losses relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also 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 $1,000, 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 $1,000 are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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 us 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 $1,000 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 that are analyzed individually for impairment 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 December 31, 2010 and 2009:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The Company classifies residential real estate loans that are not analyzed individually for impairment (less than $1,000) 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:
•
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 December 31, 2010 and 2009:
The Company evaluates consumer loans based on the credit score for each borrower when the loan is originated. The Company defines a sub-prime consumer loan as any loan to a borrower who has a credit score of less than 661 at the time of funding. The following table presents the credit score for each of the classes of consumer loans as of December 31, 2010 and 2009:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following table presents the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of and for the years ended December 31, 2010 and 2009:
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2008:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 6 - Mortgage Servicing Rights
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 (“Fannie Mae”). Residential real estate loans serviced for Fannie Mae are not included as assets on the consolidated balance sheets.
Following is an analysis of the changes in mortgage servicing rights for the years indicated:
The amount of contractually specified servicing fees for one- to four-family residential loans was $319, $247, and $73 for the years ended December 31, 2010, 2009, and 2008, respectively. The servicing fees for one- to four-family residential loans are recorded in service charges and other fees on the consolidated statements of income.
NOTE 7 - Premises and Equipment
Premises and equipment were as follows at the dates indicated:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Depreciation and amortization charged to expense amounted to $4,813, $5,313, and $5,079 for the years ended December 31, 2010, 2009, and 2008, respectively.
At December 31, 2010, the Company had certain non-cancelable operating leases for premises with future minimum annual rental payments as follows:
Rent expense was $520, $602, and $560 for the years ended December 31, 2010, 2009, and 2008, respectively.
The lease for a branch located in Arlington, Texas expired on December 31, 2010. The branch was closed on December 28, 2010.
The lease for offices located in west Fort Worth and occupied by certain administrative departments expired on October 31, 2010. The Company has entered into a ten-year lease for office space located north of downtown Fort Worth. The relocation to the new offices is expected to occur in March 2011.
The Company owns a 202,000 square-foot office building in Fort Worth, Texas that it uses for its administrative headquarters and certain bank operations. The Company occupies approximately 51,000 square feet of the building and leases the remaining space to various tenants. Gross rental income from these leases of $2,583, $2,488, and $2,515 was recognized for the years ended December 31, 2010, 2009, and 2008, respectively. At December 31, 2010, non-cancelable operating leases for the building with future minimum lease payments are as follows:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 8 - Other Real Estate Owned and Other Foreclosed Assets
At December 31, 2010 and 2009, other real estate owned totaled $14,793 and $6,762, respectively. The other real estate owned at December 31, 2010 included seven foreclosed single-family residential properties with fair market values totaling $2,196, five commercial real estate properties with fair market values totaling $8,952 and six units of a condominium project foreclosed in 2009 with fair market values totaling $3,369. During the year ended December 31, 2010, ten foreclosed single-family residential properties, two units of the condominium project and mineral rights related to a foreclosed commercial property were sold for net proceeds of $2,809 and net losses of $103 were recorded related to the sales of these properties. The other real estate owned at December 31, 2009 included two foreclosed single-family residential properties with a fair market value of $671, a commercial real estate property with a fair market value of $1,390 and eight units of a condominium project with a fair market value of $4,425. During the year ended December 31, 2009, two foreclosed single-family residential properties and one unit of the condominium project were sold for net proceeds of $2,583 and net losses of $86 were recorded related to the sales of these properties. During the year ended December 31, 2008, one foreclosed single-family residential property was sold for net proceeds of $171 and a gain of $3 was recorded related to the sale of the property.
In addition, at December 31, 2010 and 2009, other real estate owned included the fair market value of property that had been purchased as a potential branch site in 2000. In 2006, the property was reclassified to other real estate owned from premises and equipment and a $222 charge to operations was recorded to write-down the book value of the property to its fair market value of $488 as a result of management’s decision to sell the property rather than build a branch at the site. An additional $212 charge to operations was recorded in 2009 to write-down the book value of the property to its fair market value as of December 31, 2009 of $276. No additional adjustments to the property’s fair market value were recorded during the year ended December 31, 2010.
At December 31, 2010 and 2009, other foreclosed assets, which are included in other assets, totaled $207 and $267, respectively. Net gains on the sales of other foreclosed assets of $13 and $12 were recognized for the years ended December 31, 2010 and 2009, respectively. Net losses on the sales of other foreclosed assets of $25 were recognized for the year ended December 31, 2008.
NOTE 9 - Deposits
Deposits by major type consisted of the following at the dates indicated:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
At December 31, 2010 and 2009, overdrawn deposit accounts totaling $221 and $212, respectively, have been reclassified as loans on the consolidated balance sheets.
The following table summarizes the interest expense incurred on the deposits by major type for the years ended December 31, 2010, 2009, and 2008:
Certificates of deposit in excess of $100 were $122,162 and $109,291 at December 31, 2010 and 2009, respectively. Generally, deposits greater than $250 are not federally insured.
The remaining maturity on certificates of deposit at December 31, 2010 is presented below:
At December 31, 2010 and 2009, brokered time deposits totaled $884 and $883, respectively.
NOTE 10 - Borrowed Funds
The Company has a line of credit with the FHLB of Dallas which allows it to borrow on a collateralized basis at a fixed term with pledged assignments. At December 31, 2010, advances from the FHLB of Dallas totaled $41,000 and had fixed interest rates ranging from 2.83% to 4.28% with a weighted average rate of 3.62%. At December 31, 2009, advances from the FHLB of Dallas totaled $66,400 and had fixed interest rates ranging from 2.58% to 4.43% with a weighted average rate of 3.54%. The borrowings are collateralized by a blanket floating lien on all first mortgage loans, mortgage-backed securities, the FHLB capital stock owned by the Company, and any funds on deposit with FHLB. At December 31, 2010 and 2009, the borrowing limit was $435,937 and $333,091, respectively. In addition, investment securities with an amortized cost of $242,514 and $130,374 were pledged to secure the advances at December 31, 2010 and 2009, respectively.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
At December 31, 2010, the Company had FHLB advances outstanding which mature on the dates indicated as follows:
The Company entered into a sale of securities under agreement to repurchase (“repurchase agreement”) with PNC Bank, N.A. (“PNC”) on July 24, 2007. The 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 a 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. At December 31, 2010 and 2009, the Company had $58,000 and $58,000 in repurchase agreements outstanding, respectively. These repurchase agreements were secured by investment securities with a fair value of $66,207 and $67,291 at December 31, 2010 and 2009, respectively.
Additionally, the Company maintains $27,500 in federal funds lines with other financial institutions.
In 2009, the Company established a line of credit with the Federal Reserve Bank. As of December 31, 2010, $24,092 of commercial loans and $149,888 of consumer loans were pledged as collateral. At December 31, 2010, the available line of credit was $173,980. The Bank has never drawn on this line of credit.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Information relating to the FHLB advances and other borrowings as of or for the years ended December 31, 2010 and 2009 is summarized as follows:
NOTE 11 - Employee Benefit Plans
Pension Plan
The Company sponsors a defined benefit pension plan (the “Pension Plan”) for the benefit of its employees. The Pension Plan originally called for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and compensation levels at retirement. On November 15, 2006, the Company announced that it would freeze benefits under the Pension Plan effective December 31, 2006, so that no further benefits will be earned by employees after that date. In addition, no new participants may be added to the Pension Plan after December 31, 2006.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Changes in the plan benefit obligation using a December 31 measurement date for the years ended December 31, 2010 and 2009 were as follows:
Changes in plan assets for the years ended December 31, 2010 and 2009 were as follows:
At December 31, 2010 and 2009, the funded status is recognized in accrued expenses and other liabilities in the consolidated balance sheets.
The net periodic pension cost for the years ended December 31, 2010, 2009, and 2008 includes the following components:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Amounts related to the Company’s defined benefit pension plan recognized as a component of other comprehensive income (loss) were as follows:
Amounts recognized as a component of accumulated other comprehensive income (loss) as of year-end that have not been recognized as a component of the combined net period benefit cost of the Company’s defined benefit pension plan are presented in the following table. The Company expects to recognize approximately $65 of the net actuarial loss reported in the following table as of December 31, 2010 as a component of the net periodic benefit cost during 2011.
Assumptions used in accounting for the Pension Plan are as follows:
Historical and future expected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The Company’s current pension plan target allocations and the weighted-average asset allocations as of December 31, 2010 and 2009 by asset category are as follows:
The assets of the defined benefit pension plan are invested in domestic and international equity securities, fixed income securities, and real estate securities funds. The plan’s investment policy includes guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. The objective is to maintain investment portfolios that limit risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies. The Company periodically reviews the investment policy. The policy is established and administered in a manner so as to comply at all times with applicable government regulations.
The major categories of assets in the Company’s defined benefit pension plan as of December 31, 2010 and 2009 are presented in the following table. Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820, “Fair Value Measurements and Disclosures,” utilized to measure fair value (see Note 15 - Fair Value Measurements).
The Company made contributions to the pension plan of $5 and $116 during the years ended December 31, 2010 and 2009, respectively. The Company expects to make additional contributions of $3 to the plan in fiscal year 2011.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
As of December 31, 2010, the pension benefit payments were expected to be paid as follows:
401(k) Plan
The Company also has a discretionary defined contribution savings plan (the “Savings Plan”). The Savings Plan is qualified under Sections 401 and 401(k) of the Internal Revenue Code and allows employees to contribute a portion of their salary on a pretax basis into the Savings Plan. The Company matches a portion of employees’ contributions. Matching contributions made by the Company are accrued and funded on a current basis. During the years ended December 31, 2010, 2009, and 2008, the Company contributed approximately $591, $617, and $616 to the Savings Plan, respectively, which is included in salaries and benefits expense in the accompanying consolidated statements of income.
Deferred Compensation
The Company has entered into deferred compensation agreements with certain executives that provide benefits payable based on specified terms of the agreements. A portion of the benefits is subject to forfeiture if the employee willfully leaves employment or employment is terminated for cause as defined in the agreements. The accrued liability for these agreements as of December 31, 2010 and 2009 was $165 and $156, respectively. Deferred compensation expense related to these agreements was $165, $156, and $266 for the years ended December 31, 2010, 2009, and 2008, respectively.
Employee Stock Ownership Plan
In connection with the initial public offering, OmniAmerican Bank adopted an Employee Stock Ownership Plan 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 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 offered 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 $9,522. 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 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 December 31, 2010). The note payable and the corresponding note receivable have been eliminated for consolidation purposes.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The Company may make discretionary contributions to the ESOP in the form of debt service. Dividends received on the unallocated ESOP shares are 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 $444 for the year ended December 31, 2010.
The ESOP shares as of December 31, 2010 were as follows:
NOTE 12 - Regulatory Matters
The Company is subject to regulation and examination by the Office of Thrift Supervision (“OTS”), its primary regulator. The Federal Deposit Insurance Corporation (“FDIC”) also has regulatory and examination authority with respect to the Company. The deposits of the Company are insured by the FDIC.
In January 2008, the Bank incurred a breach of its ATM/debit card system. According to the OTS, this breach of the Bank’s data systems indicated deficiencies in the Bank’s monitoring of its information technology and customer information security. In response to its findings, the OTS issued a Cease and Desist Order (“the Order”) relative to the Bank’s customer information security programs. The Bank’s Board of Directors executed a Stipulation and Consent to the Order. In response to the terms of the Order, and with the assistance of qualified consultants, the Bank prepared and received OTS approval of an information technology security remediation and action plan. This plan addressed, among other things, any identified security deficiencies, implementation of processes to detect intrusions and compliance with all applicable regulatory guidelines as set forth by the OTS. As of October 23, 2008, the Bank had completed its performance of all requirements of the Order. The OTS conducted an information technology examination in April 2009 and found that the Bank had taken the required steps to address the weaknesses that had allowed the breach of its ATM/debit card system to occur. As a result of the findings of the examination, the OTS terminated the Order on June 11, 2009.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank regulatory authorities have established risk-based capital guidelines for U.S. banking organizations. The objective of these efforts is to provide a more consistent system for comparing capital positions of banking organizations and to reflect the level of risk associated with holding various categories of assets. The guidelines define Tier 1 capital and Tier 2 capital. The components of Tier 1 capital for the Company include stockholders’ equity excluding unrealized gains and losses on available for sale securities and other intangible assets. Tier 2 capital includes a portion of the allowance for loan losses. These two components combine to become Total Capital. The guidelines also stipulate that four categories of risk weights (0, 20, 50 and 100 percent), primarily based on the relative credit risk of the counterparty, be applied to the different types of balance sheet assets. Risk weights for all off-balance sheet exposures are determined by a two step process, whereas the face value of the off-balance sheet item is converted to a “credit equivalent amount” and that amount is assigned to the appropriate risk category. Off-balance sheet items at December 31, 2010 and 2009 included unfunded loan commitments and letters of credit. The minimum ratio for qualifying Total Capital is 8.0%, of which 4.0% must be Tier 1 capital.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
In addition to the minimum guidelines stated above, the regulatory authorities have established minimums for an institution to be classified as “well capitalized.” A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.
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 for OmniAmerican Bancorp, Inc. and OmniAmerican Bank at December 31, 2010 and for OmniAmerican Bank at December 31, 2009:
The Home Owners’ Loan Act (“HOLA”), as amended, requires savings institutions to meet a Qualified Thrift Lender (“QTL”) test. The QTL test requires at least 65% of assets be maintained in housing-related finance and other specified areas. An institution must be in compliance with the QTL test on a monthly basis in nine out of every 12 months. If this requirement is not met, limits are placed on growth, branching, new investments, FHLB advances, and dividends or the Company must convert to a commercial bank charter. At December 31, 2010 and 2009, QTL was calculated as 88.2% and 83.0% respectively, and the Company has met the test in each month of the years ended December 31, 2010 and 2009.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following is a reconciliation of the Company’s equity under accounting principles generally accepted in the United States of America to regulatory capital (as defined by the OTS and FDIC) as of December 31, 2010 and 2009:
NOTE 13 - Income Taxes
The current and deferred portions of net income tax expense included in the consolidated statements of income are presented below for the years ended December 31, 2010, 2009, and 2008:
During the years ended December 31, 2010 and 2009, the Company did not incur any interest or penalties on income taxes. The Company will record interest and penalties on income taxes, if any, when they are incurred in noninterest expense.
The Company was a credit union prior to 2006 and was not subject to federal or state income taxes. The Company became a taxable entity effective January 1, 2006 in conjunction with its charter conversion. As a result of the change in tax status, the Company recorded a net deferred tax asset on January 1, 2006 in the amount of $6,107. The net deferred tax asset consisted of a tax benefit of $4,541 as a result of timing differences for certain items such as depreciation of premises and equipment and allowance for loans losses and $1,566 for the tax effect of the changes in the fair value of securities available for sale. The Company’s pretax income is subject to federal income taxes at a combined rate of 34%.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
At December 31, 2010 and 2009, the net deferred tax asset consisted of the following:
No valuation allowance has been provided on deferred tax assets as of December 31, 2010 or 2009. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize all benefits related to these deductible temporary differences.
For the years ended December 31, 2010, 2009, and 2008, the effective tax rate differs from the federal statutory rate of 34% applied to income before income taxes due to the following:
As of December 31, 2010, the Company had net operating loss carryforwards of approximately $8,175 which begin to expire in 2026. These net operating loss carryforwards may be used to offset future income taxes payable, however the Company may be subject to alternative minimum tax. The realization of the net operating loss carryforwards is dependent on future taxable income.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 14 - Related Party Transactions
The Company has made loans in the ordinary course of business with certain of its executive officers, directors and their affiliates. All loans included in such transactions are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and all loans are current as to principal and interest payments. Loans to executive officers, directors, and their affiliates were as follows for the year ended December 31, 2010:
Deposits from executive officers, directors, and their affiliates were $2,368 and $1,639 at December 31, 2010 and 2009, respectively.
NOTE 15 - Fair Value Measurements
ASC Topic 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 assets measured at fair value on a recurring basis, as well as the general classification of such assets pursuant to the fair value hierarchy, is set forth below.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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 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. The fair value of these securities was determined using a discounted cash flow model that incorporates assumptions regarding defaults on the underlying collateral.
In accordance with ASC Topic 820, certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities 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. Nonfinancial assets or liabilities required to be measured at fair value on a nonrecurring basis include other real estate owned.
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 Bank’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.
Mortgage servicing rights are carried at the lower of 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.
Other real estate owned is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, real estate brokers or listing prices. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Assets and liabilities measured at fair value on a recurring and nonrecurring basis are summarized below:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010:
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009:
No changes in unrealized gains or losses were recorded through earnings for the years ended December 31, 2010 and 2009 for the assets measured using significant unobservable inputs (Level 3 Inputs).
ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The 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.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
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 December 31, 2010 and 2009 are summarized as follows:
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 16 - Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments, standby letters of credit, and documentary letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
The Company’s exposure to credit loss in the event of non-performance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Outstanding commitments to extend credit and standby letters of credit are summarized as follows at December 31, 2010 and 2009:
As of December 31, 2010 and 2009, commitments to fund fixed rate loans of $1,650 and $3,453, respectively, were included in the outstanding commitments to extend credit. The interest rates on these commitments to fund fixed rate loans ranged from 3.25% to 12.99% at December 31, 2010 and 2009.
Loan commitments are agreements to lend to a customer as long as there is no customer violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Since many of the loan commitments and letters of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied real estate, and income-producing commercial properties.
NOTE 17 - Litigation
The Company is involved in legal actions arising in the ordinary course of business. It is the opinion of management, after reviewing such actions with outside legal counsel, that the settlement of these matters will not materially affect the Company’s financial position, results of operations or cash flows.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 18 - Parent Company Only Condensed Financial Information
Condensed financial information of OmniAmerican Bancorp, Inc. follows:
Condensed Balance Sheet
December 31, 2010
Condensed Statement of Income
Period from January 20, 2010 through December 31, 2010
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Condensed Statement of Cash Flows
Period from January 20, 2010 through December 31, 2010
NOTE 19 - Earnings Per Share
Basic earnings per share excludes dilution and is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options or unvested restricted stock) were issued during the period, as well as any adjustments to income that would result from the assumed issuance. There were no dilutive securities for the year ended December 31, 2010.
Because the mutual to stock conversion was not completed until January 20, 2010, per share earnings data has not been presented for the years ended December 31, 2009 and 2008.
Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted average number of common shares outstanding for either basic or diluted earnings per share calculations.
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Earnings per share for the year ended December 31, 2010 have been computed as follows (dollars in thousands, except per share data):
OmniAmerican Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
NOTE 20 - Quarterly Financial Data
(Unaudited)
ITEM 9.
ITEM 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A.
Controls and Procedures
(a) Evaluation of Disclosure 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 December 31, 2010. 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.
(b) Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining an effective system of internal control over financial reporting. The Company’s internal control over financial reporting is designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2010, based on those criteria.
McGladrey & Pullen, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2010. The attestation report of McGladrey & Pullen, LLP appears below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
OmniAmerican Bancorp, Inc.
We have audited OmniAmerican Bancorp, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. OmniAmerican Bancorp, Inc. and Subsidiary’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, OmniAmerican Bancorp, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010, of OmniAmerican Bancorp Inc. and Subsidiary and our report dated March 10, 2011 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
Dallas, Texas
March 10, 2011
(c) Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2010, 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.
None.
PART III
ITEM 10.
ITEM 10.
Directors, Executive Officers and Corporate Governance
OmniAmerican Bancorp, Inc. has adopted a Code of Ethics that applies to OmniAmerican Bancorp, Inc.’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was filed as Exhibit 14 to the Form 10-K for the year ended December 31, 2009. A copy of the Code will be furnished without charge upon written request to the Secretary, OmniAmerican Bancorp, Inc., 1320 South University Drive, Suite 900, Fort Worth, Texas 76107.
Information concerning directors and executive officers of OmniAmerican Bancorp, Inc. is incorporated herein by reference from our definitive Proxy Statement (the “Proxy Statement”), specifically the section captioned “Proposal 1 - Election of Directors.”
Information concerning executive compensation is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal 1 - Election of Directors.”
ITEM 12.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain owners and management is incorporated herein by reference from our Proxy Statement, specifically the sections captioned “Voting Securities and Principal Holders Thereof” and “Proposal 1 - Election of Directors.”
ITEM 13.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
Information concerning relationships and transactions is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons.”
ITEM 14.
ITEM 14.
Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV
ITEM 15.
ITEM 15.
Exhibits and Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OMNIAMERICAN BANCORP, INC.
Date: March 10, 2011 By: /s/ Tim Carter
Tim Carter
President, Chief Executive Officer and Director (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.