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OABC > SEC Filings for OABC > Form 10-K on 11-Mar-2013All Recent SEC Filings

Show all filings for OMNIAMERICAN BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for OMNIAMERICAN BANCORP, INC.


11-Mar-2013

Annual Report


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, 2012 and 2011, and our results of operations for the years ended December 31, 2012, 2011, and 2010. 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. 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, provisions for loan losses, commissions, gains (losses) on sales of securities and loans, and other income. Our noninterest expense consists primarily of salaries and benefits, professional and outside services, occupancy, other operations expense, software and equipment maintenance, depreciation of furniture, software and equipment, net losses on the write-down of other real estate owned, and communications costs.
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 and fluctuations in real estate values), 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.
Business Strategy
Our primary objective is to operate as 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:
Providing exceptional customer service to attract and retain customers. As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to our customers and distinguishes us from the larger banks that operate in our primary market area. Deepening our customer relationships. We intend to expand our business by cross-selling our loan and deposit products and services to our customers. We offer a wide range of products and services that allow us to meet our customers' banking needs and provide us diversification of revenue sources. We offer our retail customers a comprehensive portfolio of deposit products, including checking, money market, savings, certificates of deposit, and individual retirement accounts, as well as lending products, including one- to four-family residential mortgage loans, new and used automobile loans, and individual lines of credit. We provide our commercial customers an extensive array of deposit and lending products and cash management programs. We focus our business lending on small and medium-sized businesses and cross-sell the entire business banking relationship to these customers, including checking and savings deposits and business banking products and services, such as online cash management, remote deposit capture, and treasury management.
Continuing to grow our loan portfolio. Our strategy for increasing net income includes increasing our loan originations. We intend to continue to emphasize the origination of one- to four-family residential real estate loans, consumer loans, and indirect automobile loans, as well as commercial real estate loans and commercial business loans. 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.
Maintaining our high level of asset quality through conservative underwriting guidelines and aggressive monitoring of our loan portfolio. 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, 2012 and 2011, our average ratio of losses from consumer loans to average total loans was 0.28% and 0.31%, 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.


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Emphasizing our lower cost deposit products to reduce the funding costs of our loan growth. We offer interest-bearing and noninterest-bearing demand accounts, money market accounts, and savings accounts, 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, 2012, 2011, and 2010, the average of our demand accounts, money market accounts, and savings accounts represented 62.58%, 59.34%, and 56.96%, respectively, of average total deposits. We intend to continue emphasizing demand accounts, money market accounts, and savings accounts as a source of funding.
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 fixed-rate one- to four-family residential real estate loans with terms 15 years or greater. 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 demand deposits, money market deposits, and savings deposits. Our strategy is to continue managing interest rate risk in response to changes in the local and national economy. 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-homogeneous. 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:

loans that we evaluate individually for impairment pursuant to ASC 310-10, "Receivables," and

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.


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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, 2012, we used actuarial assumptions that included a discount rate and an expected long-term rate of return on plan assets. The discount rate of 4.75%, used in this calculation, is the rate used in computing the benefit obligation as of December 31, 2012. The expected long-term rate of return on plan assets of 8.00% is based on the weighted-average expected long-term returns for the target allocation of plan assets as of the measurement date, December 31, 2012, 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, 2012 and 2011 Assets. Total assets decreased $79.4 million, or 5.9%, to $1.26 billion at December 31, 2012 from $1.34 billion at December 31, 2011. The decrease was primarily the result of decreases in securities classified as available for sale of $146.0 million and other real estate owned of $1.9 million, partially offset by increases in loans, net of the allowance for loan losses and deferred fees and discounts, of $51.8 million, bank-owned life insurance of $11.2 million, and cash and cash equivalents of $2.7 million.
Cash and Cash Equivalents. Total cash and cash equivalents increased $2.7 million, or 12.7%, to $23.9 million at December 31, 2012 from $21.2 million at December 31, 2011. The increase in total cash and cash equivalents was primarily due to $268.0 million of cash received from loan principal repayments, $194.4 million in proceeds from sales, principal repayments, and maturities of securities, $73.7 million of proceeds from the sales of loans, $11.0 million in cash from overnight borrowings, $8.7 million in cash from the net increase in deposits, and $5.7 million in proceeds from the sales of repossessed assets. These increases were partially offset by decreases due to $388.8 million in cash used to originate loans, $55.0 million in cash used to repay Federal Home Loan Bank advances, $53.0 million in cash used to purchase securities classified as available for sale, $50.0 million used to repay repurchase agreements, and $10.0 million in cash used to purchase bank-owned life insurance.
Securities. Securities classified as available for sale decreased $146.0 million, or 27.6%, to $383.9 million at December 31, 2012 from $529.9 million at December 31, 2011. The decrease in securities classified as available for sale during the year ended December 31, 2012, reflected principal repayments and maturities of $134.0 million, sales of $59.6 million, and amortization of the net premiums on investments of $4.4 million during the year ended December 31, 2012. These decreases were partially offset by an increase due to purchases of $53.0 million. At December 31, 2012, securities classified as available for sale consisted primarily of government-sponsored mortgage-backed securities, government-sponsored CMOs, agency bonds, and other equity securities.


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Bank Owned Life Insurance. Bank-owned life insurance increased $11.2 million, or 53.1%, to $32.2 million at December 31, 2012 from $21.0 million at December 31, 2011, primarily due to the purchase of $10.0 million of life insurance policies on certain key employees during the year ended December 31, 2012. Loans. Loans, net increased $51.8 million, or 7.6%, to $735.3 million at December 31, 2012 from $683.5 million at December 31, 2011.

                                              December 31,     December 31,     Dollar
                                                  2012             2011         change      Percent change
                                                        (Dollars in thousands)
One- to four-family                          $     251,756     $  270,426     $ (18,670 )         (6.9 )%
Home equity                                         20,863         22,074        (1,211 )         (5.5 )
Commercial real estate                              84,783         87,650        (2,867 )         (3.3 )
Real estate construction                            52,245         48,128         4,117            8.6
Commercial business                                 63,390         36,648        26,742           73.0
Automobile, indirect                               221,907        184,093        37,814           20.5
Automobile, direct                                  27,433         23,316         4,117           17.7
Other consumer                                      16,707         17,354          (647 )         (3.7 )
Total loans                                        739,084        689,689        49,395            7.2
Other items:
Unearned fees and discounts, net                     3,087          1,710         1,377           80.5
Allowance for loan losses                           (6,900 )       (7,908 )       1,008          (12.7 )
Total loans, net                             $     735,271     $  683,491     $  51,780            7.6  %

Automobile loans (consisting of direct and indirect loans) increased $41.9 million, or 20.2%, to $249.3 million at December 31, 2012 from $207.4 million at December 31, 2011, related primarily to our refocused sales initiatives and competitive rate structure. Commercial business loans increased $26.7 million, or 73.0%, to $63.4 million at December 31, 2012 from $36.7 million at December 31, 2011, as a result of our focus on growing this area of our business and the addition of commercial lending staff in 2012. In addition, commercial business loans included a participating interest in a mortgage warehouse line of credit with another financial institution with a balance of $13.6 million at December 31, 2012. Real estate construction loans increased $4.1 million, or 8.6%, to $52.2 million at December 31, 2012 from $48.1 million at December 31, 2011, as new construction borrowing demand increased in our market area. One- to four-family residential real estate loans decreased $18.7 million, or 6.9%, to $251.7 million at December 31, 2012 from $270.4 million at December 31, 2011. The decrease in one- to four-family residential real estate loans was primarily due to repayments of $60.6 million, sales of $9.1 million, and reclassifications to other real estate owned of $1.8 million, partially offset by originations of $52.8 million. Commercial real estate loans decreased $2.9 million, or 3.3% to $84.8 million and home equity loans decreased $1.2 million, or 5.5%, to $20.9 million, as loans are maturing and paying off. We continue to monitor the composition of our loan portfolio and seek to obtain a reasonable return while managing the potential for risk of loss.
Allowance for Loan Losses. The allowance for loan losses decreased $1.0 million, or 12.7%, to $6.9 million at December 31, 2012 from $7.9 million at December 31, 2011, while total loans increased $49.4 million, or 7.2%, to $739.1 million at December 31, 2012 from $689.7 million at December 31, 2011. The decreases in the allowance for loan losses attributable to one- to four-family residential real estate loans, real estate construction loans, and automobile loans were partially offset by an increase in the allowance for loan losses related to commercial real estate loans. At December 31, 2012, the allowance for loan losses represented 0.93% of total loans compared to 1.15% of total loans at December 31, 2011. Included in the allowance for loan losses at December 31, 2012 were specific reserves for loan losses of $278,000 related to three impaired loans with balances totaling $981,000. Impaired loans with balances totaling $19.5 million did not require specific reserves for loan losses at December 31, 2012. The allowance for loan losses at December 31, 2011 included specific reserves for loan losses of $1.4 million related to four impaired loans with balances totaling $11.2 million. In addition, impaired loans with balances totaling $21.7 million did not require specific reserves for loan losses at December 31, 2011. The balance of unimpaired loans increased $61.8 million, or 9.4%, to $718.6 million at December 31, 2012 from $656.8 million at December 31, 2011. The allowance for loan losses related to unimpaired loans increased $80,000, or 1.2%, to $6.6 million at December 31, 2012 from $6.5 million at December 31, 2011.


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The significant changes in the amount of the allowance for loan losses during the year ended December 31, 2012 related to: (i) a $517,000 decrease in the allowance for loan losses attributable to impaired real estate construction loans primarily due to an increase in the value of the collateral underlying one impaired real estate construction loan and a reduction in the loan balance due to principal payments during the year ended December 31, 2012; (ii) a $440,000 decrease in the allowance for loan losses attributable to impaired commercial business loans primarily due to reductions in the loan balances resulting from principal payments on two loans during the year ended December 31, 2012; and
(iii) a $325,000 decrease in the general allowance for loan losses on unimpaired automobile loans primarily due to a decrease in net charge-offs of automobile loans to 0.75% of average loans outstanding for the year ended December 31, 2012 from 0.87% of average loans outstanding for the year ended December 31, 2011. 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. Other Real Estate Owned. Other real estate owned decreased $1.9 million, or 28.6% to $4.8 million at December 31, 2012 from $6.7 million at December 31, 2011. The decrease resulted primarily from the sales of other real estate owned properties totaling $2.9 million and write-downs of the values of other real estate owned properties to the current fair values less costs to sell totaling $1.0 million, partially offset by $2.0 million in loans reclassified to other real estate owned. Deposits. Deposits increased $8.7 million, or 1.1%, to $816.3 million at December 31, 2012 from $807.6 million at December 31, 2011.

                                             December 31,    December 31,      Dollar
                                                 2012            2011          change      Percent change
                                                       (Dollars in thousands)
Noninterest-bearing demand                   $    47,331     $    33,261     $  14,070           42.3  %
Interest-bearing demand                          139,976         135,802         4,174            3.1
Savings                                          105,946         168,433       (62,487 )        (37.1 )
Money market                                     229,537         151,443        78,094           51.6
Certificates of deposit                          293,512         318,695       (25,183 )         (7.9 )
Total deposits                               $   816,302     $   807,634     $   8,668            1.1  %

The increase was primarily due to increases in money market deposits of $78.1 million, noninterest-bearing demand deposits of $14.1 million, and interest-bearing demand deposits of $4.2 million, partially offset by decreases in savings deposits of $62.5 million. The overall increase in transaction accounts was primarily due to increases in the deposit account balances of our commercial customers. Certificates of deposit decreased $25.2 million primarily due to certificates of deposit that matured and were not renewed.
Borrowings. Federal Home Loan Bank advances decreased $55.0 million, or 21.0%, to $207.0 million at December 31, 2012 from $262.0 million at December 31, 2011. The decrease in Federal Home Loan Bank was attributable to scheduled maturities of $307.5 million, partially offset by advances of $252.5 million during the year ended December 31, 2012. Repurchase agreements decreased $50.0 million, or 86.2%, to $8.0 million at December 31, 2012 from $58.0 million at December 31, 2011. The decrease resulted primarily from the maturity and repayment of $50.0 million of repurchase agreements in July 2012. Other borrowings increased $11.0 million at December 31, 2012 from December 31, 2011, primarily due to $11.0 million in overnight borrowings from the Federal Home Loan Bank.
Stockholders' Equity. At December 31, 2012, our stockholders' equity was $205.6 million, an increase of $6.6 million, or 3.3%, from $199.0 million at December 31, 2011.

                                              December 31,      December 31,       Dollar
                                                  2012              2011           change       Percent change
                                                         (Dollars in thousands)
Common stock                                 $         114     $         112     $       2            1.8  %
Additional paid-in capital                         106,684           105,638         1,046            1.0
. . .
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