UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to ____________                     
Commission file number 001-34605
OMNIAMERICAN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
 
27-0983595
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
 
 
1320 S. University Drive, Fort Worth, Texas
 
76107
(Address of Principal Executive Offices)
 
(Zip Code)
(817) 367-4640
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 11,551,732 shares of Common Stock, par value $0.01 per share, issued and outstanding as of May 2, 2014 .
 
 
 
 
 



 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 2.1
 Exhibit 10.2
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
 
i


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
 
March 31,
2014
 
December 31, 2013
ASSETS
 
 
 
Cash and due from financial institutions
$
11,492

 
$
11,498

Short-term interest-earning deposits in other financial institutions
1,433

 
4,382

Total cash and cash equivalents
12,925

 
15,880

Investments:
 
 
 
Securities available for sale (Amortized cost of $465,236 on March 31, 2014 and $433,580 on December 31, 2013)
464,844

 
430,775

Other
17,912

 
19,782

Loans held for sale
1,607

 
1,509

Loans, net of deferred fees and discounts
801,988

 
831,326

Less allowance for loan losses
(6,468
)
 
(6,445
)
Loans, net
795,520

 
824,881

Premises and equipment, net
40,964

 
41,512

Bank-owned life insurance
43,972

 
43,606

Other real estate owned
1,035

 
177

Mortgage servicing rights
1,505

 
1,473

Deferred tax asset, net
3,252

 
4,066

Accrued interest receivable
3,379

 
3,447

Other assets
3,504

 
4,205

Total assets
$
1,390,419

 
$
1,391,313

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
69,162

 
$
58,071

Interest-bearing
763,450

 
755,503

Total deposits
832,612

 
813,574

Federal Home Loan Bank advances
338,667

 
362,000

Other borrowings
2,000

 
2,000

Accrued expenses and other liabilities
6,805

 
6,597

Total liabilities
1,180,084

 
1,184,171

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, par value $0.01 per share; 100,000,000 shares authorized; 11,551,732 shares issued and outstanding at March 31, 2014 and 11,451,596 shares issued and outstanding at December 31, 2013
116

 
115

Additional paid-in capital
109,798

 
109,250

Unallocated Employee Stock Ownership Plan (“ESOP”) shares; 790,326 shares at March 31, 2014 and 799,848 shares at December 31, 2013
(7,903
)
 
(7,999
)
Retained earnings
109,260

 
108,304

Accumulated other comprehensive loss:
 
 
 
Unrealized loss on securities available for sale, net of income taxes
(259
)
 
(1,851
)
Unrealized loss on pension plan, net of income taxes
(677
)
 
(677
)
Total accumulated other comprehensive loss
(936
)
 
(2,528
)
Total stockholders’ equity
210,335

 
207,142

Total liabilities and stockholders’ equity
$
1,390,419

 
$
1,391,313


See Condensed Notes to Unaudited Consolidated Interim Financial Statements.


1

OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended
 
March 31,
 
2014
 
2013
Interest income:
 
 
 
Loans, including fees
$
9,202

 
$
8,901

Securities — taxable
2,588

 
2,163

Securities — nontaxable
1

 
—

Total interest income
11,791

 
11,064

Interest expense:
 
 
 
Deposits
1,013

 
1,457

Borrowed funds
709

 
623

Total interest expense
1,722

 
2,080

Net interest income
10,069

 
8,984

Provision for loan losses
650

 
500

Net interest income after provision for loan losses
9,419

 
8,484

Noninterest income:
 
 
 
Service charges and other fees
2,058

 
2,218

Net gains on sales of loans
183

 
786

Net gains on sales of securities available for sale (reclassified from unrealized gains (losses) on available-for-sale securities in accumulated other comprehensive income)
259

 
1,701

Net (losses) gains on disposition of premises and equipment
(1
)
 
344

Net losses on sales of repossessed assets
(38
)
 
(30
)
Commissions
374

 
308

Increase in cash surrender value of bank-owned life insurance
366

 
316

Other income
257

 
219

Total noninterest income
3,458

 
5,862

Noninterest expense:
 
 
 
Salaries and benefits
6,182

 
6,757

Software and equipment maintenance
587

 
610

Depreciation of furniture, software, and equipment
317

 
413

FDIC insurance
180

 
190

Real estate owned expense (income)
35

 
(20
)
Service fees
144

 
114

Communications costs
236

 
224

Other operations expense
751

 
761

Occupancy
965

 
980

Professional and outside services
1,042

 
1,038

Loan servicing
78

 
111

Marketing
122

 
150

Total noninterest expense
10,639

 
11,328

Income before income tax expense
2,238

 
3,018

Income tax expense (includes income tax expense from items reclassified from accumulated other comprehensive income of $88 and $578 for the three months ended March 31, 2014 and 2013, respectively)
709

 
1,085

Net income
$
1,529

 
$
1,933

Earnings per share:
 
 
 
Basic
$
0.14

 
$
0.19

Diluted
$
0.14

 
$
0.18

See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

2

OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in thousands)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
1,529

 
$
1,933

 
 
 
 
Change in unrealized gains (losses) on securities available for sale
2,672

 
(1,414
)
Reclassification of amount realized through sale of securities
(259
)
 
(1,701
)
Income tax effect
(821
)
 
1,059

Other comprehensive income (loss), net of income tax
1,592

 
(2,056
)
Comprehensive income (loss)
$
3,121

 
$
(123
)
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

3


OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)
(Dollars in thousands, except share data)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Unallocated
ESOP
Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balances at January 1, 2014
$
115

 
$
109,250

 
$
(7,999
)
 
$
108,304

 
$
(2,528
)
 
$
207,142

ESOP shares allocated, 9,522 shares
—

 
117

 
96

 
—

 
—

 
213

Share-based compensation expense
—

 
425

 
—

 
—

 
—

 
425

Tax benefit from the exercise of stock options and the vesting of restricted stock
—

 
7

 
—

 
—

 
—

 
7

Restricted stock issued, net of forfeitures, 97,078 shares
1

 
(1
)
 
—

 
—

 
—

 
—

Net income
—

 
—

 
—

 
1,529

 
—

 
1,529

Dividends declared
—

 
—

 
—

 
(573
)
 
—

 
(573
)
Other comprehensive income
—

 
—

 
—

 
—

 
1,592

 
1,592

Balances at March 31, 2014
$
116

 
$
109,798

 
$
(7,903
)
 
$
109,260

 
$
(936
)
 
$
210,335

See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

4

OmniAmerican Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
1,529

 
$
1,933

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
783

 
847

Provision for loan losses
650

 
500

Amortization of net premium on investments
631

 
933

Amortization and impairment of mortgage servicing rights
61

 
(38
)
Net gains on sales of securities available for sale
(259
)
 
(1,701
)
Net gains on sales of loans
(183
)
 
(786
)
Proceeds from sales of loans held for sale
11,337

 
26,938

Loans originated for sale
(11,273
)
 
(19,647
)
Net losses (gains) on disposition of premises and equipment
1

 
(344
)
Net losses on sales of repossessed assets
38

 
30

Increase in cash surrender value of bank-owned life insurance
(366
)
 
(316
)
Federal Home Loan Bank stock dividends
(14
)
 
(11
)
ESOP compensation expense
213

 
242

Share-based compensation
425

 
395

Excess tax benefit from share-based compensation
(7
)
 
—

Changes in operating assets and liabilities:
 

 
 
Accrued interest receivable
68

 
(27
)
Other assets
600

 
1,335

Accrued interest payable and other liabilities
208

 
292

Net cash provided by operating activities
4,442

 
10,575

Cash flows from investing activities:
 
 
 
Securities available for sale:
 
 
 
Purchases
(53,707
)
 
(97,967
)
Proceeds from sales
6,428

 
46,212

Proceeds from maturities, calls, and principal repayments
15,251

 
32,092

Purchases of other investments
(38
)
 
(1,334
)
Redemptions of other investments
1,922

 
592

Purchase of bank-owned life insurance
—

 
(10,000
)
Net decrease (increase) in loans held for investment
27,104

 
(6,377
)
Purchases of premises and equipment
(236
)
 
(698
)
Proceeds from sales of premises and equipment
—

 
680

Proceeds from sales of foreclosed assets
740

 
682

Proceeds from sales of other real estate owned
—

 
277

Net cash used in investing activities
(2,536
)
 
(35,841
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
19,038

 
10,421

Net (decrease) increase in Federal Home Loan Bank advances
(23,333
)
 
25,000

Net decrease in other borrowings
—

 
(17,000
)
Payment of dividends
(573
)
 
—

Excess tax benefit from share-based compensation
7

 
—

Purchase of common stock
—

 
(1
)
Net cash (used in) provided by financing activities
(4,861
)
 
18,420

Net decrease in cash and cash equivalents
(2,955
)
 
(6,846
)
Cash and cash equivalents, beginning of period
15,880

 
23,853

Cash and cash equivalents, end of period
$
12,925

 
$
17,007

Supplemental cash flow information:
 
 
 
Interest paid
$
1,766

 
$
2,133

Non-cash transactions:
 
 
 
Loans transferred to other real estate owned
$
858

 
$
38

Loans transferred to foreclosed assets
$
749

 
$
652

Change in unrealized gains on securities available for sale
$
2,413

 
$
(3,115
)
See Condensed Notes to Unaudited Consolidated Interim Financial Statements.

5


OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements
NOTE 1 — Basis of Financial Statement Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of OmniAmerican Bancorp, Inc. (referred to herein as “the Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2013 , included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2014 . In management’s opinion, the interim data as of March 31, 2014 and for the three -month periods ended March 31, 2014 and 2013 , includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. References to the Company include, where appropriate, OmniAmerican Bank, the Company’s wholly-owned subsidiary.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments are particularly subject to change.
NOTE 2 — Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This update clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results when any of the following occurs: (i) the component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale; (ii) the component of an entity or group of components of an entity is disposed of by sale; or (iii) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). ASU 2014-08 is effective for for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014.


6
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

NOTE 3 — Investment Securities
The amortized cost and estimated fair values of investment securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of March 31, 2014 and December 31, 2013 were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
U. S. government sponsored mortgage-backed securities
$
301,864

 
$
3,010

 
$
(3,995
)
 
$
300,879

U. S. government sponsored collateralized mortgage obligations
152,192

 
1,926

 
(946
)
 
153,172

Agency bonds
5,000

 
—

 
(318
)
 
4,682

Municipal obligations
180

 
—

 
(6
)
 
174

Other equity securities
6,000

 
—

 
(63
)
 
5,937

Total investment securities available for sale
$
465,236

 
$
4,936

 
$
(5,328
)
 
$
464,844

December 31, 2013
 
 
 
 
 
 
 
U. S. government sponsored mortgage-backed securities
$
282,180

 
$
2,616

 
$
(5,208
)
 
$
279,588

U. S. government sponsored collateralized mortgage obligations
140,221

 
1,758

 
(1,403
)
 
140,576

Agency bonds
5,000

 
—

 
(462
)
 
4,538

Municipal obligations
179

 
—

 
(9
)
 
170

Other equity securities
6,000

 
—

 
(97
)
 
5,903

Total investment securities available for sale
$
433,580

 
$
4,374

 
$
(7,179
)
 
$
430,775

Investment securities available for sale with gross unrealized losses at March 31, 2014 and December 31, 2013 , aggregated by investment category and length of time that individual securities have been in a continuous loss position, were as follows:
 
Continuous Unrealized Losses Existing for
 
 
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U. S. government sponsored mortgage-backed securities
$
151,367

 
$
(3,749
)
 
$
8,622

 
$
(246
)
 
$
159,989

 
$
(3,995
)
U. S. government sponsored collateralized mortgage obligations
42,086

 
(830
)
 
3,728

 
(116
)
 
45,814

 
(946
)
Agency bonds
4,682

 
(318
)
 
—

 
—

 
4,682

 
(318
)
Municipal obligations
—

 
—

 
174

 
(6
)
 
174

 
(6
)
Other equity securities
5,937

 
(63
)
 
—

 
—

 
5,937

 
(63
)
 
$
204,072

 
$
(4,960
)
 
$
12,524

 
$
(368
)
 
$
216,596

 
$
(5,328
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U. S. government sponsored mortgage-backed securities
$
142,715

 
$
(5,088
)
 
$
2,248

 
$
(120
)
 
$
144,963

 
$
(5,208
)
U. S. government sponsored collateralized mortgage obligations
50,066

 
(1,403
)
 
—

 
—

 
50,066

 
(1,403
)
Agency bonds
4,538

 
(462
)
 
—

 
—

 
4,538

 
(462
)
Municipal obligations
170

 
(9
)
 
—

 
—

 
170

 
(9
)
Other equity securities
5,903

 
(97
)
 
—

 
—

 
5,903

 
(97
)
 
$
203,392

 
$
(7,059
)
 
$
2,248

 
$
(120
)
 
$
205,640

 
$
(7,179
)

7
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

At March 31, 2014 , the Company owned 200 investment securities of which 81 had unrealized losses. At December 31, 2013 , the Company owned 202 investment securities of which 82 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 March 31, 2014 and December 31, 2013 , and are subject to change daily as interest rates fluctuate. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell prior to recovery. Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to sell or whether it would be more likely than not required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
The amortized cost and fair value of securities available for sale by contractual maturity at March 31, 2014 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or earlier redemptions that may occur.
 
Amortized Cost
 
Fair Value
 
(In thousands)
Due in one year or less
$
—

 
$
—

Due from one to five years
—

 
—

Due from five to ten years
26,112

 
25,303

Due after ten years
433,124

 
433,604

Equity securities
6,000

 
5,937

Total
$
465,236

 
$
464,844

Investment securities with a fair value of $134.1 million and $161.6 million at March 31, 2014 and December 31, 2013 , respectively, were pledged to secure Federal Home Loan Bank advances. In addition, investment securities with a fair value of $2.7 million and $2.2 million at March 31, 2014 and December 31, 2013 , respectively, were pledged to secure repurchase agreements which are included in other borrowings.
Sales activity of securities available for sale for the three months ended March 31, 2014 and 2013 was as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Proceeds from sales of investment securities
$
6,428

 
$
46,212

Gross gains from sales of investment securities
259

 
1,701

Gains or losses on the sales of securities are recognized at the trade date utilizing the specific identification method.



8
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

NOTE 4 — Loans and Allowance for Loan Losses
The composition of the loan portfolio was as follows at the dates indicated:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Residential real estate loans:
 
 
 
One- to four-family
$
263,521

 
$
262,723

Home equity
16,259

 
17,106

Total residential real estate loans
279,780

 
279,829

Commercial loans:
 
 
 
Commercial real estate
110,881

 
106,560

Real estate construction
55,988

 
59,648

Commercial business
70,830

 
69,320

Total commercial loans
237,699

 
235,528

Consumer loans:
 
 
 
Automobile, indirect
234,164

 
264,671

Automobile, direct
31,648

 
31,598

Other consumer
15,105

 
15,330

Total consumer loans
280,917

 
311,599

Total loans
798,396

 
826,956

Plus (less):
 
 
 
Deferred fees and discounts
3,592

 
4,370

Allowance for loan losses
(6,468
)
 
(6,445
)
Total loans receivable, net
$
795,520

 
$
824,881


The Company originates one- to four-family residential real estate loans which are sold in the secondary market. The Company retains the servicing for residential real estate loans that are sold to the Federal National Mortgage Association (“FNMA”). Residential real estate loans serviced for FNMA are not included as assets on the consolidated balance sheets. The following table presents loans sold and serviced as of March 31, 2014 and December 31, 2013 :
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Principal balances of the loans sold and serviced for FNMA
$
193,326

 
$
189,084

Mortgage servicing rights associated with the mortgage loans serviced for FNMA
1,505

 
1,473



9
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The following table presents loans identified as impaired by class of loans as of March 31, 2014 and December 31, 2013 :
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Balance
 
Interest
Income
Recognized
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
One- to four-family
$
8,095

 
$
8,095

 
$
—

 
$
7,406

 
$
69

Home equity
34

 
34

 
—

 
39

 
—

Commercial real estate
2,338

 
2,338

 
—

 
2,341

 
42

Real estate construction
—

 
—

 
—

 
—

 
—

Commercial business
497

 
497

 
—

 
528

 
15

Automobile, indirect
805

 
805

 
—

 
846

 
5

Automobile, direct
35

 
35

 
—

 
36

 
—

Other consumer
16

 
16

 
—

 
11

 
—

Impaired loans with no related allowance recorded
11,820

 
11,820

 
—

 
11,207

 
131

With an allowance recorded:
 
 
 
 
 
 
 
 
 
One- to four-family
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Home equity
—

 
—

 
—

 
—

 
—

Commercial real estate
621

 
621

 
313

 
567

 
—

Real estate construction
—

 
—

 
—

 
—

 
—

Commercial business
896

 
896

 
244

 
995

 
2

Automobile, indirect
—

 
—

 
—

 
—

 
—

Automobile, direct
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
—

 
—

Impaired loans with an allowance recorded
1,517

 
1,517

 
557

 
1,562

 
2

Total
$
13,337

 
$
13,337

 
$
557

 
$
12,769

 
$
133

 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
One- to four-family
$
7,531

 
$
7,531

 
$
—

 
$
7,468

 
$
305

Home equity
42

 
42

 
—

 
14

 
1

Commercial real estate
2,347

 
2,347

 
—

 
4,237

 
31

Real estate construction
—

 
—

 
—

 
3,171

 
66

Commercial business
591

 
591

 
—

 
700

 
21

Automobile, indirect
824

 
824

 
—

 
738

 
26

Automobile, direct
32

 
32

 
—

 
34

 
2

Other consumer
15

 
15

 
—

 
4

 
—

Impaired loans with no related allowance recorded
11,382

 
11,382

 
—

 
16,366

 
452

With an allowance recorded:
 
 
 
 
 
 
 
 
 
One- to four-family
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Home equity
—

 
—

 
—

 
—

 
—

Commercial real estate
551

 
551

 
321

 
46

 
—

Real estate construction
—

 
—

 
—

 
—

 
—

Commercial business
1,040

 
1,040

 
200

 
1,064

 
8

Automobile, indirect
—

 
—

 
—

 
—

 
—

Automobile, direct
—

 
—

 
—

 
—

 
—

Other consumer
—

 
—

 
—

 
—

 
—

Impaired loans with an allowance recorded
1,591

 
1,591

 
521

 
1,110

 
8

Total
$
12,973

 
$
12,973

 
$
521

 
$
17,476

 
$
460


For the three months ended March 31, 2013 , the average recorded investment in impaired loans and the related amount of interest income recognized during the time within the period that the loans were impaired were $21.2 million and $89,000 , respectively.

10
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)


As of March 31, 2014 and December 31, 2013 , no additional funds were committed to be advanced in connection with impaired loans.
The following table presents the recorded investment in non-accrual loans by class of loans as of March 31, 2014 and December 31, 2013 :
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Residential real estate loans:
 
 
 
One- to four-family
$
1,181

 
$
2,050

Home equity
34

 
42

Commercial loans:
 
 
 
Commercial real estate
865

 
800

Commercial business
639

 
864

Consumer loans:
 
 
 
Automobile, indirect
543

 
558

Automobile, direct
21

 
15

Other consumer
16

 
15

Total
$
3,299

 
$
4,344

There were no loans greater than 90 days past due that continued to accrue interest at March 31, 2014 or December 31, 2013 .
The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loans:
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days
and
Greater
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 
Total
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$
430

 
$
215

 
$
1,066

 
$
1,711

 
$
261,810

 
$
263,521

Home equity
—

 
—

 
34

 
34

 
16,225

 
16,259

Commercial loans:
 
 
 

 
 

 
 

 
 

 
 
Commercial real estate
—

 
—

 
119

 
119

 
110,762

 
110,881

Real estate construction
—

 
—

 
—

 
—

 
55,988

 
55,988

Commercial business
576

 
—

 
—

 
576

 
70,254

 
70,830

Consumer loans:
 
 
 

 
 

 
 
 
 

 
 
Automobile, indirect
1,887

 
506

 
543

 
2,936

 
231,228

 
234,164

Automobile, direct
3

 
18

 
21

 
42

 
31,606

 
31,648

Other consumer
73

 
53

 
16

 
142

 
14,963

 
15,105

Total loans
$
2,969

 
$
792

 
$
1,799

 
$
5,560

 
$
792,836

 
$
798,396



11
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days
and
Greater
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 
Total
 
(In thousands)
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,170

 
$
—

 
$
1,932

 
$
3,102

 
$
259,621

 
$
262,723

Home equity
1

 
—

 
42

 
43

 
17,063

 
17,106

Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
120

 
120

 
106,440

 
106,560

Real estate construction
876

 
—

 
—

 
876

 
58,772

 
59,648

Commercial business
—

 
—

 
—

 
—

 
69,320

 
69,320

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Automobile, indirect
2,217

 
615

 
558

 
3,390

 
261,281

 
264,671

Automobile, direct
48

 
21

 
15

 
84

 
31,514

 
31,598

Other consumer
72

 
33

 
15

 
120

 
15,210

 
15,330

Total loans
$
4,384

 
$
669

 
$
2,682

 
$
7,735

 
$
819,221

 
$
826,956

Our methodology for evaluating the adequacy of the allowance for loan losses consists of:
•
a specific loss component which is the allowance for impaired loans; and
•
a general loss component for all other loans not individually evaluated for impairment but that, on a portfolio basis, are believed to have some inherent but unidentified loss.
The specific component of the allowance for loan losses relates to loans that are considered impaired, which are generally classified as doubtful or substandard. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are 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-homogeneous loans, including one- to four-family residential real estate loans with balances in excess of $1 million, commercial real estate, real estate construction, and commercial business loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, consumer and one- to four-family residential real estate loans with balances less than $1 million are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.
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;

12
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

•
changes in the nature and volume of the loan portfolio;
•
changes in the experience, ability, and depth of knowledge 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.
Real estate construction loans generally have greater credit risk than traditional one- to four-family residential real estate loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event a loan is made on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Real estate construction loans also expose the Company to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
When establishing the allowance for loan losses, management categorizes loans into risk categories based on the class of loans — residential real estate, commercial, or consumer — and relevant information about the ability of the borrowers to repay the loans, such as the current economic conditions, historical payment experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and the estimated value of any underlying collateral, among other factors. Management classifies the loans individually analyzed for impairment as to credit risk. This analysis includes residential real estate loans with an outstanding balance in excess of $1 million and non-homogeneous loans, such as commercial real estate, real estate construction, and commercial business loans. The following definitions for the credit risk ratings are used for such loans:
Special mention. Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Substandard. Substandard loans have well defined weaknesses where a payment default and/or a loss is possible, but not yet probable. Loans so classified are inadequately protected by the current net worth and repayment capacity of the obligor or of the collateral pledged, if any. If deficiencies are not corrected quickly, there is a possibility of loss.

13
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

Doubtful. Doubtful loans have the weaknesses and characteristics of substandard loans, but the available information suggests that collection or liquidation in its entirety, on the basis of currently existing facts, conditions and values, is highly improbable. The possibility of a loss is exceptionally high, but certain identifiable contingencies could possibly arise (proposed merger, acquisition, capital injection, refinancing plans, and pledging of additional collateral) that may strengthen the loan, such that it is reasonable to defer its classification as a loss until a more exact status is determined.
Loans not meeting the criteria described above are considered to be pass-rated loans. The following table presents the risk category of loans by class for loans individually analyzed for impairment as of March 31, 2014 and December 31, 2013 :
 
Commercial Real Estate
 
Real Estate
Construction
 
Commercial
Business
 
One- to Four-
Family
 
Total
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
 
 
Pass
$
104,919

 
$
55,878

 
$
65,811

 
$
12,878

 
$
239,486

Special Mention
841

 
—

 
1,357

 
—

 
2,198

Substandard
5,121

 
110

 
3,662

 
4,615

 
13,508

Doubtful
—

 
—

 
—

 
—

 
—

 
$
110,881

 
$
55,988

 
$
70,830

 
$
17,493

 
$
255,192

December 31, 2013:
 
 
 
 
 
 
 
 
 
Pass
$
101,134

 
$
59,536

 
$
64,155

 
$
15,514

 
$
240,339

Special Mention
735

 
—

 
2,164

 
—

 
2,899

Substandard
4,691

 
112

 
3,001

 
3,175

 
10,979

Doubtful
—

 
—

 
—

 
—

 
—

 
$
106,560

 
$
59,648

 
$
69,320

 
$
18,689

 
$
254,217

The Company classifies residential real estate loans that are not analyzed individually for impairment (less than $1 million) as prime or subprime. The Company defines a subprime residential real estate loan as any loan to a borrower who has no credit score or a credit score of less than 661 along with at least one of the following at the time of funding:
•
Two or more 30 day delinquencies in the past 12 months;
•
One or more 60 day delinquencies in the past 24 months;
•
Bankruptcy filing within the past 60 months;
•
Judgment or unpaid charge-off of $500 or more in the last 24 months; and
•
Foreclosure or repossession in the past 24 months.
All other residential real estate loans not individually analyzed for impairment are classified as prime.
The following table presents the prime and subprime residential real estate loans collectively evaluated for impairment as of March 31, 2014 and December 31, 2013 :
 
One- to
Four-
Family
 
Home
Equity
 
Total
 
(In thousands)
March 31, 2014:
 
 
 
 
 
Prime
$
196,035

 
$
15,688

 
$
211,723

Subprime
49,993

 
571

 
50,564

 
$
246,028

 
$
16,259

 
$
262,287

December 31, 2013:
 
 
 
 
 
Prime
$
195,919

 
$
16,521

 
$
212,440

Subprime
48,115

 
585

 
48,700

 
$
244,034

 
$
17,106

 
$
261,140


14
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The Company evaluates consumer loans based on the credit score for each borrower when the loan is originated. The Company defines a subprime consumer loan as any loan to a borrower who has a credit score of less than 661 at the time of funding. The following table presents the credit score for each of the classes of consumer loans as of March 31, 2014 and December 31, 2013 :
Risk Tier
 
Credit Score
 
Automobile, indirect
 
Automobile, direct
 
Other consumer
 
Total
 
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
 
 
 
A
 
720+
 
$
120,646

 
$
23,163

 
$
11,193

 
$
155,002

B
 
690–719
 
47,081

 
4,257

 
2,211

 
53,549

C
 
661–689
 
39,536

 
2,380

 
1,329

 
43,245

D
 
660 and under
 
26,901

 
1,848

 
372

 
29,121

 
 
 
 
$
234,164

 
$
31,648

 
$
15,105

 
$
280,917

December 31, 2013:
 
 
 
 
 
 
 
 
 
 
A
 
720+
 
$
135,583

 
$
23,137

 
$
11,453

 
$
170,173

B
 
690–719
 
53,678

 
4,311

 
2,228

 
60,217

C
 
661–689
 
44,732

 
2,320

 
1,268

 
48,320

D
 
660 and under
 
30,678

 
1,830

 
381

 
32,889

 
 
 
 
$
264,671

 
$
31,598

 
$
15,330

 
$
311,599

The following table presents the activity in the allowance for loan losses by portfolio segment based on impairment method for the three months ended March 31, 2014 and 2013 :
 
Residential
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
Allowance for loan losses for the three months ended:
 
 
 
 
 
 
 
Beginning balance
$
851

 
$
2,517

 
$
3,077

 
$
6,445

Charge-offs
(18
)
 
—

 
(748
)
 
(766
)
Recoveries of loans previously charged-off
14

 
24

 
101

 
139

Provision for loan losses
(38
)
 
209

 
479

 
650

Ending balance
$
809

 
$
2,750

 
$
2,909

 
$
6,468

Ending balance attributable to loans:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
557

 
$
—

 
$
557

Collectively evaluated for impairment
809

 
2,193

 
2,909

 
5,911

Total ending balance
$
809

 
$
2,750

 
$
2,909

 
$
6,468

March 31, 2013:
 

 
 

 
 

 
 

Allowance for loan losses for the three months ended:
 
 
 
 
 
 
 
Beginning balance
$
870

 
$
3,133

 
$
2,897

 
$
6,900

Charge-offs
(153
)
 
—

 
(452
)
 
(605
)
Recoveries of loans previously charged-off
8

 
15

 
104

 
127

Provision for loan losses
106

 
197

 
197

 
500

Ending balance
$
831

 
$
3,345

 
$
2,746

 
$
6,922

Ending balance attributable to loans:
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
317

 
$
—

 
$
317

Collectively evaluated for impairment
831

 
3,028

 
2,746

 
6,605

Total ending balance
$
831

 
$
3,345

 
$
2,746

 
$
6,922


15
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The Company’s recorded investment in loans as of March 31, 2014 , December 31, 2013 , and March 31, 2013 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology is as follows:
 
Residential
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In thousands)
March 31, 2014:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
8,129

 
$
4,352

 
$
856

 
$
13,337

Loans collectively evaluated for impairment
271,651

 
233,347

 
280,061

 
785,059

Total ending balance
$
279,780

 
$
237,699

 
$
280,917

 
$
798,396

December 31, 2013:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
7,573

 
$
4,529

 
$
871

 
$
12,973

Loans collectively evaluated for impairment
272,256

 
230,999

 
310,728

 
813,983

Total ending balance
$
279,829

 
$
235,528

 
$
311,599

 
$
826,956

March 31, 2013:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
7,206

 
$
14,339

 
$
669

 
$
22,214

Loans collectively evaluated for impairment
261,445

 
187,056

 
273,325

 
721,826

Total ending balance
$
268,651

 
$
201,395

 
$
273,994

 
$
744,040

A loan is considered a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in the interest rate to less than a current market rate of interest or an extension of a loan’s stated maturity date. Loans classified as TDRs are designated as impaired.
A summary of the Company’s loans classified as TDRs at March 31, 2014 and December 31, 2013 is presented below:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
TDR
 
 
 
Residential Real Estate
$
7,029

 
$
6,276

Commercial
2,564

 
2,581

Consumer
343

 
382

Total TDR
9,936

 
9,239

Less: TDR in non-accrual status
 
 
 
Residential Real Estate
115

 
795

Commercial
470

 
483

Consumer
68

 
99

Total performing TDR
$
9,283

 
$
7,862


16
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The Company may grant concessions through a number of different restructuring methods. The following table presents the outstanding principal balance of loans by class and by method of concession that were the subject of a TDR during t he three months ended March 31, 2014 and 2013 :

Residential
Real Estate
 
Commercial
 
Consumer
 
Total
 
(In thousands)
Three Months Ended March 31, 2014:
 
 
 
 
 
 
 
Interest rate reduction
$
1,459

 
$
—

 
$
22

 
$
1,481

Loan maturity extension
—

 
—

 
—

 
—

Forbearance
—

 
—

 
—

 
—

Principal reduction
—

 
—

 
—

 
—

   Total
$
1,459

 
$
—

 
$
22

 
$
1,481

Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
Interest rate reduction
$
—

 
$
—

 
$
28

 
$
28

Loan maturity extension
—

 
—

 
30

 
30

Forbearance
—

 
—

 
—

 
—

Principal reduction
—

 
—

 
—

 
—

   Total
$
—

 
$
—

 
$
58

 
$
58


The following table presents the number of loans modified and the balances before and after modification for t he three months ended March 31, 2014 and 2013 :
 
Number of
Loans
 
Pre-Modification
Outstanding
Recorded Balance
 
Post-Modification
Outstanding
Recorded Balance
 
(Dollar amounts in thousands)
Three Months Ended March 31, 2014:
 
 
 
 
 
Residential Real Estate
1

 
$
1,459

 
$
1,459

Commercial
—

 
—

 
—

Consumer
1

 
22

 
22

   Total
2

 
$
1,481

 
$
1,481

Three Months Ended March 31, 2013:
 
 
 
 
 
Residential Real Estate
—

 
$
—

 
$
—

Commercial
—

 
—

 
—

Consumer
3

 
58

 
58

   Total
3

 
$
58

 
$
58

There was one commercial business TDR loan and one consumer TDR loan that had been modified in the previous 12 months and had a payment default during the three months ended March 31, 2014 with a balance of $345,000 and $14,000 , respectively, at March 31, 2014 . There were no TDR loans that had payment defaults during the three months ended March 31, 2013 . Default occurs when a loan is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.
Included in the impaired loans as of March 31, 2014 and December 31, 2013 were TDRs of $9.9 million and $9.2 million , respectively. The Company has allocated $68,000 and $72,000 of specific reserves to customers whose loan terms have been modified as TDRs at March 31, 2014 and December 31, 2013 , respectively. As of March 31, 2014 and December 31, 2013 , no additional funds were committed to be advanced in connection with TDRs.
The Company’s other real estate owned and foreclosed assets represent properties and personal collateral acquired through customer loan defaults. The property is recorded at fair value less the estimated costs to sell at the date acquired. Any difference between the book value and estimated market value is recognized as a charge-off through the allowance for loan losses. Subsequently, should the fair market value of an asset less the estimated cost to sell decline to less than the carrying amount of the asset, the deficiency is recognized in the period in which it becomes known and is included in noninterest expense.

17
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

At March 31, 2014 and December 31, 2013 , the Company had balances in non-performing assets consisting of the following:
 
March 31,
2014
 
December 31,
2013
 
(Dollar amounts in thousands)
Other real estate owned and foreclosed assets
 
 
 
Residential Real Estate
$
965

 
$
107

Commercial
70

 
70

Consumer
821

 
850

Total other real estate owned and foreclosed assets
1,856

 
1,027

Total non-accrual loans
3,299

 
4,344

Total non-performing assets
$
5,155

 
$
5,371

Non-accrual loans/Total loans
0.41
%
 
0.53
%
Non-performing assets/Total assets
0.37
%
 
0.39
%

NOTE 5 — Derivative Financial Instruments

The Company has entered into commitments with prospective residential mortgage borrowers to originate loans whereby the interest rate on the loan is determined prior to funding and the borrowers have locked into that interest rate. The interest rate lock commitments on loans originated for sale are recorded at fair value in accordance with ASC 815, “Derivatives and Hedging,” and are recorded as an other asset or an accrued liability in the consolidated balance sheets. The estimated fair values of the interest rate lock commitments are based on quoted secondary market pricing, include the fair value of the servicing rights based on the discounted present value of expected future cash flows, and assume an approximate closure rate based on recent historical experience. Changes in the fair value of interest rate lock commitments are recorded in current earnings as a component of net gains on sales of loans.
To manage the interest rate risk associated with interest rate lock commitments and mortgage loans held for sale, the Company may enter into forward loan sales commitments to deliver mortgage loan inventory to investors. The estimated fair values of forward loan sales commitments are based on quoted secondary market pricing. The fair values of the forward loan sales commitments are recorded as an other asset or an accrued liability in the consolidated balance sheets. Changes in the fair values of forward loan sales commitments are recorded in current earnings as a component of net gains on sales of loans.
The outstanding notional value and fair values of outstanding positions as of March 31, 2014 , and 2013, and December 31, 2013 , and the recorded gains and losses during the three months ended March 31, 2014 and 2013, and the year ended December 31, 2013 were as follows:
 
Outstanding Notional Balance
 
Fair Value
 
Recorded (Losses)/Gains
 
(In thousands)
March 31, 2014:
 
 
 
 
 
Interest rate lock commitments
$
4,577

 
$
(16
)
 
$
(72
)
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
Interest rate lock commitments
$
3,453

 
$
56

 
$
(208
)
 
 
 
 
 
 
March 31, 2013:
 
 
 
 
 
Interest rate lock commitments
$
10,434

 
$
296

 
$
32

Forward loan sales commitments
$
1,971

 
$
(3
)
 
$
(3
)

The Company had no forward loan sales commitments at March 31, 2014 or December 31, 2013 .


18
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

NOTE 6 — Other Borrowings
Beginning July 26, 2007, the Company entered into sales of securities under agreements to repurchase (“Repurchase Agreements”) with PNC Bank, N.A. (“PNC”). The Repurchase Agreements are 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 Agreements are treated as financings, and the obligations to repurchase securities sold are included in other borrowings in the consolidated balance sheets. The underlying securities continue to be carried as assets of the Company, and the Company is entitled to receive interest and principal payments on the underlying securities. The Company had $2.0 million in repurchase agreements outstanding at March 31, 2014 and December 31, 2013 . These repurchase agreements were secured by investment securities with a fair value of $2.7 million and $2.2 million at March 31, 2014 and December 31, 2013 , respectively.

NOTE 7 — Employee Benefit Plans
Employee Stock Ownership Plan
OmniAmerican Bank adopted an Employee Stock Ownership Plan (“ESOP”) effective January 1, 2010 . The ESOP enables all eligible employees of OmniAmerican Bank to share in the growth of the Company through the acquisition of Company common stock. Employees are generally eligible to participate in the ESOP after completion of one year of service and attaining age 21 .
The ESOP purchased 8% of the shares sold in the initial public offering of the Company ( 952,200 shares). This purchase was facilitated by a note payable to the Company from the ESOP in the amount of $9.5 million . The note is secured by a pledge of the ESOP shares. The shares pledged as collateral are reported as unallocated ESOP shares in the accompanying consolidated balance sheets. The corresponding note is to be paid back in 25 approximately equal annual payments of $561,000 on the last day of each fiscal year, beginning December 31, 2010, including interest at an adjustable rate equal to the Wall Street Journal prime rate ( 3.25% as of March 31, 2014 and December 31, 2013 ). The note payable and the corresponding note receivable have been eliminated for consolidation purposes.
The Company may make discretionary contributions to the ESOP in the form of debt service. Dividends received on the unallocated ESOP shares, if any, 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 at 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.
The ESOP shares as of March 31, 2014 and December 31, 2013 were as follows:
 
March 31,
2014
 
December 31,
2013
Allocated shares
161,874

 
152,352

Unearned shares
790,326

 
799,848

Total ESOP shares
952,200

 
952,200

Fair value of unearned shares (in thousands)
$
18,012

 
$
17,101

Year-to-date compensation expense recognized from the release of shares from the ESOP (in thousands)
213

 
893

Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Pension Plan”) that provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and compensation levels at retirement. Effective December 31, 2006, the Company froze benefits under the Pension Plan, so that no further benefits would be earned by employees after that date. In addition, no new participants may be added to the Pension Plan after December 31, 2006.

19
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The net periodic pension cost for the three months ended March 31, 2014 and 2013 includes the following components:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Interest cost on projected benefit obligation
$
55

 
$
57

Expected return on assets
(86
)
 
(74
)
Amortization of net loss
11

 
48

Net periodic pension cost
$
(20
)
 
$
31

Share-Based Compensation

At its annual meeting held May 24, 2011 , the Company’s shareholders approved the OmniAmerican Bancorp, Inc. 2011 Equity Incentive Plan (the “Plan”) which provides for the grant of stock-based and other incentive awards to officers, employees, and directors of the Company. The Plan provides the board or a committee thereof with the flexibility to award no less than half the eligible awards, constituting 7% of the shares issued in the Company’s initial public offering, in the form of stock options and up to 7% of the shares issued in the initial public offering in the form of restricted stock. By resolution by the board of directors, the board confirmed that restricted stock awards will not exceed 4% of the common stock sold in the Company’s initial public offering. Pursuant to board resolution, 1,190,250 options to purchase shares of common stock and 476,100 restricted shares of common stock were made available. Share-based compensation expense for the three months ended March 31, 2014 and 2013 was as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Share-based compensation expense
$
425

 
$
395

Restricted Stock
Compensation expense for restricted stock is recognized over the vesting period of the awards based on the fair value of the stock at grant date, which is determined using the last sale price as quoted on the NASDAQ Stock Market. Shares awarded to employees vest at a rate of 20% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Shares awarded to directors vest at rates of 20% to 33% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Under the terms of the Plan, awarded shares are restricted as to transferability and may not be sold, assigned, or transferred prior to vesting. The vesting period is subject to acceleration of vesting upon a change in control of the Company or upon the termination of the award recipient’s service due to death or disability. Total restricted shares issuable pursuant to board resolution were 476,100 at March 31, 2014 , of which 392,616 shares had been issued under the Plan through March 31, 2014 .
A summary of changes in the Company’s non-vested restricted shares for the three months ended March 31, 2014 follows:
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Per Share
Non-vested at January 1, 2014
179,583

 
$
19.18

Granted
97,078

 
21.16

Vested
(60
)
 
16.32

Forfeited
—

 
—

Non-vested at March 31, 2014
276,601

 
$
19.87


As of March 31, 2014 , the Company had $3.8 million of unrecognized compensation expense related to non-vested shares of restricted stock awarded under the Plan. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 3.83 years . The Company applied an estimated forfeiture rate of 13.03% to employees’ and 0.00% to directors’ shares based on the historical turnover rates.

20
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

Stock Options
Under the terms of the Plan, stock options may not be granted with an exercise price less than the fair market value of the Company’s common stock on the date the option is granted and may not be exercised later than 10 years after the grant date. The fair market value is the last sale price as quoted on the NASDAQ Stock Market on the date of grant. All stock options granted must vest over at least three years and not more than five years , subject to acceleration of vesting upon a change in control, death, or disability.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. The risk-free interest rate utilized in the model is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option in effect at the time of the grant. Although the contractual term of the stock options granted is 10 years , the expected term of the stock options is less because option restrictions do not permit recipients to sell or hedge their options. Management believes these restrictions encourage exercise of the option before the end of the contractual term. The Company does not have sufficient historical information about its own employees’ vesting behavior; therefore, the expected term of stock options is estimated using the average of the vesting period and contractual term. The expected volatility is based on historical information about the Company's stock volatility and the volatility of peer banks.
The weighted average fair value of each stock option granted during the three months ended March 31, 2014 was $7.03 . The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
Risk-free interest rate
2.12
%
Expected term of stock options (years)
7.5

Expected stock price volatility
30.64
%
Expected dividends
0.90
%
Forfeiture rate — for officers and employees
13.03
%
Forfeiture rate — for directors
—
%

A summary of activity in the stock option portion of the Plan for the three months ended March 31, 2014 follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at January 1, 2014
394,933

 
$
16.13

 
7.54

 
$
2,088

Granted
428,788

 
21.11

 
—

 
720

Exercised
(8,525
)
 
14.35

 
—

 
(69
)
Forfeited
—

 
—

 
—

 
—

Expired
(2,400
)
 
22.24

 
—

 
(1
)
Outstanding at March 31, 2014
812,796

 
$
18.76

 
8.78

 
$
3,281

Fully vested and expected to vest
698,470

 
$
18.59

 
8.71

 
$
2,938

Exercisable at March 31, 2014
128,970

 
$
15.40

 
7.33

 
$
953

As of March 31, 2014 , the Company had $ 3.5 million of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 4.23 years . The intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the market price of our common stock as of March 31, 2014 .

21
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

NOTE 8 — Earnings Per Share

Basic earnings per common share is computed by dividing net income adjusted for distributed and undistributed earnings to participating securities by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. D iluted 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 unexercised stock options and unvested restricted stock awards. The table below presents t he information used to compute basic and diluted earnings per share:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Earnings:
 
 
 
Net income
$
1,529

 
$
1,933

Distributed and undistributed earnings to participating securities
(30
)
 
—

Income available to common shareholders
1,499

 
1,933

Basic shares:
 
 
 
Weighted-average common shares outstanding
11,486,026

 
11,444,211

Less: Average unallocated ESOP shares
(793,500
)
 
(831,588
)
    Average unvested restricted stock awards
(211,940
)
 
(253,639
)
Average shares for basic earnings per share
10,480,586

 
10,358,984

Net income per common share, basic
$
0.14

 
$
0.19

Diluted shares:
 
 
 
Weighted-average common shares outstanding for basic earnings per common share
10,480,586

 
10,358,984

Add: Dilutive effects of share-based compensation plan
63,288

 
171,389

Average shares for diluted earnings per share
10,543,874

 
10,530,373

Net income per common share, diluted
$
0.14

 
$
0.18


NOTE 9 — Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
•
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.
•
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy, is set forth below.

22
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

Securities available for sale : Securities available for sale are valued at fair value on a recurring basis. The fair values of securities available for sale are 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).
Interest rate lock commitments : Interest rate locks on commitments to originate loans for the held for sale portfolio are reported at fair value in other assets on the consolidated balance sheets with changes in value recorded in current earnings. The estimated fair values of the interest rate lock commitments are based on quoted secondary market pricing, include the fair value of the servicing rights based on the discounted present value of expected future cash flows, and assume an approximate closure rate based on recent historical experience. At March 31, 2014 , for loans with terms of 180 months, the fair value of the servicing rights was estimated as 0.96% of the loan balance if the loan had an interest rate of 3.50% or lower, 0.98% of the loan balance if the loan had an interest rate of higher than 3.50% and equal to or less than 4.00%, and 0.81% if the interest rate was higher than 4.00%. For loans with terms greater than 180 months, the fair value was estimated as 1.23% of the loan balance if the loan had an interest rate of 4.50% or lower, 1.08% of the loan balance if the loan had an interest rate higher than 4.50% but equal to or less than 5.00%, and 0.99% of the loan balance if the loan had an interest rate of higher than 5.00%. At December 31, 2013 , the fair value of the servicing rights was estimated as 1.00% of the loan balance for loans with terms of 180 months, and for loans with terms of greater than 180 month, the fair value was estimated as 1.31% of the loan balance if the loan had an interest rate of 4.50% or lower and 1.08% of the loan balance if the loan had an interest rate higher than 4.50%. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. At March 31, 2014 and December 31, 2013 , the estimated closure rate based on historical experience over the preceding two-year period was 82.4% and 77.1% , respectively. Because the closure rate and fair value of servicing rights are significant unobservable assumptions, interest rate lock commitments are included in Level 3 of the hierarchy.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Fair Value Measurements at March 31, 2014, Using
 
Total Fair Value at March 31, 2014
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
 
 
(In thousands)
Measured on a recurring basis:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. government sponsored mortgage-backed securities
$
—

 
$
300,879

 
$
—

 
$
300,879

U.S. government sponsored collateralized mortgage obligations
—

 
153,172

 
—

 
153,172

U.S. government agency securities
—

 
4,682

 
—

 
4,682

Municipal obligations
—

 
174

 
—

 
174

Other equity securities
—

 
5,937

 
—

 
5,937

Liabilities:
 
 
 
 
 
 
 
Interest rate lock commitments
$
—

 
$
—

 
$
(16
)
 
$
(16
)

23
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

 
Fair Value Measurements at December 31, 2013 Using
 
Total Fair Value at
December 31, 2013
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
 
 
(In thousands)
Measured on a recurring basis:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. government sponsored mortgage-backed securities
$
—

 
$
279,588

 
$
—

 
$
279,588

U.S. government sponsored collateralized mortgage obligations
—

 
140,576

 
—

 
140,576

U.S. government agency securities
—

 
4,538

 
—

 
4,538

Municipal obligations
—

 
170

 
—

 
170

Other equity securities
—

 
5,903

 
—

 
5,903

Interest rate lock commitments
—

 
—

 
56

 
56


A reconciliation and income statement classification of gains and losses for the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013 has not been provided since the amounts are not significant.
In accordance with ASC Topic 820, certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets or liabilities required to be measured at fair value on a nonrecurring basis include impaired loans and mortgage servicing rights. 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 Company’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. Therefore, the Company has categorized its impaired loans as Level 3.
The following table presents impaired loans that were remeasured and reported at fair value through a specific reserve of the allowance for loan losses based upon the fair value of the underlying collateral during the three months ended March 31, 2014 and 2013 :
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Carrying value of impaired loans
$
1,517

 
$
3,715

Specific reserve
(557
)
 
(317
)
Fair Value
$
960

 
$
3,398

Mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. The estimated fair values of mortgage servicing rights are classified as Level 3 because they are obtained from independent third-party valuations through an analysis of cash flows and 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, such as the market’s perception of future interest rate movements. The Company’s mortgage servicing rights were recorded at $1.5 million at March 31, 2014 and December 31, 2013 .
Non-financial assets measured at fair value on a non-recurring basis are limited to other real estate owned. Other real estate owned is carried at fair value less estimated selling costs (as determined by independent appraisal) within Level 3 of the fair value hierarchy. At the time of foreclosure, the value of the underlying loan is written down to the fair value of the real estate to

24
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

be acquired by a charge to the allowance for loan losses, if necessary. The fair value is reviewed periodically and subsequent write-downs are recorded accordingly. The following table represents other real estate owned that was remeasured and reported at fair value as of March 31, 2014 and March 31, 2013 :
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Carrying value of other real estate owned prior to remeasurement
$
954

 
$
337

Less: charge-offs recognized in the allowance for loan losses at initial acquisition
(96
)
 
(18
)
Less: sales of other real estate owned
—

 
(282
)
Carrying value of remeasured other real estate owned at end of period
$
858

 
$
37


Significant unobservable inputs used in Level 3 fair value measurements for financial assets and nonfinancial assets measured at fair value on a non-recurring basis at March 31, 2014 and December 31, 2013 , are summarized below:
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
(In thousands)
 
Valuation Techniques
 
Unobservable Input
 
Range
 (Average)
March 31, 2014:
 
 
 
 
 
 
 
Impaired loans, net of allowance
$
493

 
Discounted Cash Flow Analysis
 
Interest rate
 
1.5% - 7.0% (3.9%)
 
 
 
 
 
Loan term (in months)
 
60 - 120 (95)
 
$
467

 
Third-Party Appraisal
 
Discount of market value
 
0% (0%)
 
 
 
 
 
Estimated marketing costs
 
0% - 25.0% (6.5%)
 
 
 
 
 
Estimated property maintenance
 
0% - 3.6% (2.6%)
Mortgage servicing rights
$
1,505

 
Discounted Cash Flow Analysis
 
Interest rate
 
2.6% - 7.9% (4.3%)
 
 
 
 
 
Loan term (in months)
 
82 - 527 (312)
Other real estate owned
$
1,035

 
Third-Party Appraisal
 
Discount of market value
 
0% (0%)
 
 
 
 
 
Estimated marketing costs
 
0% - 6.0% (5.4%)
 
 
 
 
 
Estimated property maintenance
 
0% - 8.1% (1.8%)
December 31, 2013:
 
 
 
 
 
 
 
Impaired loans, net of allowance
$
840

 
Discounted Cash Flow Analysis
 
Interest rate
 
1.5% - 7.0% (4.9%)
 
 
 
 
 
Loan term (in months)
 
60 - 120 (91)
 
$
230

 
Third-Party Appraisal
 
Discount of market value
 
0% (0%)
 
 
 
 
 
Estimated marketing costs
 
6.0% (6.0%)
 
 
 
 
 
Estimated property maintenance
 
3.6% (3.6%)
Mortgage servicing rights
$
1,473

 
Discounted Cash Flow Analysis
 
Interest rate
 
2.6% - 7.9% (4.3%)
 
 
 
 
 
Loan term (in months)
 
82 - 527 (312)
Other real estate owned
$
177

 
Third-Party Appraisal
 
Discount of market value
 
0% (0%)
 
 
 
 
 
Estimated marketing costs
 
0.0% - 6.0% (2.4%)
 
 
 
 
 
Estimated property maintenance
 
0% (0%)

25
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

There were no transfers between levels during the three months ended March 31, 2014 or the year ended December 31, 2013 .
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.
Other investments: The carrying amount for other investments, which consists primarily of Federal Home Loan Bank stock, approximates fair values.
Loans held for sale: The fair value of loans held for sale is based on quoted market prices in the secondary market for loans with similar characteristics.
Loans: The estimated fair values for all fixed-rate loans are derived utilizing discounted cash flow analyses, the calculations of which are performed on groupings of loan receivables that are similar in terms of loan type and characteristics. The expected future cash flows of each grouping are discounted using the U.S. Treasury curve and current offering rates to calculate a discount spread to the curve. 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. Significant inputs to the fair value measurement of the loan portfolio are unobservable, and as such are classified as Level 3.
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 interest curve and current offering rates to calculate a discount spread to the curve.
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.

26
OmniAmerican Bancorp, Inc. and Subsidiary
Condensed Notes to Unaudited Consolidated Interim Financial Statements — (Continued)

The carrying amount and estimated fair value of the Company’s financial instruments at March 31, 2014 and December 31, 2013 are summarized as follows:
 
March 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Level 1 inputs:
 
 
 
 
 
 
 
Cash and cash equivalents
$
12,925

 
$
12,925

 
$
15,880

 
$
15,880

Level 2 inputs:
 
 
 
 
 
 
 
Securities available for sale
464,844

 
464,844

 
430,775

 
430,775

Other investments
17,912

 
17,912

 
19,782

 
19,782

Loans held for sale
1,607

 
1,608

 
1,509

 
1,522

Accrued interest receivable
3,379

 
3,379

 
3,447

 
3,447

Level 3 inputs:
 
 
 
 
 
 
 
Loans, net
795,520

 
804,609

 
824,881

 
840,478

Mortgage servicing rights
1,505

 
1,505

 
1,473

 
1,473

Interest rate lock commitments
—

 
—

 
56

 
56

Financial liabilities:
 
 
 
 
 
 
 
Level 2 inputs:
 
 
 
 
 
 
 
Federal Home Loan Bank advances
$
338,667

 
$
336,129

 
$
362,000

 
$
360,576

Accrued interest payable
345

 
345

 
389

 
389

Level 3 inputs:
 
 
 
 
 
 
 
Deposits
832,612

 
843,764

 
813,574

 
824,856

Repurchase agreements
2,000

 
2,038

 
2,000

 
2,049

Interest rate lock commitments
16

 
16

 
—

 
—

Off-balance sheet financial instruments:
 
 
 
 
 
 
 
Loan commitments
$
—

 
$
—

 
$
—

 
$
—

Letters of credit
—

 
—

 
—

 
—

NOTE 10 — Subsequent Events
On April 28, 2014 , the Company announced that it entered into an Agreement and Plan of Merger (“Merger Agreement”) with Southside Bancshares, Inc. (“Southside”), whereby the Company will be merged into Southside and OmniAmerican Bank will be merged into Southside’s subsidiary, Southside Bank. In the merger, shareholders of the Company will receive 0.4459 of a share of Southside’s common stock plus approximately $13.125 in cash for each outstanding share of OmniAmerican common stock. Concurrently with the execution of the Merger Agreement, Southside entered into voting and support agreements with each non-employee director of the Company pursuant to which each director agreed to, among other things, vote his or her shares in favor of the Merger Agreement. The Merger Agreement is subject to approval by the shareholders of Southside and the Company, approval by the appropriate regulatory agencies, and other customary terms and conditions as described in the Merger Agreement. The Merger Agreement was filed with the Securities and Exchange Commission as an exhibit to this Form 10-Q for the Quarterly Period Ended March 31, 2014.


27

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:
•
statements of our goals, intentions, and expectations;
•
statements regarding our business plans, prospects, growth, and operating strategies;
•
statements regarding the asset quality of our loan and investment portfolios; and
•
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•
general economic conditions, either nationally or in our market areas, that are worse than expected;
•
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
•
adverse changes in the securities markets;
•
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•
our ability to enter new markets successfully and capitalize on growth opportunities;
•
our ability to successfully integrate acquired entities, if any;
•
changes in consumer spending, borrowing, and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission, and the Public Company Accounting Oversight Board;
•
inability of borrowers and/or third-party providers to perform their obligations to us;
•
the effect of developments in the secondary market affecting our loan pricing;
•
changes in our organization, compensation, and benefit plans;
•
changes in our financial condition or results of operations that reduce capital available to pay dividends;
•
changes in the financial condition or future prospects of issuers of securities that we own;
•
changes resulting from intense compliance and regulatory costs associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
•
changes in our regulatory capital resulting from compliance with the final Basel III capital rules;
•
the Company’s pending merger with Southside could have a negative impact on our business; and
•
the failure to complete the merger with Southside could negatively impact our business.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. For a more detailed discussion of these and other factors that may affect our business, see the discussion under the caption “Risk Factors” in our Annual Report on Form 10-K and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

28

General
OmniAmerican Bancorp, Inc. (referred to herein as “we,” “us,” “our,” or the “Company”) is the Maryland corporation that owns all of the outstanding shares of common stock of OmniAmerican Bank (the “Bank”) following the January 20, 2010 completion of the mutual-to-stock conversion of the Bank and initial public stock offering of the Company. The Company has no significant assets other than all of the outstanding shares of common stock of the Bank and the net proceeds that we retained in connection with the offering.
The Bank is a federally chartered savings bank headquartered in Fort Worth, Texas. The Bank was originally chartered in 1956 as a federal credit union serving the active and retired military personnel of Carswell Air Force Base. The Bank converted from a Texas credit union charter to a federal mutual savings bank charter on January 1, 2006. The objective of the charter conversion was to convert to a savings bank charter in order to carry out our business strategy of broadening our banking services into residential real estate and commercial lending, selling loans, and servicing loans for others, which has allowed us to better serve the needs of our customers and the local community.
Our principal business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans and investments. Our lending activity has focused primarily on mortgage loans secured by residential real estate, consumer loans, consisting primarily of indirect automobile loans (automobile loans referred to us by automobile dealerships), and to a lesser extent, commercial real estate, real estate construction, commercial business, and direct automobile loans. In recent years, we have increased our residential real estate, real estate construction, commercial real estate and commercial business lending while deemphasizing our consumer lending activities.
On April 28, 2014, the Company announced that it entered into an Agreement and Plan of Merger (“Merger Agreement”) with Southside Bancshares, Inc. (“Southside”), whereby the Company will be merged into Southside and OmniAmerican Bank will be merged into Southside’s subsidiary, Southside Bank. In the merger, shareholders of the Company will receive 0.4459 of a share of Southside’s common stock plus approximately $13.125 in cash for each outstanding share of OmniAmerican common stock. Concurrently with the execution of the Merger Agreement, Southside entered into voting and support agreements with each non-employee director of the Company pursuant to which each director agreed to, among other things, vote his or her shares in favor of the Merger Agreement. The Merger Agreement is subject to approval by the shareholders of Southside and the Company, approval by the appropriate regulatory agencies, and other customary terms and conditions as described in the Merger Agreement. The Merger Agreement was filed with the Securities and Exchange Commission as an exhibit to this Form 10-Q for the Quarterly Period Ended March 31, 2014.
On October 9, 2013, the Company announced its plan to discontinue the purchase of auto loans originated through auto dealerships in order to further strengthen the Company’s focus on its commercial, direct retail and mortgage lending strategies. In addition, the Company eliminated 24 positions in the auto lending and administrative functions, or approximately eight percent of its total workforce.
Loans are originated from our main office in Fort Worth, Texas, and from our branch network in the Dallas-Fort Worth Metroplex and surrounding communities in North Texas. We generally sell the long-term, fixed-rate one- to four-family residential mortgage loans (terms 15 years or greater) that we originate either to the Federal National Mortgage Association on a servicing-retained basis or into the secondary mortgage market on a servicing-released basis, in order to generate fee income and for interest rate risk management purposes. We retain in our portfolio all adjustable-rate loans that we originate, as well as fixed-rate one- to four-family residential mortgage loans with terms less than 15 years.
In addition to loans, we invest in a variety of investments, primarily government sponsored mortgage-backed securities and government sponsored collateralized mortgage obligations, and to a lesser extent municipal obligations, agency bonds and equity securities. At March 31, 2014 , our investment securities portfolio had an amortized cost of $465.2 million .
We attract retail deposits from the general public in the areas surrounding our main office and our branch offices. We offer a variety of deposit accounts, including noninterest-bearing and interest-bearing demand accounts, savings accounts, money market accounts, and certificates of deposit.
Our revenues are derived primarily from interest on loans, mortgage-backed securities, and other investment securities. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, principal and interest payments on securities and loans, and borrowings.
The Securities and Exchange Commission’s Division of Corporation Finance staff issued disclosure guidance that summarizes its observations about Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

and accounting policy disclosures of smaller financial institutions. The focus of the guidance is on asset quality and loan accounting issues. Please refer to Note 4 of our unaudited interim financial statements for our detailed disclosures related to asset quality and loan accounting issues.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2014 .

Comparison of Financial Condition at March 31, 2014 and December 31, 2013
Assets. Total assets remained relatively unchanged at $1.39 billion at March 31, 2014 and December 31, 2013 . Securities available for sale increased $34.0 million , while loans, net of the allowance for loan losses and deferred fees and discounts, decrease d $29.4 million and cash and cash equivalents decreased $3.0 million .
Cash and Cash Equivalents. Total cash and cash equivalents decreased $3.0 million , or 18.6% , to $12.9 million at March 31, 2014 from $15.9 million at December 31, 2013 . The decrease in total cash and cash equivalents reflects $53.7 million in cash used to purchase securities classified as available for sale, $36.2 million in cash used to originate loans, and a $23.3 million net decrease in Federal Home Loan Bank advances during the three months ended March 31, 2014 . These decreases were partially offset by increases in cash due to loan principal repayments of $51.9 million, a net increase in deposits of $19.0 million, principal repayments and maturities of securities of $15.3 million , proceeds from the sales of loans of $11.3 million , and proceeds from the sales of securities available for sale of $6.4 million . The loans sold during the three months ended March 31, 2014 consisted of one- to four-family residential real estate loans with terms 15 years or greater. These loans were sold in order to manage our interest rate risk.
Loans held for sale. Loans held for sale increased $98,000 , or 6.5% , to $1.6 million at March 31, 2014 from $1.5 million at December 31, 2013 . The increase in loans held for sale resulted from $11.2 million in sales, partially offset by originations of $11.3 million during the three months ended March 31, 2014 .
Securities. Securities classified as available for sale increased $34.0 million , or 7.9% , to $464.8 million at March 31, 2014 from $430.8 million at December 31, 2013 . The increase was primarily due to purchases of $53.7 million in securities classified as available for sale and a decrease in unrealized losses of $2.4 million during the quarter ended March 31, 2014 , partially offset by principal repayments and maturities of $15.3 million , sales of investment securities of $6.2 million, and the amortization of net premiums on investments of $630,000. At March 31, 2014 , securities classified as available for sale consisted of government sponsored mortgage-backed securities, government sponsored collateralized mortgage obligations, agency bonds, municipal obligations, and other equity securities.
Loans. Loans, net of the allowance for loan losses and deferred fees and discounts, decreased $29.4 million , or 3.6% , to $795.5 million at March 31, 2014 from $824.9 million at December 31, 2013 .
 
March 31,
2014
 
December 31, 2013
 
Dollar
change
 
Percent
change
 
(Dollars in thousands)
 
 
One- to four-family
$
263,521

 
$
262,723

 
$
798

 
0.3
 %
Home equity
16,259

 
17,106

 
(847
)
 
(5.0
)
Commercial real estate
110,881

 
106,560

 
4,321

 
4.1

Real estate construction
55,988

 
59,648

 
(3,660
)
 
(6.1
)
Commercial business
70,830

 
69,320

 
1,510

 
2.2

Automobile, indirect
234,164

 
264,671

 
(30,507
)
 
(11.5
)
Automobile, direct
31,648

 
31,598

 
50

 
0.2

Other consumer
15,105

 
15,330

 
(225
)
 
(1.5
)
Total loans
798,396

 
826,956

 
(28,560
)
 
(3.5
)
Other items:
 
 
 
 
 
 
 
Unearned fees and discounts, net
3,592

 
4,370

 
(778
)
 
(17.8
)
Allowance for loan losses
(6,468
)
 
(6,445
)
 
(23
)
 
0.4

Total loans, net
$
795,520

 
$
824,881

 
$
(29,361
)
 
(3.6
)%

30

The decrease in indirect automobile loans of $30.5 million , or 11.5% , to $234.2 million at March 31, 2014 from $264.7 million at December 31, 2013 , was primarily due to the discontinuation of our indirect lending program in October 2013. Real estate construction loans decrease d $3.7 million , or 6.1% , to $56.0 million at March 31, 2014 from $59.6 million at December 31, 2013 , primarily due to repayments of $8.0 million partially offset by originations of $4.4 million during the three months ended March 31, 2014 . These decreases were partially offset by an increase in commercial real estate loans of $4.3 million , or 4.1% , to $110.9 million at March 31, 2014 from $106.6 million at December 31, 2013 , and an increase in commercial business loans of $1.5 million , or 2.2% , to $70.8 million at March 31, 2014 from $69.3 million at December 31, 2013 . We continue to monitor the composition of our loan portfolio and seek to obtain a reasonable return while containing the potential for risk of loss.
Allowance for Loan Losses. The allowance for loan losses increased $23,000 , or 0.4% , to $6.5 million at March 31, 2014 from $6.4 million at December 31, 2013 . This increase was primarily related to a $36,000 increase in specific reserves at March 31, 2014 to $557,000 related to nine impaired loans with balances totaling $1.5 million , compared to specific reserves of $521,000 related to five impaired loans with balances totaling $1.6 million at December 31, 2013 . Impaired loans with balances totaling $11.8 million did not require specific reserves at March 31, 2014 . Impaired loans with balances totaling $11.4 million did not require specific reserves at December 31, 2013 . The allowance for loan losses represented 0.81% and 0.78% of total loans at March 31, 2014 and December 31, 2013 , respectively.
The significant changes in the amount of the allowance for loan losses during the three months ended March 31, 2014 related to a $36,000 increase in the allowance for loan losses attributable to impaired commercial loans resulting from insufficient collateral on seven loans within the commercial portfolio at March 31, 2014 as compared to December 31, 2013 . Management also considered local economic factors and unemployment as well as the higher risk profile of real estate construction and commercial business loans when evaluating the adequacy of the allowance for loan losses as it pertains to these types of loans.
Bank-Owned Life Insurance. Bank-owned life insurance increased $366,000 , or 0.8% , to $44.0 million at March 31, 2014 from $43.6 million at December 31, 2013 . The increase in bank-owned life insurance is due to the increase in the cash surrender value of the policies.
Deposits . Deposits increased $ 19.0 million , or 2.3% , to $ 832.6 million at March 31, 2014 from $ 813.6 million at December 31, 2013 .
 
March 31,
2014
 
December 31, 2013
 
Dollar
change
 
Percent change
 
(Dollars in thousands)
 
 
Noninterest-bearing demand
$
69,162

 
$
58,071

 
$
11,091

 
19.1
 %
Interest-bearing demand
150,295

 
146,818

 
3,477

 
2.4

Savings
107,340

 
105,030

 
2,310

 
2.2

Money market
236,635

 
233,918

 
2,717

 
1.2

Certificates of deposit
269,180

 
269,737

 
(557
)
 
(0.2
)
Total deposits
$
832,612

 
$
813,574

 
$
19,038

 
2.3
 %
The increase in deposits was primarily attributable to an increase in noninterest-bearing demand deposits of $11.1 million . The increase in noninterest-bearing deposits included a $10.1 million increase in commercial deposits which resulted primarily from our efforts to deepen our commercial relationships. Interest-bearing demand deposits increased $3.5 million , money market deposits increased $2.7 million , and savings deposits increased $2.3 million , primarily due to organic growth in the bank’s 14 branches. These increases in deposits were partially offset by a $557,000 decrease in certificates of deposit. The decrease in certificates of deposits resulted from certificates of deposit that matured and were not renewed.
Borrowings. Federal Home Loan Bank advances decreased $ 23.3 million , or 6.4% , to $ 338.7 million at March 31, 2014 from $ 362.0 million at December 31, 2013 . The decrease in Federal Home Loan Bank advances was attributable to scheduled maturities of $88.3 million advances, offset by new advances of $65.0 million during the three months ended March 31, 2014 . Other borrowings remained unchanged at $2.0 million at March 31, 2014 and December 31, 2013 .

31

Stockholders’ Equity. At March 31, 2014 , our stockholders’ equity was $ 210.3 million , an increase of $ 3.2 , or 1.5% , from $ 207.1 million at December 31, 2013 .
 
March 31,
2014
 
December 31, 2013
 
Dollar
change
 
Percent change
 
(Dollars in thousands)
 
 
Common stock
$
116

 
$
115

 
$
1

 
0.9
 %
Additional paid-in capital
109,798

 
109,250

 
548

 
0.5
 %
Unallocated ESOP shares
(7,903
)
 
(7,999
)
 
96

 
(1.2
)%
Retained earnings
109,260

 
108,304

 
956

 
0.9
 %
Accumulated other comprehensive (loss) income
(936
)
 
(2,528
)
 
1,592

 
(63.0
)%
Total stockholders’ equity
$
210,335

 
$
207,142

 
$
3,193

 
1.5
 %
The increase in stockholders’ equity was primarily due to a decrease in unrealized losses on available for sale securities of $ 1.6 million after tax, net income of $ 1.5 million , share-based compensation expense of $ 425,000 , and ESOP compensation expense of $ 213,000 during the three months ended March 31, 2014 . These increases were partially offset by a decrease due to dividends declared of $573,000.
Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013
General . Net income decrease d $ 404,000 , or 20.9% , to $ 1.5 million for the three months ended March 31, 2014 from $1.9 million for the prior year period. The decrease in net income reflected a decrease in noninterest income of $2.4 million and an increase in the provision for loan losses of $150,000 , partially offset by an increase in net interest income of $1.1 million , a decrease in noninterest expense of $689,000 , and a $376,000 decrease in the income tax expense.
Interest Income . Interest income increase d $727,000 , or 6.6% , to $11.8 million for the three months ended March 31, 2014 from $11.1 million for the three months ended March 31, 2013 . The increase resulted primarily due to a $135.1 million , or 11.7% percent increase in the average balance of interest-earning assets to $1.29 billion for the three months ended March 31, 2014 from $1.16 billion for the three months ended March 31, 2013 , partially offset by an 18 basis point decrease in the average yield on interest-earning assets.
 
Three Months Ended
March 31,
 
Dollar
change
 
Percent change
 
2014
 
2013
 
 
 
(Dollars in thousands)
 
 
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
9,202

 
$
8,901

 
$
301

 
3.4
%
Securities—taxable
2,588

 
2,163

 
425

 
19.6

Securities—nontaxable
1

 
—

 
1

 
—

Total interest income
$
11,791

 
$
11,064

 
$
727

 
6.6
%
The increase in interest income on loans of $301,000 was primarily due to an increase in the average balance of our loan portfolio of $66.8 million , or 8.9% , to $813.5 million for the three months ended March 31, 2014 from $746.7 million for the three months ended March 31, 2013 , partially offset by a decrease in the average yield on our loan portfolio of 25 basis points to 4.52% for the three months ended March 31, 2014 from 4.77% for the three months ended March 31, 2013 .
The increase in interest income on investment securities of $426,000 resulted primarily from a $42.8 million , or 11.0% , increase in the average balance of our securities portfolio to $434.1 million for the three months ended March 31, 2014 from $391.3 million for the three months ended March 31, 2013 , primarily due purchases of securities. In addition to the increase in the average balance of our securities portfolio, the average yield on our securities portfolio increase d 16 basis points to 2.35% for the three months ended March 31, 2014 from 2.19% for the three months ended March 31, 2013 .

32

Interest Expense . Interest expense decrease d by $358,000 , or 17.2% , to $1.7 million for the three months ended March 31, 2014 from $2.1 million for the three months ended March 31, 2013 .
 
Three Months Ended
March 31,
 
Dollar
change
 
Percent change
 
2014
 
2013
 
 
 
(Dollars in thousands)
 
 
Interest expense:
 
 
 
 
 
 
 
Deposits
$
1,013

 
$
1,457

 
$
(444
)
 
(30.5
)%
Borrowed funds
709

 
623

 
86

 
13.8

Total interest expense
$
1,722

 
$
2,080

 
$
(358
)
 
(17.2
)%
The decrease in interest expense on deposits of $444,000 resulted from a decrease in the average rate we paid on deposits and a decrease in the average balance of interest-bearing deposits. The average rate we paid decreased 22 basis points to 0.54% for the three months ended March 31, 2014 from 0.76% for the three months ended March 31, 2013 , as we were able to reprice our deposits lower as market interest rates declined. The average balance of interest-bearing deposits decreased $6.9 million , or 0.9% , to $756.3 million for the three months ended March 31, 2014 from $763.2 million for the three months ended March 31, 2013 . The decrease in the average balance of our interest-bearing deposits was primarily due to decreases in the average balances of our certificates of deposit, partially offset by increases in the average balances of our interest-bearing demand accounts and money market accounts.
Interest expense on certificates of deposit decrease d $429,000 , or 33.7% , to $845,000 for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2013 . The average balance of certificates of deposit decreased $24.0 million , or 8.2% , to $269.2 million for the three months ended March 31, 2014 from $293.2 million for the three months ended March 31, 2013 . In addition, the average rate paid on certificates of deposit decreased 48 basis points to 1.26% for the three months ended March 31, 2014 from 1.74% for the three months ended March 31, 2013 , reflecting the continuing low market interest rate environment.
The increase in interest expense on borrowed funds of $86,000 resulted primarily from an increase of $123.1 million , or 52.8% , in the average balance of borrowed funds to $356.4 million for the three months ended March 31, 2014 from $233.3 million for the three months ended March 31, 2013 , partially offset by a 27 basis point decrease in the average rate paid on borrowed funds to 0.80% for the three months ended March 31, 2014 from 1.07% for the three months ended March 31, 2013 .
Net Interest Income . Net interest income increase d by $1.1 million , or 12.1% , to $10.1 million for the three months ended March 31, 2014 from $9.0 million for the prior year period. Our interest rate spread increased 3 basis points to 3.03% for the three months ended March 31, 2014 from 3.00% for the three months ended March 31, 2013 . Our net interest margin increased 1 basis point to 3.12% for the three months ended March 31, 2014 from 3.11% for the three months ended March 31, 2013 . These increases in net interest income, the net interest margin, and the interest rate spread resulted primarily from an increase of $42.8 million , or 11.0% , in the average balance of investment securities available for sale to $434.1 million for the three months ended March 31, 2014 from $391.3 million for the three months ended March 31, 2013 , an increase of $66.8 million , or 8.9% , in the average balance of our loan portfolio to $813.5 million for the three months ended March 31, 2014 from $746.7 million for the three months ended March 31, 2013 , and a 48 basis point decrease in the average rate we paid on certificates of deposit to 1.26% for the three months ended March 31, 2014 from 1.74% for the three months ended March 31, 2013 .
Provision for Loan Loss es. We recorded a provision for loan losses of $650,000 for the three months ended March 31, 2014 compared to $500,000 provision for loan losses for the three months ended March 31, 2013 . The provision for loan losses is charged to operations to bring the allowance for loan losses to a level that reflects management’s best estimate of the losses inherent in the portfolio. The increase in the provision for loan losses was primarily due to an increase in net chargeoffs and growth in the loan portfolio. Net chargeoffs increased $149,000, to $627,000, or 0.31% of average loans outstanding, for the quarter ended March 31, 2014 from $478,000, or 0.25% of average loans outstanding, for the quarter ended March 31, 2013. Total loans increased $54.4 million , or 7.3% , to $798.4 million at March 31, 2014 from $744.0 at March 31, 2013 . An evaluation of the loan portfolio, current economic conditions, and other factors is performed at each balance sheet date. The allowance for loan losses to total loans receivable decreased to 0.81% at March 31, 2014 from 0.93% at March 31, 2013 . Total substandard loans decreased $7.8 million , or 36.5% , to $13.5 million at March 31, 2014 from $21.3 million at March 31, 2013 . Total impaired loans decreased $8.9 million , or 40.0% , to $13.3 million at March 31, 2014 from $22.2 million at March 31, 2013 .

33

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 March 31, 2014 or March 31, 2013 . At March 31, 2014 , non-performing loans totaled $3.3 million , or 0.41% of total loans, compared to $8.4 million , or 1.13% of total loans, at March 31, 2013 . The allowance for loan losses as a percentage of non-performing loans increased to 196.06% at March 31, 2014 from 82.49% at March 31, 2013 .
Noninterest Income . Noninterest income decrease d $2.4 million , or 41.0% , to $3.5 million for the three months ended March 31, 2014 from $5.9 million for the three months ended March 31, 2013 .
 
Three Months Ended
March 31,
 
Dollar
change
 
Percent change
 
2014
 
2013
 
 
 
(Dollars in thousands)
 
 
Noninterest income:
 
 
 
 
 
 
 
Service charges and other fees
$
2,058

 
$
2,218

 
$
(160
)
 
(7.2
)%
Net gains on sales of loans
183

 
786

 
(603
)
 
(76.7
)
Net gains on sales of securities available for sale
259

 
1,701

 
(1,442
)
 
(84.8
)
Net (losses) gains on sales of premises and equipment
(1
)
 
344

 
(345
)
 
(100.3
)
Net losses on sales of repossessed assets
(38
)
 
(30
)
 
(8
)
 
26.7

Commissions
374

 
308

 
66

 
21.4

Increase in cash surrender value of bank-owned life insurance
366

 
316

 
50

 
15.8

Other income
257

 
219

 
38

 
17.4

Total noninterest income
$
3,458

 
$
5,862

 
$
(2,404
)
 
(41.0
)%
The decrease in noninterest income was primarily attributable to a $1.4 million decrease in net gains on the sales of investments, a $603,000 decrease in net gains on the sales of loans, and a $345,000 decrease in gains on sales of premises and equipment. The decrease in net gains on sales of investments is attributable to sales of $6.2 million of investment securities for a gain of $259,000 during the three months ended March 31, 2014, while $44.5 million of investment securities were sold for a gain of $1.7 million during the three months ended March 31, 2013. The decrease in net gains on sales of loans resulted primarily from a decrease in the volume of loans sold to 67 loans sold in the three months ended March 31, 2014 from 144 loans sold in the three months ended March 31, 2013. The decrease in net gains on sales of premises and equipment resulted primarily from a $344,000 gain recognized on the sale of land adjacent to one of our branch locations during the three months ended March 31, 2013.

34

Noninterest Expense . Noninterest expense decrease d $689,000 , or 6.1% , to $10.6 million for the three months ended March 31, 2014 from $11.3 million for the three months ended March 31, 2013 .
 
Three Months Ended
March 31,
 
Dollar
change
 
Percent change
 
2014
 
2013
 
 
 
(Dollars in thousands)
 
 
Noninterest expense:
 
 
 
 
 
 
 
Salaries and benefits
$
6,182

 
$
6,757

 
$
(575
)
 
(8.5
)%
Software and equipment maintenance
587

 
610

 
(23
)
 
(3.8
)
Depreciation of furniture, software, and equipment
317

 
413

 
(96
)
 
(23.2
)
FDIC insurance
180

 
190

 
(10
)
 
(5.3
)
Real estate owned expense (income)
35

 
(20
)
 
55

 
(275.0
)
Service fees
144

 
114

 
30

 
26.3

Communications costs
236

 
224

 
12

 
5.4

Other operations expense
751

 
761

 
(10
)
 
(1.3
)
Occupancy
965

 
980

 
(15
)
 
(1.5
)
Professional and outside services
1,042

 
1,038

 
4

 
0.4

Loan servicing
78

 
111

 
(33
)
 
(29.7
)
Marketing
122

 
150

 
(28
)
 
(18.7
)
Total noninterest expense
$
10,639

 
$
11,328

 
$
(689
)
 
(6.1
)%
The decrease in noninterest expense was primarily attributable to a $575,000 decrease in salaries and benefits expense which resulted primarily from a reduction in force which occurred during the fourth quarter of 2013.
Income Tax Expense . Income tax expense decrease d $376,000 , or 34.7% , to $709,000 for the three months ended March 31, 2014 from $1.1 million for the three months ended March 31, 2013 which reflected an effective tax rate of 31.68% and 35.95% for the three months ended March 31, 2014 and March 31, 2013 , respectively. The decrease in income tax expense was primarily due to decreases in net income and nondeductible expenses and an increase in nontaxable income.
Analysis of Net Interest Income — Three Months Ended March 31, 2014 and 2013
Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.


35

Average Balances and Yields
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
 
For the Three Months Ended March 31,
 
2014
 
2013
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Rate   (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/
Rate   (1)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
813,484

 
$
9,202

 
4.52
%
 
$
746,674

 
$
8,901

 
4.77
%
Investment securities available for sale
434,138

 
2,555

 
2.35

 
391,258

 
2,141

 
2.19

Cash and cash equivalents
24,283

 
12

 
0.20

 
4,322

 
4

 
0.37

Other
18,621

 
22

 
0.47

 
13,201

 
18

 
0.55

Total interest-earning assets
1,290,526

 
11,791

 
3.65

 
1,155,455


11,064

 
3.83

Noninterest-earning assets
103,222

 
 
 
 
 
107,159

 
 
 
 
Total assets
$
1,393,748

 
 
 
 
 
$
1,262,614

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
146,975

 
$
24

 
0.07
%
 
$
137,507

 
$
31

 
0.09
%
Savings accounts
104,794

 
12

 
0.05

 
103,873

 
11

 
0.04

Money market accounts
235,273

 
132

 
0.22

 
228,617

 
141

 
0.25

Certificates of deposit
269,242

 
845

 
1.26

 
293,204

 
1,274

 
1.74

Total interest-bearing deposits
756,284

 
1,013

 
0.54

 
763,201

 
1,457

 
0.76

Federal Home Loan Bank advances
353,741

 
695

 
0.79

 
222,278

 
599

 
1.08

Other secured borrowings
2,691

 
14

 
2.08

 
11,053

 
24

 
0.87

Total interest-bearing liabilities
1,112,716

 
1,722

 
0.62

 
996,532

 
2,080

 
0.83

Noninterest-bearing liabilities (2)
70,611

 
 
 
 
 
60,003

 
 
 
 
Total liabilities
1,183,327

 
 
 
 
 
1,056,535

 
 
 
 
Equity
210,421

 
 
 
 
 
206,079

 
 
 
 
Total liabilities and equity
$
1,393,748

 
 
 
 
 
$
1,262,614

 
 
 
 
Net interest income
 
 
$
10,069

 
 
 
 
 
$
8,984

 
 
Interest rate spread  (3)
 
 
 
 
3.03
%
 
 
 
 
 
3.00
%
Net interest-earning assets (4)
$
177,810

 
 
 
 
 
$
158,923

 
 
 
 
Net interest margin (5)
 
 
 
 
3.12
%
 
 
 
 
 
3.11
%
Average interest-earning assets to interest-bearing liabilities
115.98
%
 
 
 
 
 
115.95
%
 
 
 
 
_______________________
(1)
Annualized.
(2)
Includes noninterest-bearing deposits.
(3)
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by average total interest-earning assets.

36


Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by later volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
 
Three Months Ended March 31,
2014 vs. 2013
 
Increase (Decrease)
Due to
 
Total
Increase (Decrease)
 
Volume
 
Rate
 
 
(In thousands)
Interest-earning assets:
 
 
 
 
 
Loans
$
796

 
$
(495
)
 
$
301

Investment securities available for sale
235

 
179

 
414

Cash and cash equivalents
18

 
(10
)
 
8

Other
7

 
(3
)
 
4

Total interest-earning assets
$
1,056

 
$
(329
)
 
$
727

Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
$
2

 
$
(9
)
 
$
(7
)
Savings accounts
—

 
1

 
1

Money market accounts
4

 
(13
)
 
(9
)
Certificates of deposit
(104
)
 
(325
)
 
(429
)
Total interest-bearing deposits
(98
)
 
(346
)
 
(444
)
Federal Home Loan Bank advances
354

 
(258
)
 
96

Other secured borrowings
(18
)
 
8

 
(10
)
Total interest-bearing liabilities
$
238

 
$
(596
)
 
$
(358
)
Change in net interest income
$
818

 
$
267

 
$
1,085

Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Dallas, and maturities and sales of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We monitor our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand;
(ii) expected deposit flows and borrowing maturities;
(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.

37

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 March 31, 2014 , cash and cash equivalents totaled $12.9 million . Securities classified as available for sale, which provide additional sources of liquidity, totaled $464.8 million at March 31, 2014 . On that date, we had $338.7 million in Federal Home Loan Bank advances, with the ability to borrow an additional $303.9 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 March 31, 2014 , we had $106.0 million in commitments to extend credit. Included in these commitments to extend credit were $93.4 million in unused lines of credit to borrowers. Certificates of deposit due within one year of March 31, 2014 totaled $139.1 million , or 16.7% 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 unfavorable 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 March 31, 2015. 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.
Generally, our primary investing activity is originating loans. During the three months ended March 31, 2014 , we originated $36.2 million of loans. In addition, we purchased $53.7 million of securities classified as available for sale during the three months ended March 31, 2014 .
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances and other borrowings. Total deposits increased $19.0 million for the three months ended March 31, 2014 . Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, we may utilize our borrowing agreements with the Federal Home Loan Bank of Dallas, which provides an additional source of funds. Federal Home Loan Bank advances decreased by $23.3 million for the three months ended March 31, 2014 . At March 31, 2014 , we had the ability to borrow up to $642.6 million from the Federal Home Loan Bank of Dallas. In addition, we maintained $55.0 million in federal funds lines with other financial institutions at March 31, 2014 . 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 March 31, 2014 , the borrowing limit for this line of credit was $278.3 million.

38

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2014 , the Bank exceeded all regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. The table below presents the capital required as a percentage of total and risk-weighted assets and the percentage and the total amount of capital maintained at March 31, 2014 and December 31, 2013 without giving effect to the final Basel III capital rules adopted by the Federal Reserve Board on July 2, 2013 and by the Office of the Comptroller of the Currency on July 9, 2013.
 
Actual
 
Minimum
For Capital
Adequacy Purposes
 
Minimum To Be
Well Capitalized Under
Prompt Corrective
Actions Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
Consolidated as of March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital to risk-weighted assets
$
215,231

 
24.24
%
 
$
71,034

 
8.00
%
 
$
88,793

 
10.00
%
Tier I risk-based capital to risk-weighted assets
208,288

 
23.46
%
 
35,517

 
4.00
%
 
53,276

 
6.00
%
Tier I (Core) capital to adjusted total assets
208,288

 
14.98
%
 
55,603

 
4.00
%
 
69,503

 
5.00
%
OmniAmerican Bank as of March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital to risk-weighted assets
$
198,506

 
22.35
%
 
$
71,039

 
8.00
%
 
$
88,799

 
10.00
%
Tier I risk-based capital to risk-weighted assets
191,563

 
21.57
%
 
35,520

 
4.00
%
 
53,280

 
6.00
%
Tier I (Core) capital to adjusted total assets
191,563

 
13.78
%
 
55,605

 
4.00
%
 
69,506

 
5.00
%
Consolidated as of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital to risk-weighted assets
$
213,553

 
23.41
%
 
$
72,948

 
8.00
%
 
$
91,185

 
10.00
%
Tier I risk-based capital to risk-weighted assets
206,662

 
22.66
%
 
36,474

 
4.00
%
 
54,711

 
6.00
%
Tier I (Core) capital to adjusted total assets
206,662

 
14.86
%
 
55,633

 
4.00
%
 
69,542

 
5.00
%
OmniAmerican Bank as of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital to risk-weighted assets
$
196,115

 
21.50
%
 
$
72,957

 
8.00
%
 
$
91,197

 
10.00
%
Tier I risk-based capital to risk-weighted assets
189,224

 
20.75
%
 
36,479

 
4.00
%
 
54,718

 
6.00
%
Tier I (Core) capital to adjusted total assets
189,224

 
13.60
%
 
55,638

 
4.00
%
 
69,548

 
5.00
%

Management continues to evaluate the final Basel III capital rules and their impact, which rules will apply beginning in reporting periods after January 1, 2015.

39

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments . As a financial services provider, we routinely are a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make.
Contractual Obligations . In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at March 31, 2014 . The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
 
Payments Due by Period
 
One year or
less
 
More than
one year to
three years
 
More than
three years to
five years
 
More than
five years
 
Total
 
(In thousands)
Contractual obligations:
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
133,167

 
$
194,167

 
$
13,333

 
$
—

 
$
340,667

Operating leases
597

 
843

 
988

 
803

 
3,231

Certificates of deposit
139,099

 
89,578

 
40,503

 
—

 
269,180

Total contractual obligations
$
272,863

 
$
284,588

 
$
54,824

 
$
803

 
$
613,078

Off-balance sheet loan commitments:
 
 
 
 
 
 
 
 
 
Undisbursed portion of loans closed
$
12,556

 
$
—

 
$
—

 
$
—

 
$
12,556

Unused lines of credit (2)
—

 
—

 
—

 
—

 
93,435

Total loan commitments
$
12,556


$
—

 
$
—

 
$
—

 
$
105,991

Total contractual obligations and loan commitments
$
285,419

 
$
284,588

 
$
54,824

 
$
803

 
$
719,069

_______________________

(1)
Includes Federal Home Loan Bank advances and securities sold under agreements to repurchase.
(2)
Because lines of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity, and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
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 mortgage loans (terms 15 years or greater) that we originate into the secondary mortgage market;

40

(ii)
lengthen the weighted-average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding sources such as fixed-rate advances from the Federal Home Loan Bank of Dallas;
(iii)
invest in shorter- to medium-term securities;
(iv)
originate commercial business and consumer loans, which tend to have shorter terms and higher interest rates than residential mortgage loans, and which generate customer relationships that can result in larger noninterest-bearing demand deposit accounts;
(v)
maintain adequate levels of capital; and
(vi)
evaluate the performance of the leveraging strategy by utilizing our internal measuring and monitoring systems which include interest rate sensitivity analysis.
We have not engaged in hedging through the use of derivatives.
Net Portfolio Value . We currently use a net portfolio value (“NPV”) analysis to monitor our level of interest rate risk. This analysis measures interest rate risk by capturing changes in the NPV of our cash flows from assets, liabilities, and off-balance sheet items, based on a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 basis point decrease in the United States Treasury yield curve with no effect given to any steps that we might take to counter the effect of that interest rate movement.

The table below sets forth, as of March 31, 2014 , our calculation of the estimated changes in our NPV 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 March 31, 2014 :
At March 31, 2014
 
 
 
 
 
 
 
 
NPV as a Percentage of
 
 
 
 
 
 
 
 
 
 
Present Value of Assets (3)
 
Net Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (Decrease) in
Change in
 
 
 
Estimated Increase
 
 
 
Increase
 
Estimated
 
Estimated Net Interest
Interest Rates
 
Estimated
 
(Decrease) in NPV
 
 
 
(Decrease)
 
Net Interest
 
Income
(basis points) (1)
 
NPV (2)
 
Amount
 
Percent
 
NPV Ratio (4)
 
(basis points)
 
Income
 
Amount
 
Percent
 
 
(Dollars in thousands)
+300
 
$
267,323

 
$
12,104

 
4.74
 %
 
19.88
%
 
305

 
$
40,930

 
$
(963
)
 
(2.30
)%
+200
 
265,583

 
10,364

 
4.06
 %
 
19.12
%
 
229

 
40,814

 
(1,079
)
 
(2.58
)%
+100
 
261,541

 
6,322

 
2.48
 %
 
18.23
%
 
140

 
40,678

 
(1,215
)
 
(2.90
)%
—
 
255,219

 
—

 
—

 
16.83
%
 
—

 
41,893

 
—

 
—

-100
 
240,341

 
(14,878
)
 
(5.83
)%
 
16.75
%
 
(8
)
 
37,907

 
(3,986
)
 
(9.51
)%
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at March 31, 2014 , in the event of a 200 basis point increase in interest rates, we would experience a 4.06% decrease in NPV. In the event of a 100 basis point decrease in interest rates, we would experience a 5.83% decrease in NPV.
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 March 31, 2014 , using our internal interest rate risk model, we estimated that our net interest income for the three months ended March 31, 2014

41

would decrease by 2.58% in the event of an instantaneous 200 basis point increase in market interest rates, and would decrease by 9.51% in the event of an instantaneous 100 basis point decrease in market interest rates.
We use various assumptions in assessing interest rate risk through changes in NPV and net interest income. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if there is a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2014 . Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended March 31, 2014 , 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.

42

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions that are considered ordinary routine litigation incidental to the business of the Company. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a materially adverse effect on the Company’s financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS
There are no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2013 , as filed with the Securities and Exchange Commission on March 7, 2014 , other than the following risks relating to the proposed merger with Southside.

The pendency of our agreement to be acquired by Southside could have a negative impact on our business.
On April 28, 2014, we entered into the Merger Agreement, pursuant to which, subject to the satisfaction or waiver of the conditions contained in the Merger Agreement, the Company will merge with and into Southside, and Southside will be the surviving corporation. The announcement and pendency of the merger with Southside may have a negative impact on our business, financial results and operations or disrupt our business by:
•
intensifying competition as our competitors may seek opportunities related to our pending merger;
•
affecting our relationships with our customers, vendors and employees;
•
limiting certain of our business operations prior to completion of the merger which may prevent us from pursuing certain opportunities without Southside’s approval;
•
causing us to forego certain opportunities we might otherwise pursue absent the Merger Agreement;
•
impairing our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with Southside following the completion of the merger; and
•
creating distractions from our strategy and day-to-day operations for our employees and management and a strain on resources.
The failure to complete the merger with Southside could negatively impact our business.
There is no assurance that the merger with Southside or any other transaction will occur or that the conditions to the merger will be satisfied in a timely manner or at all. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of the Merger Agreement will not occur. If the proposed merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under certain circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $10.0 million. Certain costs associated with the merger are already incurred or may be payable even if the merger is not completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruptions to our business resulting from the announcement and pendency of the merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, vendors and employees or recruiting and retention efforts, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, as compared to the condition prior to the announcement of the merger, if the merger is not consummated.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Not applicable.
(b)
Not applicable.
(c)
Not applicable.


43

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION
None

ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

44

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
OMNIAMERICAN BANCORP, INC.
 
(Registrant)
 
 
Date: May 2, 2014
/s/ Tim Carter

 
Tim Carter
 
President and Chief Executive Officer
 
 
Date: May 2, 2014
/s/ Deborah B. Wilkinson
 
 
Deborah B. Wilkinson
 
Senior Executive Vice President and Chief Financial Officer

45

INDEX TO EXHIBITS
Exhibit
Number
Description
2.1

Agreement and Plan of Merger by and among Southside Bancshares, Inc., Omega Merger Sub, Inc. and OmniAmerican Bancorp, Inc., dated as of April 28, 2014 *

 
 
10.1

Form of Indemnification Agreement entered into between OmniAmerican Bancorp, Inc. and certain directors and executive officers **

 
 
10.2

Form of Stockholder Voting and Support Agreement by and between Southside Bancshares, Inc. and the each of the non-executive directors of OmniAmerican Bancorp, Inc., dated as of April 28, 2014 *

 
 
31.1

Certification of Tim Carter, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
 

 
31.2

Certification of Deborah B. Wilkinson, Senior Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
 

 
32

Certification of Tim Carter, President and Chief Executive Officer, and Deborah B. Wilkinson, Senior Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

 
101+

Interactive Data File
*
Filed herewith.
**
Incorporated by reference to Exhibit 10.1 to the Form 8-K of OmniAmerican Bancorp, Inc., (File No. 001-34605), originally filed with the Securities and Exchange Commission on March 21, 2014.
+
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

46
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