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OKSB > SEC Filings for OKSB > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for SOUTHWEST BANCORP INC


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies followed by Southwest Bancorp, Inc. ("we", "our", "us", "Southwest") conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses and goodwill and other intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

There have been no significant changes in our application of critical accounting policies since December 31, 2012.

GENERAL

We are a bank holding company for Stillwater National Bank and Trust Company ("Stillwater National") and Bank of Kansas. Through our subsidiaries, we offer commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services from offices in Oklahoma, Texas, and Kansas, and on the Internet, through SNB DirectBankerŽ. We were organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. At March 31, 2013, we had total assets of $2.1 billion, deposits of $1.7 billion, and shareholders' equity of $250.5 million.

Our area of expertise focuses on the special financial needs of healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. We established a strategic focus on healthcare lending in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of March 31, 2013, approximately $474.8 million, or 36%, of our noncovered loans were loans to individuals and businesses in the healthcare industry. We conduct regular market reviews of our current and potential healthcare lending and the appropriate concentrations within healthcare based upon economic and regulatory conditions.

We also focus on commercial real estate mortgage and construction credits. Additionally, subprime residential lending has never been a part of our business strategy, and our exposure to subprime mortgage loans and subprime lenders is minimal. One-to-four family mortgages account for 6% of total noncovered loans. As of March 31, 2013 approximately $1.0 billion, or 74%, of our noncovered loans were commercial real estate mortgage and construction loans, including $328.4 million of loans to individuals and businesses in the healthcare industry.

Our common stock is traded on the NASDAQ Global Select Market under the symbol OKSB. Our public trust preferred securities are traded on the NASDAQ Global Select Market under the symbol OKSBP. We focus on converting our strategic vision into long-term shareholder value. Our vision includes a commercial banking model and a community banking model focused on more traditional banking operations in our three-state market.

At March 31, 2013, the Oklahoma Banking segment accounted for $628.7 million in loans, the Texas Banking segment accounted for $495.8 million in loans, the Kansas Banking segment accounted for $195.4 million in loans, and the Secondary Market segment accounted for $7.3 million in loans. Please see "Financial Condition: Loans" below for additional information.

For additional information on our operating segments, please see "Note 8:
Operating Segments" in the Notes to Unaudited Consolidated Financial Statements.


FINANCIAL CONDITION

Investment Securities

The following table shows the composition of the investment portfolio at the dates indicated:

                                    March 31,     December 31,
(Dollars in thousands)                2013            2012         $ Change    % Change
Federal agency securities          $  107,255     $    115,614    $  (8,359)    (7.23) %
Obligations of state and political     47,403           48,355         (952)
subdivisions                                                                    (1.97)
Residential mortgage-backed           199,476          203,675       (4,199)
securities                                                                      (2.06)
Asset-backed securities                 9,469            7,671        1,798     23.44
Equity securities                       2,002            1,797          205     11.41
Total                              $  365,605     $    377,112    $ (11,507)    (3.05) %

Loans

Total loans, including loans held for sale, were $1.3 billion at March 31, 2013. The following table shows the composition of the loan portfolio at the dates indicated:

                         March 31, 2013           December 31, 2012         Total        Total
(Dollars in          Noncovered     Covered     Noncovered     Covered     $ Change    % Change
thousands)
Real estate
mortgage
Commercial          $   819,873    $ 16,970    $   870,975    $ 18,298    $ (52,430)    (5.90) %
One-to-four family       73,911       4,458         70,954       4,881        2,534      3.34
residential
Real estate
construction
Commercial              139,462         367        130,753         382        8,694      6.63
One-to-four family        5,015            -         3,656            -       1,359     37.17
residential
Commercial              232,224       1,715        240,498       2,037       (8,596)    (3.54)
Installment and
consumer
Guaranteed student        4,576            -         4,680            -        (104)    (2.22)
loans
Other                    28,553          91         31,512         109       (2,977)    (9.41)
Total loans         $ 1,303,614    $ 23,601    $ 1,353,028    $ 25,707    $ (51,520)    (3.74) %

The composition of loans held for sale and a reconciliation to total loans is shown in the following table:

                                    March 31,     December 31,
(Dollars in thousands)                 2013           2012         $ Change     % Change
Loans held for sale:
Student loans                      $          -    $     4,680    $  (4,680)   (100.00) %
One-to-four family residential           7,061           5,112        1,949      38.13
Government guaranteed commercial           152          21,794      (21,642)    (99.30)
real estate
Other loans held for sale                   84              96          (12)    (12.50)
Total loans held for sale                7,297          31,682      (24,385)    (76.97)
Noncovered portfolio loans           1,296,317       1,321,346      (25,029)     (1.89)
Covered portfolio loans                 23,601          25,707       (2,106)     (8.19)
Total loans                        $ 1,327,215     $ 1,378,735    $ (51,520)     (3.74) %


Allowance for Loan Losses

Management determines the appropriate level of the allowance for loan losses using an established methodology. (See "Note 3: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements.) Management believes the amount of the allowance is appropriate, based on our analysis.

The allowance for loan losses on noncovered loans is comprised of two components. Loans deemed to be impaired (all loans on nonaccrual status and troubled debt restructurings) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.

The allowance on the unimpaired noncovered loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors, segmented into loan pools by type of loan and market area.

The composition of the allowance for loan losses is shown in the following table:

                                As of March 31, 2013                      As of December 31, 2012
                                                    Allowance
(Dollars in thousands) Loan Balance    Allowance        %        Loan Balance     Allowance    Allowance %
Noncovered
Nonaccrual              $    32,356     $  4,872       15.1  %    $    35,103     $   7,740         22.0  %
Performing TDR               36,638        4,022       11.0            40,570         3,983          9.8
All other                 1,227,323       33,745        2.7         1,245,673        34,771          2.8
Total noncovered        $ 1,296,317     $ 42,639        3.3  %    $ 1,321,346     $  46,494          3.5  %

Covered
Total covered           $    23,601     $    214        0.9  %    $    25,707     $     224          0.9  %

Total                   $ 1,319,918     $ 42,853        3.2  %    $ 1,347,053     $  46,718          3.5  %

The decrease in the allowance for nonaccrual loans was the result of a current period charge-offs related to nonperforming loans. The decrease in the allowance relating to the other noncovered loans resulted from the decrease in the loan portfolio as well as the impairment of the loan portfolio and in consideration of trends and qualitative factors, including portfolio loss trends as well as management's assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans.

The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the first three months of 2013 were $4.4 million, primarily related to one loan, which is an increase of $3.0 million, or 231%, from the $1.3 million recorded for the first three months of 2012. The provision for loan losses for the first three months of 2013 was $0.5, representing a decrease of $1.2 million, or 71%, from the $1.7 million recorded for the first three months of 2012.

Nonperforming Loans

At March 31, 2013, the allowance for loan losses was 131.78% of noncovered nonperforming loans, compared to 121.10% of noncovered nonperforming loans, at December 31, 2012 (see "Provision for Loan Losses" on page 41). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $32.4 million as of March 31, 2013, a decrease of $2.7 million, or 8%, from December 31, 2012. We have taken cumulative net charge-offs related to these noncovered nonaccrual loans of $11.8 million as of March 31, 2013. Noncovered nonaccrual loans at March 31, 2013 were comprised of 33 relationships and were primarily concentrated in commercial real estate (41%), commercial and industrial (37%), and real estate construction (20%) loans. All noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. These noncovered loans are believed to have sufficient collateral and are in the process of being collected. Covered nonperforming loans at March 31, 2013 of $2.9 million are subject to protection under the loss share agreements with the FDIC.


                                           March 31, 2013             December 31, 2012
(Dollars in thousands)                Noncovered      Covered      Noncovered      Covered
Nonaccrual loans:
Commercial real estate                $  13,362      $ 2,613       $  18,337      $ 3,087
One-to-four family residential              651           50             563           52
Real estate construction                  6,409          130           3,355          130
Commercial                               11,861           79          12,761          324
Other consumer                               73            1              88            2
Total nonaccrual loans                   32,356        2,873          35,104        3,595

Past due 90 days or more:
One-to-four family residential                 -            -            747             -
Commercial                                     -            -          2,471             -
Other consumer                                 -            -             72             -
Total past due 90 days or more                 -            -          3,290             -
Total nonperforming loans                32,356        2,873          38,394        3,595
Other real estate                         9,422        2,243          11,315        3,643
Total nonperforming assets            $  41,778      $ 5,116       $  49,709      $ 7,238

Nonperforming assets to portfolio
loans receivable and
other real estate                          3.20  %     19.80  %         3.73  %     24.66  %
Nonperforming loans to portfolio           2.50        12.17            2.91        13.98
loans receivable
Allowance for loan losses to             131.78         7.45          121.10         6.23
nonperforming loans
Government-guaranteed portion of      $        -     $ 2,117       $      76      $ 2,456
nonperforming loans

At March 31, 2013, five credit relationships represented 85% of noncovered nonperforming loans and 66% of noncovered nonperforming assets. These were all collateral dependent and commercial or commercial real estate lending relationships and had an aggregate principal balance of $27.6 million and related impairment reserves of $4.0 million. Aggregate charge-offs for these five relationships were $10.1 million as of March 31, 2013.

Noncovered performing loans considered potential problem loans, loans which are not included in the past due or nonaccrual categories but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, amounted to approximately $89.6 million at March 31, 2013, compared to $94.4 million at December 31, 2012. Substantially all of these loans were performing in accordance with their present terms at March 31, 2013. Additionally, as of March 31, 2013 and December 31, 2012, there were $4.0 million and $3.2 million, respectively, of covered potential problem loans, which are subject to protection under the loss share agreements with the FDIC. Loans may be monitored by management and reported as potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms.

At March 31, 2013, the reserve for unfunded loan commitments was $3.0 million, a $0.1 million, or 4%, increase from the amount at December 31, 2012. Management believes the amount of the reserve is appropriate and is included in other liabilities on the unaudited consolidated statement of financial condition. The increase related to loss ratios in categories where commitments are centered.

Deposits and Other Borrowings

Our deposits were $1.7 billion at both March 31, 2013 and December 31, 2012. The following table shows the composition of deposits at the dates indicated:

                                   March 31,     December 31,
(Dollars in thousands)                2013           2012         $ Change    % Change
Noninterest-bearing demand        $   416,979     $   424,008    $  (7,029)    (1.66) %
Interest-bearing demand               125,914         112,012       13,902     12.41
Money market accounts                 437,629         423,417       14,212      3.36
Savings accounts                       39,733          37,693        2,040      5.41
Time deposits of $100,000 or more     317,270         351,273      (34,003)    (9.68)
Other time deposits                   340,143         361,175      (21,032)    (5.82)
Total deposits                    $ 1,677,668     $ 1,709,578    $ (31,910)    (1.87) %


Stillwater National has substantial unused borrowing availability in the form of unsecured brokered certificate of deposits from Bank of America Merrill Lynch, Citigroup Global Markets, Inc., Wells Fargo Bank, NA, UBS Securities, LLC, RBC Capital Markets Corp., and Morgan Stanley & Co., Inc. in connection with its retail certificate of deposit program. There were no retail certificates of deposit as of March 31, 2013 or December 31, 2012.

Some of our interest-bearing deposits were obtained through brokered transactions and we participate in the Certificate of Deposit Account Registry Service ("CDARS"). There were no brokered certificates of deposit as of March 31, 2013 or December 31, 2012. CDARS deposits totaled $5.8 million at March 31, 2013 and $9.9 million as of December 31, 2012.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $0.5 million, or 1%, to $70.9 million during the first three months of 2013. The increase primarily reflects the timing of repurchase agreements for the period.

Shareholders' Equity

Shareholders' equity increased $4.5 million, or 2%, primarily due to income of $2.4 million, for the first three months of 2013, and common stock issuances of $2.1 million. Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax) remained flat at $1.7 million at March 31, 2013.

At March 31, 2013, Southwest, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See "Capital Requirements" on page 38.


RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2013 and 2012

Net income available to common shareholders for the first quarter of 2013 of $2.4 million represented a decrease of $1.7 million from the $4.1 million net income recorded for the first quarter of 2012. Diluted earnings per share were $0.12 for the first quarter of 2013, compared to $0.21 for the first quarter of 2012. The decrease in quarterly net income available to common shareholders was the result of a $5.2 million, or 25%, decrease in net interest income offset in part by a $1.3 million, or 40%, decrease in income tax expense, a $1.2 million, or 71%, decrease in the provision for loan losses, and the $1.1 million decrease primarily in dividends on preferred stock due to the repurchase during 2012.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See "Note 3: Loans and Allowance for Loan Losses" in the Notes to Unaudited Consolidated Financial Statements and "Provision for Loan Losses" on page 36.)

On an operating segment basis, the decrease in net income was the net result of a $0.8 million decrease from the Kansas Banking segment, a $0.8 million decrease in net income from the Texas Banking segment, a $0.6 million decrease from the Oklahoma Banking segment, and a $0.1 million decrease from the Secondary Market segment.

Net Interest Income




                                         For the three months
                                           ended March 31,
(Dollars in thousands)                     2013         2012      $ Change    % Change
Interest income:
Loans                                   $   17,006    $ 23,377    $ (6,371)   (27.25) %
Investment securities:
U.S. government and agency obligations         472         393          79     20.10
Mortgage-backed securities                     867       1,319        (452)   (34.27)
State and political subdivisions               304         212          92     43.40
Other securities                                48          22          26    118.64
Other interest-earning assets                  240         184          56     30.38
Total interest income                       18,937      25,507      (6,570)   (25.76)

Interest expense:
Interest-bearing demand deposits                45          70         (25)   (35.71)
Money market accounts                          236         286         (50)   (17.48)
Savings accounts                                12          13          (1)    (7.69)
Time deposits of $100,000 or more              698       1,320        (622)   (47.12)
Other time deposits                            661       1,207        (546)   (45.24)
Other borrowings                               220         224          (4)    (1.79)
Subordinated debentures                      1,459       1,538         (79)    (5.14)
Total interest expense                       3,331       4,658      (1,327)   (28.49)

Net interest income                     $   15,606    $ 20,849    $ (5,243)   (25.15) %

Net interest income is the difference between the interest income we earn on our loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because rates on different types of assets and liabilities may react differently and at different times to changes in market interest rates. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest could reduce net interest income.


AVERAGE BALANCES, YIELDS AND RATES

The following table shows average interest-earning assets and interest-bearing liabilities and the average yields and rates on them for the periods indicated.

                                                         For the three months ended March 31,
                                                     2013                                            2012
                                  Average                            Average          Average                    Average
(Dollars in thousands)            Balance           Interest        Yield/Rate        Balance      Interest    Yield/Rate
Assets
Noncovered loans (1) (2)       $    1,330,578      $   16,514           5.03  %     $ 1,664,615    $ 22,723        5.49  %
Covered loans (1)                      24,895             492           8.01             36,050         654        7.30
Investment securities (2)             380,525           1,691           1.80            314,925       1,946        2.49
Other interest-earning assets         268,396             240           0.36            181,637         184        0.41
Total interest-earning assets       2,004,394          18,937           3.83          2,197,227      25,507        4.67
Other assets                           87,592                                           158,921
Total assets                   $    2,091,986                                       $ 2,356,148

Liabilities and shareholders'
equity
Interest-bearing demand        $      133,600      $       45           0.14  %     $   120,605    $     70        0.23  %
deposits
Money market accounts                 419,635             236           0.23            393,820         286        0.29
Savings accounts                       38,721              12           0.13             34,587          13        0.15
Time deposits                         683,159           1,359           0.81            931,792       2,527        1.09
Total interest-bearing              1,275,115           1,652           0.53          1,480,804       2,896        0.79
deposits
Other borrowings                       69,728             220           1.28             54,848         224        1.64
Subordinated debentures                81,963           1,459           7.12             81,963       1,538        7.51
Total interest-bearing              1,426,806           3,331           0.95          1,617,615       4,658        1.16
liabilities
Noninterest-bearing demand            403,547                                           378,959
deposits
Other liabilities                      12,285                                            48,688
Shareholders' equity                  249,348                                           310,886
Total liabilities and          $    2,091,986                                       $ 2,356,148
shareholders' equity

Net interest income and                            $   15,606                 %                    $ 20,849              %
interest rate spread                                                    2.88                                       3.51
Net interest margin (3)                                                 3.16  %                                    3.82  %
Ratio of average
interest-earning assets
to average interest-bearing           140.48%                                           135.83%
liabilities

(1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material.
(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
(3) Net interest margin = annualized net interest income / average interest-earning assets

Compared to the first quarter of 2012, the first quarter 2013 yields on our interest-earning assets decreased 84 basis points, while the rates paid on our interest-bearing liabilities decreased 21 basis points, resulting in a decrease in the interest rate spread to 2.88%. During the same periods, annualized net interest margin was 3.16% and 3.82%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 140.48% from 135.83%. Included in both the first quarter of 2013 and the first quarter of 2012 were immaterial adjustments of the discount accretion on loans and the loss share receivable, offset in part by immaterial interest reversal on nonaccrual loans.


RATE VOLUME TABLE

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