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OKSB > SEC Filings for OKSB > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for SOUTHWEST BANCORP INC

Form 10-Q for SOUTHWEST BANCORP INC


5-Aug-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 June 30, 2013, we had total assets of $2.0 billion, deposits of $1.6 billion, and shareholders' equity of $249.4 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 June 30, 2013, approximately $429.4 million, or 33%, 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. 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 June 30, 2013 approximately $945.6 million, or 73%, of our noncovered loans were commercial real estate mortgage and construction loans, including $285.7 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. We focus on converting our strategic vision into long-term shareholder value.

Our subsidiary, Southwest Capital II, holds our public trust preferred securities that are traded on the NASDAQ Global Select Market under the symbol OKSBP. It is our intention to redeem the $34.5 million of 10.5% Trust Preferred Securities in mid-September 2013, subject to regulatory approval.

At June 30, 2013, the Oklahoma Banking segment accounted for $656.4 million in loans, the Texas Banking segment accounted for $444.3 million in loans, the Kansas Banking segment accounted for $210.2 million in loans, and the Secondary Market segment accounted for $7.2 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:

                                    June 30,      December 31,
(Dollars in thousands)                2013            2012         $ Change    % Change
Federal agency securities         $   119,593     $    115,614    $   3,979      3.44  %
Obligations of state and               45,834           48,355       (2,521)
political subdivisions                                                          (5.21)
Residential mortgage-backed           195,525          203,675       (8,150)
securities                                                                      (4.00)
Asset-backed securities                 9,261            7,671        1,590     20.73
Equity securities                       2,190            1,797          393     21.87
Total                             $   372,403     $    377,112    $  (4,709)    (1.25) %

Loans

Total loans, including loans held for sale, were $1.3 billion at June 30, 2013. The following table shows the composition of the loan portfolio at the dates indicated:

                         June 30, 2013            December 31, 2012         Total        Total
(Dollars in          Noncovered     Covered     Noncovered     Covered     $ Change    % Change
thousands)
Real estate
mortgage
Commercial          $   786,686    $ 15,452    $   870,975    $ 18,298    $ (87,135)    (9.80) %
One-to-four family       77,445       4,253         70,954       4,881        5,863      7.73
residential
Real estate
construction
Commercial              158,907         320        130,753         382       28,092     21.42
One-to-four family        5,241            -         3,656            -       1,585     43.35
residential
Commercial              235,667       1,554        240,498       2,037       (5,314)    (2.19)
Installment and
consumer
Guaranteed student        4,520            -         4,680            -        (160)    (3.42)
loans
Other                    27,977          67         31,512         109       (3,577)   (11.31)
Total loans         $ 1,296,443    $ 21,646    $ 1,353,028    $ 25,707    $ (60,646)    (4.40) %

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

                                     June 30,     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           7,087           5,112        1,975      38.63
Government guaranteed commercial            55          21,794      (21,739)    (99.75)
real estate
Other loans held for sale                   75              96          (21)    (21.88)
Total loans held for sale                7,217          31,682      (24,465)    (77.22)
Noncovered portfolio loans           1,289,226       1,321,346      (32,120)     (2.43)
Covered portfolio loans                 21,646          25,707       (4,061)    (15.80)
Total loans                        $ 1,318,089     $ 1,378,735    $ (60,646)     (4.40) %


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 (loans on nonaccrual status and greater than one-hundred thousand, and all 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 June 30, 2013                       As of December 31, 2012
                                                    Allowance
(Dollars in thousands) Loan Balance    Allowance        %        Loan Balance     Allowance     Allowance %
Noncovered
Nonaccrual              $    29,513     $  3,938       13.3  %    $    35,104     $    7,740         22.0  %
Performing TDR               35,852        4,037       11.3            40,570          3,983          9.8
All other                 1,223,861       32,295        2.6         1,245,672         34,771          2.8
Total noncovered        $ 1,289,226     $ 40,270        3.1  %    $ 1,321,346     $   46,494          3.5  %

Covered
Total covered           $    21,646     $     82        0.4  %    $    25,707     $      224          0.9  %

Total                   $ 1,310,872     $ 40,352        3.1  %    $ 1,347,053     $   46,718          3.5  %

The decrease in the allowance for nonaccrual loans was the result of 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, the decrease in the dollar amounts of impaired loans in 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, or negative 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 six months of 2013 were $6.0 million, an increase of $3.5 million, or 136%, from the $2.5 million recorded for the first six months of 2012. The provision for loan losses for the first six months of 2013 was a credit (or negative provision) of $0.4, representing a decrease of $2.1 million, or 122%, from the $1.7 million provision recorded for the first six months of 2012. The decline in the provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs.

Nonperforming Loans / Nonperforming Assets

At June 30, 2013, the allowance for loan losses was 136.44% of noncovered nonperforming loans, compared to 121.10% of noncovered nonperforming loans, at December 31, 2012 (see "Provision for Loan Losses" on page 2). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $29.5 million as of June 30, 2013, a decrease of $5.6 million, or 16%, from December 31, 2012. We have taken cumulative net charge-offs related to these noncovered nonaccrual loans of $12.6 million as of June 30, 2013. Noncovered nonaccrual loans at June 30, 2013 were comprised of 29 relationships and were primarily concentrated in commercial real estate (42%), commercial and industrial (36%), 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 of $3.1 million were subject to protection under the loss share agreements with the FDIC at June 30, 2013.


                                           June 30, 2013              December 31, 2012
(Dollars in thousands)                Noncovered      Covered      Noncovered      Covered
Nonaccrual loans:
Commercial real estate                $  12,325      $ 2,787       $  18,337      $ 3,087
One-to-four family residential              418           74             563           52
Real estate construction                  5,989          130           3,355          130
Commercial                               10,718           71          12,761          324
Other consumer                               63             -             88            2
Total nonaccrual loans                   29,513        3,062          35,104        3,595

Past due 90 days or more:
One-to-four family residential                 -            -            747             -
Commercial                                    1             -          2,471             -
Other consumer                                1             -             72             -
Total past due 90 days or more                2             -          3,290             -
Total nonperforming loans                29,515        3,062          38,394        3,595
Other real estate                           145        1,666          11,315        3,643
Total nonperforming assets            $  29,660      $ 4,728       $  49,709      $ 7,238

Nonperforming assets to portfolio
loans receivable and
other real estate                          2.30  %     20.28  %         3.73  %     24.66  %
Nonperforming loans to portfolio           2.29        14.15            2.91        13.98
loans receivable
Allowance for loan losses to             136.44         2.68          121.10         6.23
nonperforming loans
Government-guaranteed portion of      $      72      $ 2,180       $      76      $ 2,456
nonperforming loans

At June 30, 2013, five credit relationships represented 87% of noncovered nonperforming loans. These were all commercial or commercial real estate lending collateral dependent relationships and had an aggregate principal balance of $25.7 million and related impairment reserves of $3.2 million. Aggregate charge-offs for these five relationships were $11.1 million as of June 30, 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 $94.1 million at June 30, 2013, compared to $94.4 million at December 31, 2012. Substantially all of these loans were performing in accordance with their present terms at June 30, 2013. Additionally, as of June 30, 2013 and December 31, 2012, there were $3.4 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 June 30, 2013, noncovered other real estate was $145,000, down from $11.3 million at December 31, 2012. During the first six months of 2013, there was $9.4 million in sales of other real estate properties and $1.9 million in other real estate write-downs.

At June 30, 2013, the reserve for unfunded loan commitments was $3.2 million, a $0.4 million, or 13%, 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 $1.6 billion and $1.7 billion at June 30, 2013 and December 31, 2012, respectively . The following table shows the composition of deposits at the dates indicated:


                                    June 30,     December 31,
(Dollars in thousands)                2013           2012         $ Change    % Change
Noninterest-bearing demand        $   412,176     $   424,008    $ (11,832)    (2.79) %
Interest-bearing demand               138,502         112,012       26,490     23.65
Money market accounts                 408,145         423,417      (15,272)    (3.61)
Savings accounts                       38,611          37,693          918      2.44
Time deposits of $100,000 or more     295,179         351,273      (56,094)   (15.97)
Other time deposits                   323,348         361,175      (37,827)   (10.47)
Total deposits                    $ 1,615,961     $ 1,709,578    $ (93,617)    (5.48) %

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 June 30, 2013 or December 31, 2012. CDARS deposits totaled $4.9 million at June 30, 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 $4.0 million, or 6%, to $74.3 million during the first six months of 2013. The increase primarily reflects the timing of repurchase agreements for the period.

Shareholders' Equity

Shareholders' equity increased $3.4 million, or 1%, primarily due to net income of $6.8 million, for the first six months of 2013, offset in part by the repurchase of the common stock warrant from the U.S. Treasury for $2.3 million. Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax) decreased to a net unrealized holding loss of $1.5 million at June 30, 2013, which reflects changes in the interest rate environment.

At June 30, 2013, we, Stillwater National, and Bank of Kansas continued to exceed all applicable regulatory capital requirements. See "Capital Requirements" on page 2.


RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2013 and 2012

Net income available to common shareholders for the second quarter of 2013 of $4.4 million represented an increase of $1.4 million from the $3.0 million net income recorded for the second quarter of 2012. Diluted earnings per share were $0.22 for the second quarter of 2013, compared to $0.15 for the second quarter of 2012. The increase in quarterly net income available to common shareholders was the result of a $3.9 million, or 23%, decrease in noninterest expense, a $1.1 million decrease primarily in dividends on preferred stock due to the repurchase of shares issued to the U.S. Treasury during 2012, a $0.9 million decrease in the provision for loan losses, and a $0.2 million, or 7%, decrease in income tax expense, offset in part by a $4.6 million, or 23%, decrease in net interest income and a $0.1 million, or 3%, decrease in noninterest income.

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 2.)

Net Interest Income




                                         For the three months
                                            ended June 30,
(Dollars in thousands)                     2013         2012      $ Change    % Change
Interest income:
Loans                                   $   16,415    $ 21,708    $ (5,293)   (24.38) %
Investment securities:
U.S. government and agency obligations         426         411          15      3.65
Mortgage-backed securities                     833       1,319        (486)   (36.85)
State and political subdivisions               302         257          45     17.51
Other securities                                33         152        (119)   (78.34)
Other interest-earning assets                  255         193          62     32.17
Total interest income                       18,264      24,040      (5,776)   (24.03)

Interest expense:
Interest-bearing demand deposits                37          59         (22)   (37.29)
Money market accounts                          190         234         (44)   (18.80)
Savings accounts                                12          13          (1)    (7.69)
Time deposits of $100,000 or more              613       1,185        (572)   (48.27)
Other time deposits                            590       1,051        (461)   (43.86)
Other borrowings                               222         222            -         -
Subordinated debentures                      1,466       1,529         (63)    (4.12)
Total interest expense                       3,130       4,293      (1,163)   (27.09)

Net interest income                     $   15,134    $ 19,747    $ (4,613)   (23.36) %

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 June 30,
                                                  2013                                            2012
                               Average                            Average          Average                    Average
(Dollars in thousands)         Balance           Interest        Yield/Rate        Balance      Interest    Yield/Rate
Assets
Noncovered loans (1) (2)    $    1,296,589      $   16,018           4.96  %     $ 1,565,342    $ 21,125        5.43  %
Covered loans (1)                   22,361             397           7.12             31,853         583        7.36
Investment securities (2)          374,353           1,594           1.71            339,435       2,139        2.53
Other interest-earning             282,067             255           0.36            202,040         193        0.38
assets
Total interest-earning           1,975,370          18,264           3.71          2,138,670      24,040        4.52
assets
Other assets                        63,390                                           147,822
Total assets                $    2,038,760                                       $ 2,286,492

Liabilities and
shareholders' equity
Interest-bearing demand     $      126,250      $       37           0.12  %     $   120,648    $     59        0.20  %
deposits
Money market accounts              420,477             190           0.18            356,758         234        0.26
Savings accounts                    38,833              12           0.12             34,632          13        0.15
Time deposits                      633,647           1,203           0.76            880,007       2,236        1.02
Total interest-bearing           1,219,207           1,442           0.47          1,392,045       2,542        0.73
deposits
Other borrowings                    71,857             222           1.24             59,754         222        1.49
Subordinated debentures             81,963           1,466           7.15             81,963       1,529        7.46
Total interest-bearing           1,373,027           3,130           0.91          1,533,762       4,293        1.13
liabilities
Noninterest-bearing demand         402,224                                           387,057
deposits
Other liabilities                   10,561                                            50,696
Shareholders' equity               252,948                                           314,977
Total liabilities and       $    2,038,760                                       $ 2,286,492
shareholders' equity

Net interest income and                         $   15,134                 %                    $ 19,747              %
interest rate spread                                                 2.80                                       3.39
Net interest margin (3)                                              3.07  %                                    3.71  %
Ratio of average
interest-earning assets
to average
interest-bearing                   143.87%                                           139.44%
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 second quarter of 2012, the second quarter 2013 yields on our interest-earning assets decreased 81 basis points, while the rates paid on our interest-bearing liabilities decreased 22 basis points, resulting in a decrease in the interest rate spread to 2.80%. During the same periods, annualized net interest margin was 3.07% and 3.71%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 143.87% from 139.44%.


RATE VOLUME TABLE

The following table analyzes changes in our interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable . . .

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