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OKSB > SEC Filings for OKSB > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for SOUTHWEST BANCORP INC

Form 10-Q for SOUTHWEST BANCORP INC


7-May-2014

Quarterly Report


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

EXECUTIVE SUMMARY

Southwest Bancorp, Inc. ("we", "our", "us", or "Southwest") is a financial holding company for Bank SNB, National Association, which has been providing banking services since 1894. Through Bank SNB, we have twenty-four full-service banking offices primarily located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas. We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and consumer banking services, including commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services and products. At March 31, 2014 we had total assets of $2.0 billion, deposits of $1.6 billion, and shareholders' equity of $264.6 million.

Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. At March 31, 2014, the Oklahoma Banking segment accounted for $754.7 million in loans, the Texas Banking segment accounted for $372.0 million in loans, the Kansas Banking segment accounted for $170.7 million in loans, and the Mortgage Banking segment accounted for $22.7 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.

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.

INDUSTRY FOCUS

Our area of expertise focuses on the special financial needs of healthcare and health professionals, commercial real estate borrowers, businesses and their managers and owners, commercial lending, and energy banking. The healthcare and real estate industries make up the majority of our loan and deposit portfolio. We conduct regular reviews of our current and potential healthcare and real estate lending and the appropriate concentrations within those industries based upon economic and regulatory conditions.

As of March 31, 2014, approximately $433.2 million, or 33%, of our noncovered loans were real estate industry loans. We expect that the real estate recovery should continue to improve in 2014 as the market has progressed further through the economic and real estate cycles. Job growth, solid corporate profits, and recovery in the housing market are all positives for the real estate industry. Conversely, the high unemployment rate, uncertainty over government regulation and fiscal/monetary policy, and a concern about the rising cost of debt capital are all industry risk factors.

Our tactical focus on healthcare lending was established 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, 2014, approximately $420.3 million, or 32%, of our noncovered loans were loans to individuals and businesses in the healthcare industry.

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)               2014            2013         $ Change     % Change
Federal agency securities         $  117,395     $    120,773    $  (3,378)     (2.80) %
Obligations of state and              43,894           44,356         (462)
political subdivisions                                                          (1.04)
Residential mortgage-backed          180,801          183,170       (2,369)
securities                                                                      (1.29)
Asset-backed securities                9,547            9,482           65       0.69
Other securities                      35,350           36,418       (1,068)     (2.93)
Total                             $  386,987     $    394,199    $  (7,212)     (1.83) %


Loans

Total loans, including loans held for sale, were $1.3 billion at March 31, 2014. The following table shows the composition of the loan portfolio at the dates indicated:

                         March 31, 2014           December 31, 2013         Total       Total
(Dollars in          Noncovered     Covered     Noncovered     Covered    $ Change    % Change
thousands)
Real estate
mortgage
Commercial          $   755,680    $ 10,498    $   740,997    $ 11,282    $ 13,899      1.85  %
One-to-four family       81,199       3,420         80,058       3,930         631      0.75
residential
Real estate
construction
Commercial              165,820         187        143,650         198      22,159     15.40
One-to-four family        6,629            -         4,646            -      1,983     42.68
residential
Commercial              265,394         917        254,087         971      11,253      4.41
Installment and                                                       -
consumer
Guaranteed student        4,318            -         4,394            -        (76)    (1.73)
loans
Other                    26,029          31         26,644          46        (630)    (2.36)
Total loans         $ 1,305,069    $ 15,053    $ 1,254,476    $ 16,427    $ 49,219      3.87  %

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)                 2014           2013        $ Change    % Change
Loans held for sale:
One-to-four family residential           4,941           2,235       2,706    121.07  %
Government guaranteed commercial           754             769         (15)    (1.95)
real estate
Other loans held for sale                   46              56         (10)   (17.86)
Total loans held for sale                5,741           3,060       2,681     87.61
Noncovered portfolio loans           1,299,328       1,251,416      47,912      3.83
Covered portfolio loans                 15,053          16,427      (1,374)    (8.36)
Total loans                        $ 1,320,122     $ 1,270,903    $ 49,219      3.87  %


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 March 31, 2014                       As of December 31, 2013
                                                    Allowance
(Dollars in thousands) Loan Balance    Allowance        %        Loan Balance     Allowance     Allowance %
Noncovered
Nonaccrual              $    15,062     $  3,314       22.0  %    $    18,560     $    4,313         23.2  %
Performing TDR               34,940        3,599       10.3            42,692          3,627          8.5
All other                 1,249,326       28,005        2.2         1,190,164         28,667          2.4
Total noncovered        $ 1,299,328     $ 34,918        2.7  %    $ 1,251,416     $   36,607          2.9  %

Covered
Total covered           $    15,053     $      7        0.0  %    $    16,427     $       56          0.3  %

Total                   $ 1,314,381     $ 34,925        2.7  %    $ 1,267,843     $   36,663          2.9  %

The decrease in the allowance for nonaccrual loans was the result of current period charge-offs related to nonperforming loans. The increase in the allowance relating to the other noncovered loans resulted from the increase 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 three months of 2014 were $0.8 million, a decrease of $3.6 million, from the $4.4 million recorded for the first three months of 2013. The provision for loan losses for the first three months of 2014 was a negative (or credit) of $1.0 million, representing a decrease of $1.5 million from the provision of $0.5 million recorded for the first three months of 2013. 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 March 31, 2014, the allowance for loan losses was 231.83% of noncovered nonperforming loans, compared to 196.67% of noncovered nonperforming loans, at December 31, 2013. Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $15.1 million as of March 31, 2014, a decrease of $3.5 million, or 19%, from December 31, 2013. We have taken cumulative net charge-offs related to these noncovered nonaccrual loans of $5.5 million as of March 31, 2014. Noncovered nonaccrual loans at March 31, 2014 were comprised of 32 relationships and were primarily concentrated in commercial real estate (44%), commercial and industrial (53%), and real estate construction (1%) 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 $1.0 million were subject to protection under the loss share agreements with the FDIC at March 31, 2014.


                                          March 31, 2014             December 31, 2013
(Dollars in thousands)               Noncovered      Covered      Noncovered      Covered
Nonaccrual loans:
Commercial real estate               $   6,571      $   970       $   6,564      $ 1,202
One-to-four family residential             417           53             456           57
Real estate construction                    80             -          2,721             -
Commercial                               7,992             -          8,769             -
Other consumer                               2             -             50             -
Total nonaccrual loans                  15,062        1,023          18,560        1,259

Past due 90 days or more:
Commercial                                    -            -             50             -
Other consumer                                -            -              3             -
Total past due 90 days or more                -            -             53             -
Total nonperforming loans               15,062        1,023          18,613        1,259
Other real estate                        2,560        2,094             560        2,094
Total nonperforming assets           $  17,622      $ 3,117       $  19,173      $ 3,353

Nonperforming assets to portfolio
loans receivable and
other real estate                         1.35  %     18.18  %         1.53  %     18.10  %
Nonperforming loans to portfolio          1.16         6.80            1.49         7.66
loans receivable
Allowance for loan losses to            231.83         0.68          196.67         4.45
nonperforming loans
Government-guaranteed portion of     $        -     $   700       $      72      $   803
nonperforming loans

At March 31, 2014, seven credit relationships represented 82% of noncovered nonperforming loans. These were all commercial or commercial real estate lending collateral dependent relationships and had an aggregate principal balance of $12.4 million and related impairment reserves of $2.8 million. Aggregate net charge-offs for these seven relationships were $5.3 million as of March 31, 2014.

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 $90.2 million at March 31, 2014, compared to $98.0 million at December 31, 2013. Substantially all of these loans were performing in accordance with their present terms at March 31, 2014. Additionally, as of March 31, 2014 and December 31, 2013, there were $1.6 million and $1.7 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, 2014, noncovered other real estate was $2.6 million, up from $0.6 million at December 31, 2013 due to the addition of other properties. During the first three months of 2014, there was one sale of other real estate property, which had no principal value, but a gain of $0.1 million. There were no further fair value adjustments to property values during the first three months of 2014 compared to the total other real estate write-downs of $1.5 million at December 31, 2013.

At March 31, 2014, the reserve for unfunded loan commitments was $2.9 million, a $0.1 million, or 3%, increase from the amount at December 31, 2013. 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 primarily to an increase in the level of outstanding commitments.

Deposits and Other Borrowings


Our deposits were $1.6 billion at both March 31, 2014 and December 31, 2013. The following table shows the composition of deposits at the dates indicated:

                                   March 31,     December 31,
(Dollars in thousands)                2014           2013         $ Change    % Change
Noninterest-bearing demand        $   471,568     $   444,796    $  26,772      6.02  %
Interest-bearing demand               132,622         120,156       12,466     10.37
Money market accounts                 440,875         439,981          894      0.20
Savings accounts                       47,532          41,727        5,805     13.91
Time deposits of $100,000 or more     236,035         251,185      (15,150)    (6.03)
Other time deposits                   277,274         286,241       (8,967)    (3.13)
Total deposits                    $ 1,605,906     $ 1,584,086    $  21,820      1.38  %

We participate in the Certificate of Deposit Account Registry Service ("CDARS") and CDARS deposits totaled $1.3 million at both March 31, 2014 and December 31, 2013.

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $5.1 million, or 6%, to $85.7 million during the first three months of 2014. The increase primarily reflects the timing of repurchase agreements for the period.

Shareholders' Equity

Shareholders' equity increased $5.4 million, or 2%, primarily due to net income of $3.7 million, for the first three months of 2014. Net unrealized holding loss of $3.0 million on available for sale investment securities and derivative instruments (net of tax) decreased to a net unrealized holding loss of $1.5 million at March 31, 2014.

At March 31, 2014, we and Bank SNB continued to exceed all applicable regulatory capital requirements. See "Capital Requirements" on page 2.


RESULTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2014 and 2013

Net income for the first quarter of 2014 of $3.7 million represented an increase of $1.3 million from the $2.4 million net income recorded for the first quarter of 2013. Diluted earnings per share were $0.19 for the first quarter of 2014, compared to $0.12 for the first quarter of 2013. The increase in quarterly net income was primarily the result of a $1.5 million, or 298%, decrease in the provision for loan losses, a $0.4 million, or 3%, increase in net interest income, and a $0.3 million, or 2%, decrease in noninterest expense, which were partially offset by a $0.5 million, or 14%, 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 March 31,
(Dollars in thousands)                     2014         2013      $ Change    % Change
Interest income:
Loans                                   $   15,775    $ 17,006    $ (1,231)    (7.24) %
Investment securities:
U.S. government and agency obligations         427         472         (45)    (9.53)
Mortgage-backed securities                     889         867          22      2.54
State and political subdivisions               296         304          (8)    (2.63)
Other securities                                38          48         (10)   (21.56)
Other interest-earning assets                  375         240         135     56.40
Total interest income                       17,800      18,937      (1,137)    (6.00)

Interest expense:
Interest-bearing demand deposits                40          45          (5)   (11.11)
Money market accounts                          146         236         (90)   (38.14)
Savings accounts                                11          12          (1)    (8.33)
Time deposits of $100,000 or more              449         698        (249)   (35.67)
Other time deposits                            379         661        (282)   (42.66)
Other borrowings                               225         220           5      2.27
Subordinated debentures                        549       1,459        (910)   (62.37)
Total interest expense                       1,799       3,331      (1,532)   (45.99)

Net interest income                     $   16,001    $ 15,606    $    395      2.53  %

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,
                                                  2014                                            2013
                               Average                            Average          Average                    Average
(Dollars in thousands)         Balance           Interest        Yield/Rate        Balance      Interest    Yield/Rate
Assets
Noncovered loans (1) (2)    $    1,262,589      $   15,536           4.99  %     $ 1,330,578    $ 16,514        5.03  %
Covered loans (1)                   15,743             239           6.16             24,895         492        8.01
Investment securities (2)          388,639           1,650           1.72            380,525       1,691        1.80
Other interest-earning             280,327             375           0.54            268,396         240        0.36
assets
Total interest-earning           1,947,298          17,800           3.71          2,004,394      18,937        3.83
assets
Other assets                        50,247                                            87,592
Total assets                $    1,997,545                                       $ 2,091,986

Liabilities and
shareholders' equity
Interest-bearing demand     $      134,760      $       40           0.12  %     $   133,600    $     45        0.14  %
deposits
Money market accounts              436,763             146           0.14            419,635         236        0.23
Savings accounts                    44,764              11           0.10             38,721          12        0.13
Time deposits                      531,071             828           0.63            683,159       1,359        0.81
Total interest-bearing           1,147,358           1,025           0.36          1,275,115       1,652        0.53
deposits
Other borrowings                    80,806             225           1.13             69,728         220        1.28
Subordinated debentures             46,393             549           4.73             81,963       1,459        7.22
Total interest-bearing           1,274,557           1,799           0.57          1,426,806       3,331        0.95
liabilities
Noninterest-bearing demand         449,128                                           403,547
deposits
Other liabilities                   10,489                                            12,285
Shareholders' equity               263,371                                           249,348
Total liabilities and       $    1,997,545                                       $ 2,091,986
shareholders' equity

Net interest income and                         $   16,001                 %                    $ 15,606              %
interest rate spread                                                 3.14                                       2.88
Net interest margin (3)                                              3.33  %                                    3.16  %
Ratio of average
interest-earning assets
to average
interest-bearing                   152.78%                                           140.48%
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 2013, the first quarter 2014 yields on our interest-earning assets decreased 12 basis points, while the rates paid on our interest-bearing liabilities decreased 38 basis points, resulting in an increase in the interest rate spread to 3.14%. During the quarterly periods ended March 31, 2014 and March 31, 2013, annualized net interest margin was 3.33% and 3.16%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities increased to 152.78% from 140.48%.


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 to: (i) changes in volume (changes in volume multiplied by the prior period's rate); and (ii) changes in rates (changes in rate multiplied by the prior period's volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.

With the rate environment remaining low in the short to mid-term, earning assets are repricing at lower rates. The decrease in net interest income is the result of the reduction in loan volume and the lower repricing rates.

                                                      For the three months ended March 31,
                                                                 2014 vs. 2013
                                                Increase                   Due to Change
                                                   Or                       In Average:
(Dollars in thousands)                         (Decrease)           Volume               Rate
Interest earned on:
Noncovered loans receivable (1)                 $     (978)         $    (838)         $      (140)
Covered loans receivable                              (253)              (155)                 (98)
Investment securities (1)                              (41)                36                  (77)
Other interest-earning assets                          135                 11                  124
Total interest income                               (1,137)              (946)                (191)

Interest paid on:
Interest-bearing demand                                 (5)                 0                   (5)
. . .
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