Southwest Bancorp, Inc. (OKSB) Q2 2017 Results Conference Call July 26, 2017 11:00 AM ET
Executives
Rusty LaForge - General Counsel
Mark Funke - President and CEO
Joe Shockley - EVP and CFO
Analysts
Operator
Good morning and welcome to the Southwest Bancorp, Inc. Second Quarter 2017 Earnings Presentation. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Rusty LaForge, General Counsel. Please go ahead.
Rusty LaForge
Thank you and good morning, everyone. Welcome to Southwest Bancorp, Inc.’s second quarter 2017 earnings call. At this time, if you’ve logged onto our webcast, please refer to the slide presentation including our Safe Harbor statement on Slide 2. For those joining by phone, please note that the Safe Harbor statement and presentation are available on our website, oksb.com.
I’m joined today by Southwest’s President and CEO, Mark Funke; and CFO, Joe Shockley. In light of our announced agreement and plan of merger with Simmons First National Corporation, we will not be taking questions at the end of the call.
With that, I’ll turn it over to Mark.
Mark Funke
Thank you, Rusty, and good morning everyone. I’m Mark Funke, President and CEO of Southwest Bancorp, and as Rusty mentioned, Joe Shockley, our CFO, he is here with us also this morning. I want to thank you for your continued interest in our company and for joining us today. Hopefully you all have a copy of our PowerPoint presentation and you also received our earnings release statement. If you have access to the PowerPoint presentation, I’m going to starting on Slide 3.
I’m pleased to announce this morning that Southwest Bancorp has reported second quarter earnings of $5.8 million or $0.31 per fully diluted share and this does compare favorably the $5.3 million or the $0.28 per diluted share that we earned in the first quarter of 2017. This represents a very solid quarter for us given the numerous initiatives that we’ve been focused on. We experience good loan production during the quarter. We added new loan commitments of $114.4 million, which included $43.4 million in new fundings. If couple of this with the pay downs and pay offs that we add overall, our funded loans increased by $35.2 million for the quarter. This represents an 8% increase for us for the second quarter of 2016.
Loan growth occurred primarily in commercial and residential real estate during the quarter and our pipeline remains very good, and I would expect loan trends to continue positively for the remainder of the year. Our net interest margin did improve for the quarter to 3.53% from 3.43% at the end of the first quarter. And our pre-tax pre-provision income was $10.8 million for the quarter, which is up 15.1% when you compared to the first quarter and it’s an increase of 34% from the $8 million that we earned in the second quarter of 2016.
We’ve made very notable progress improving our efficiency ratio over the last year. As we’ve discussed previously in these quarterly calls, this has been a key effort for us. Our efficiency ratio was 57.8% for the second quarter and this compares favorably to the ratio that we have for adjusted non-core expenses and related merger costs in the first quarter of 61.5% and that substantially better than the 65.7%, we recorded in the second quarter of 2016, so we’re pleased with our progress there.
Yesterday, our Board did approve a cash dividend of $0.08 per share payable on August 18th, to shareholders of record on August 4th. Our capital ratios remain well above regulatory standards for a well-capitalized institutionally we finish the quarter with our common equity Tier 1 capital ratio of 12.26%. As you are aware on December 14th last year, we did sign a definitive agreement to merge with Simmons First National Corporation. And as announced by Simmons last week, the application for our merger has been filed with the regulatory authorities and we are now any approval process.
We anticipate receiving approval and closing the transaction sometime between October of this year and January of 2018. We remain very pleased with this announced merger as it does provide our shareholders with an opportunity to achieve the positive returns on the capital they have invested in OKSB and also the opportunity to remain part of the growing and high-performing institution in Simmons First National Corporation.
Following the merger, Simmons will have a strong footprint in key Texas, Oklahoma, Kansas and Colorado markets and our current SNB customers will have greater access to a broader product line including wealth management, trust, SBA lending and also more retail products. And while we work through the regulatory process, we do remain very confident and we look forward to our partnership with Simmons and with Southwest Bank in Fort Worth. Updates on the status of our merger, we’re also provided by Simmons management team during their recent earnings call and I suggest that you refer to that information and also to them for further updates on the merger process.
Joe is going to outlines for more details on the second quarter results, but I want to address some credit related issues that I think are important to highlight and then I’ll come back with some comments before we close out. I’m going to move now on to Slide 4, so if you follow along. We continue to experience very stabilize, good stabilization in the economy and some growth in all of our markets. We also are seeing more stabilization in the energy markets, although pricing could always be a little bit better than it has been. In the second quarter, we did experience a sizeable reduction in our potential problem loans as they decreased by $13.4 million or 31.8% and ended the quarter at $28.7 million or 1.5% of our funded portfolio.
Non-performing loans did show an increase, they stood at $23.1 million at June 30th, which is an increase of $6.5 million from the first quarter. The increase was almost entirely attributable to one commercial, non-owner occupied real estate credit at total $6.5 million. This is a retail center in Oklahoma City where two of the largest tenants in this center announcing completed store closings during the quarter. The borrower is not maintained payments.
We believe that based on consulting with several outside experts that we have minimal loss exposure in this project and we will work appropriately and aggressively to collect our loan. And we have limited exposure to large national retail boxes, we have reviewed those large retailers that we do have exposure to and believe that the exposure we do have is generally with strong companies and are underlying loans are with good borrowers. We will continue however to closely now this asset class.
Subsequent to the end of the quarter, we did negotiate the settlement on one of our non-accrual energy production loans that resulted in a $2.5 million reduction following the quarter, reducing our non-accrual loans to $20.6 million right after the end of the quarter. At this point, it's important to note that significant improvement in our overall credit quality that's taken place over the last year. At June 30, 2016 our combined non-performing assets plus potential problem loans totaled $88.8 million. At June 30, 2017, the same problem asset categories totaled $51.8 million.
If you net out charge-offs that we have taken over the same period of time of $7.1 million, we successfully reduced these problem loans by $29.9 million or 33.7% over the last 12 months which is a very good quarter, very good 12 months. At quarter end, we had no other real estate on our balance sheet. We incurred net charge-offs for the quarter of $2 million primarily related to two credits that previously had identified this potential problem loans.
As a result of the strong loan growth and the reserves on impaired loans, we did provide an additional $1.7 million to our loan loss reserve as required by our consistent methodology and process resulting in an ending reserve position of 1.39% on the portfolio. When you combine that with our overall purchase discount on acquired loans, the reserve positions stands at 1.53% at quarter end. Overall, our portfolio showed good stabilization with improved potential problem loans during the quarter.
I'm going to now focus a little bit on our energy portfolio as outlined on Slide 5. Our total fund in energy portfolio increased slightly from $78.8 million to $83.6 million. And our commitments grew to $117.3 million, up slightly from $115 million that we had at the end of the first quarter. We continue to see some activity in our pipeline of energy deals as pricing and the market showed some stabilization, and our customers generally represents strong reserve base credits particularly companies that are located in Oklahoma and Texas market areas which we know well.
The energy segment now represents only 4.2% of our overall funded credit portfolio. The portfolio breakdown the fund basis includes 78% based on production reserve base deals and 22% to energy service provides. We have committed reserve base credits consisting of 87.2 million with 64.8 funded at the end of the quarter. Our service-based companies include $30.1 million in commitments and $18.7 million in funded balances. Including our specific allocations on our loss reserve on the energy credits that allocation on loan loss reserves stands at 3.7%. At quarter end we had energy borrowers with funded balances of $23.4 million that were criticized.
As previously mentioned and subsequent to the quarter end, we did successfully negotiate the pay off of $2.5 million non-performing energy reduction credit which brings our funded criticized balance down to $20.9 million. Currently, we have one non-performing reserve-based energy credit at the amount of $3.1 million where we continue to have a specific reserve position of about 692,000 against it. Based on our continuous and thorough review of our portfolio, we believe we are appropriately reserved at this time on our energy portfolio. We do remain very committed to our customers and to this industry.
On Slide 6, we highlight our healthcare portfolio. Bank SNB has always had a strong history and is known to have some expertise as well as a level of credit concentration in this broad industry. Today Bank SNB has approximately $522 million in committed loan facilities to the healthcare industry, and we have 22.4% of our overall -- which is 22.4% of our overall portfolio. We have 429.5 million or 22% of that portfolio that’s funded and we have only 1.6% of our healthcare portfolio identified this potential problem loans.
Our portfolio is diversified by product type and geography and the chart there on Slide 6 shows the diversification within our healthcare portfolio. We do have a named Director of Healthcare Lending in our bank and a specialized Senior Credit Officer that oversees the underwriting of our healthcare deals. We believe, this is a -- will continue to be an important part of our economy as well as an important part of our commercial banking focus in the future.
I’m now going to turn over to Joe and will come back to you some comments at the end. Joe.
Joe Shockley
Thanks Mark. Good morning, everyone. I’ll begin my comments on Slide 7. We went into the second quarter with total assets of 2.6 billion, up from 2.4 billion a year ago. The increase is driven by net loan growth from a year ago of 150 million now with approximately 2.2 billion in total loans, which is an increase of about 8%. On a linked quarter basis, loans were up about $35 million or an annualized increase of 7%. Total deposits surpassed 2 billion at June 30th of this year and increased of $111 million or 6% compared to a year ago.
Our equity capital ended the quarter 296 million, up 13 million over a year ago. Our equity capital as a percent of total assets was 11.5%. There were no shares repurchased during the quarter or the first six months of this year due to depending acquisition with Simmons First National Corporation. Our tangible book value was $14.98, up $0.78 per share, which is an increase of 5.5% over a year ago.
As Mark previously noted, our capital ratios remain well above the well-capitalized ratios just established by the regulators. We are pleased to report an increase to net income for the second quarter, reporting 5.8 million which is up from 5.4 million a year ago and 5.3 million in the first quarter of this year. Net income per share for the second quarter of this year was $0.31, which is up from $0.28 in the first quarter of ’17 and the second quarter a year ago.
Return on average assets for the second quarter was 92 basis points and return on average equity was drive at 8%. Also as Mark earlier, our net interest margin for the quarter was up at 3.53%, compared to the previous quarter of 3.43% and up from the same quarter a year ago, which was at 3.48%. Our efficiency ratio improve or decline if you will that just under 58% compares favorably to 63% in the previous quarter and 66% for the same quarter in 2016.
Moving along to Slide 8, my comments on the income statement line items were focused on our linked quarters. Our net interest income for the second quarter of 2017 was 21.4 million or an increase of 1.2 million. The increase was boosted by average loan growth during the quarter of 42 million and the increase in interest rates that became effective by fed on March 15th. Two-thirds of the increase on our net interest margin which due to the rate increase on the loan portfolio and the remainder was due to the average loan growth in the second quarter.
Our provision for loan losses was 1.7 million, which is approximately the same as it was in the first quarter of this year. The provision was driven by loan growth of $35 million during the quarter and the deterioration on acquired loan and also on C&I loan which provided professional services. Our non-interest income for the second quarter of this year was $4.5 million which is down from the previous quarter by about $360,000.
The decrease is attributable to the decline in the gain on sale of investments as we sold the private equity investment in the first quarter of this year and had a gain of $450,000. Our service charges and fees were up about $100,000 over the previous quarter and gain on sale of mortgages was up $140,000. While other non-interest income was down around the $170,000 due in part to slightly lower fees on our interest rate swaps.
Non-interest expense for the second quarter of this year was $15.2 million down $150,000 from the previous quarter. The decline was in salaries and benefits and certain G&A expenses primarily consulting expenses combined with the $200,000 settlement that occurred in the first quarter on a litigation matter that we completed. These were partially reduced through by an increase in the provision for unfunded loan commitments, which is actually a $388,000 credit for reduction of expense in the first quarter.
Our pretax income is $9 million, which was an increase about $1 million over the previous quarter. Our effected tax rate for the second quarter was 35.4% which is up slightly compared to the first quarter which was 33.7%. The increase to the affected tax rate is due to reduced tax benefit on best its stock awards during the quarter. Net income noted was $5.8 million for the quarter up by 0.3 million in the previous quarter. Our pre-tax pre-provision income was 10.8 million or up $9.4 million for again over the previous quarter which is an improvement of about 15%.
Moving onto Slide 9 is our loan portfolio by type and by segment. Our loans totaled 1.97 billion at June 30 of this year or an increase of 150 million again or 8% compared to the same quarter end a year ago. And looking at Slide 9 you can see on the left side the various segments of our loan type, on this chart. And I won't go into the details on that however one notable segment is our real estate loans which comprise 13% of total loans with 256 million outstanding at June 30 this year. This segment grew 51 million or 25% compared to a year ago.
Our residential home loan program or medical professionals has been very well received and produced good loan growth over the past 12 months. On the right side of the chart, we showed loans by geographic segment. Again Oklahoma remains our largest geographic loan segment comprising 57% of loans, Texas comprises 32% of total loans and Colorado and Kansas provide the remainder. Another notable item here is at Colorado loans have grown 34 million over a year ago and now stand at over 80 million.
Moving on to Slide 10, our non-performing loan at June 30 of this year as Mark noted of 21.3 million -- 23.1 million, which is up slightly from a year ago and up 6.5 million from the first quarter, again the increase is due one commercial non-owner occupied real estate loan as Mark discussed earlier. And looking at non-performing loans by type compared to a year ago, healthcare is decreased 4.3 million while C&I is up 3.1 million and non-owner occupied is 3.6 million.
Again the right size reflects the non-performing loans by geography. We know longer have any non-performing loans in Arizona, have a slight increase in Texas and in Oklahoma. Again, we believe, we are appropriately reserve for the loss exposures in these non-performing credits.
Moving on to Slide 11, the trend in our loan loss reserve compared to non-performing loans and our potential problem loans. Our ratio is 53%, which is slightly higher than the previous quarters. Again as I noted, we believe we appropriately reserve for the exposures in these credits.
On Slide 12, we show the trend in our credit risk profile. We paid good improvements over the past five years and our ratios are in line with our -- now with our peers.
On Slide 13, we display our strong core deposit base in the trend in our cost of funds. Again, we have 69% for deposit base represented in non-interest bearing demand, interest-bearing demand, money market and savings accounts. These categories are lower costs deposit types. With two rate increases during the best 12 months, our deposit costs have increased 16 basis points and for the second quarter of this year, our deposit cost was 59 basis points. We continue to see rate pressure increasing in the markets and expected to see increased deposit costs during the remainder of 2017. Our deposit costs for the second quarter increased 7 basis points.
On Slide 14, it shows the trend in our net interest margin and our costs of deposits. Again as previously noted, our net interest margin for the second quarter was 3.53%, which is up 10 basis points over the previous quarter and up 5 basis points over the same quarter a year ago. However, I do want to know that we did have some accelerated discount accretion on loans during the second quarter of this year, which improved our net interest margin by 7 basis points.
So normalize this margin quarter would be about 3.46%. We do not expect to see further expansion in our net interest margin unless we have another Fed rate increase. And we do expect some slight increase pressure on our cost of funds.
Again, looking at moving along the Slide 15, our components of non-interest income while I have already commented on the components of these categories of non-interest income, I will note that we did have a good quarter in our gains and revenues on the sale of mortgage loans and another good quarter and fees on interest rate swaps on a few real estate credits.
Slide 16, which show the trend and components of our non-interest expenses. Again, I’ve already commented on these categories. I do want to note that we are pleased with the improvement in our stabilization and reduction in non-interest expenses and the improvement on our efficiency ratio for the second quarter again as noted was just under 58%.
Slide 17 displays our different capital ratios and again, these ratios all exceed the level of a well-capitalized financial institution. We are pleased with the finance results for our second quarter and we've grown our revenues while maintaining our expense levels, which produced at pre-tax, pre-provision amount of 10.8 million. This is 58% improvement over first quarter of this year.
Our loan growth has produced stronger interest income and fees combined with our non-interest income in stabilization of our non interest expenses which have resulted in increase net earnings for our shareholders. Again, we are focused on the process of completing the pending merger with Simmons.
And I'll now turn it back to Mark for his closing comments.
Mark Funke
Thank you, Joe. There is additional information in the PowerPoint presentation that starts on Page 20, but I am not going to cover that. You can cover that at your own leisure. I'm going to review the information that's on Slide 18 that discusses the continuing priorities and focus points for the -- our company the balance of 2017. We will continue to manage our company in appropriate and positive manner that will allow for a smooth and successful transition, as we merger with company with Simmons later in the year. This is our most important corporate priority.
Additionally, we will continue to focus on the following key objectives, maintaining strong credit quality, core deposit growth commensurate with the growth in our loan growth. We want to continue to expand our product offering and promote growth in our fee-based business. We will continue to promote growth in our residential mortgage business and the medical professional lending that Joe mentioned. We will assess, manage and recruit talent as necessary in our company and we will continue to focus on approved operating efficiency. And as always, we will continue to deliver a highest possible service in response to this to our customers.
I remain highly confident in this management team and the leadership we built throughout our company, and we will diligently focus on the opportunity ahead of us right brought about by the announced merger with Simmons First National Corporation. Our complimentary markets and our product set along with similar credit and management culture will result in a very strong regional bank offering a unique business style across seven states.
I do want to acknowledge however the critically important role that each of employees play in this company and their tireless effort to service our clients. I thank them for their superb effort and helping to meet the many challenges and opportunities that we face. I look forward to working with them as we complete the historic transaction for our 120-year-old company later this year as we join the Simmons team.
I want to acknowledge that our Board of Southwest Bancorp and Bank SNB will continue to provide positive leadership for our company. I would also like to thank everyone who's joined us on the call today. We do appreciate your continuous interest in our company and that concludes our call this morning. Thank you very much.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Question-and-Answer Session
End of Q&A
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