SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
Commission File Number 001-34110
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
| | |
Oklahoma | | 73-1136584 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
608 South Main Street, Stillwater, Oklahoma | | 74074 |
(Address of principal executive office) | | (Zip Code) |
Registrant’s telephone number, including area code: (405) 742-1800
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of Each Class | | Name of Each Exchange on which Registered |
Common Stock, par value $1.00 per share | | The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by a check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
The registrant's Common Stock is traded on the NASDAQ Global Select Market under the symbol OKSB. The aggregate market value of approximately 18,759,647 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2013, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $247.6 million based on the closing sales price of $13.20 per share of the registrant's Common Stock on that date. Solely for purposes of this calculation, it is assumed that directors, officers, and 5% stockholders of the registrant (other than institutional investors) are affiliates.
As of the close of business on March 6, 2014, 19,786,206 shares of the registrant's Common Stock were outstanding.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Shareholders, to be held on April 23, 2014, are incorporated by reference into Part III of this Form 10-K to the extent described therein.
SOUTHWEST BANCORP, INC.
Annual Report on Form 10-K
Table of Contents
Caution about Forward-Looking Statements
Southwest Bancorp, Inc. (“we”, “our”, “us”, or “Southwest”) makes forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. We intend these statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include:
| · | | Statements of our goals, intentions, and expectations; |
| · | | Estimates of risks and of future costs and benefits; |
| · | | Expectations regarding our future financial performance and the financial performance of our operating segments; |
| · | | Expectations regarding regulatory actions; |
| · | | Expectations regarding our ability to utilize tax loss benefits; |
| · | | Assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs; |
| · | | Estimates of the value of assets held for sale or available for sale; and |
| · | | Statements of our ability to achieve financial and other goals. |
These forward-looking statements are subject to significant uncertainties because they are based upon: the amount and timing of future changes in interest rates, market behavior, and other economic conditions; future laws, regulations, and accounting principles; changes in regulatory standards and examination policies; and a variety of other matters. These other matters include, among other things, the direct and indirect effects of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and supervisory policies of banking regulators. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past growth and performance do not necessarily indicate our future results. For other factors, risks, and uncertainties that could cause actual results to differ materially from estimates and projections contained in forward-looking statements, please read the “Risk Factors” contained in this report and our future reports to the Securities and Exchange Commission (“SEC”).
These forward-looking statements speak only as of the date on which the statements were made. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this release, whether as a result of differences in actual results, changes in assumptions, or changes in other factors affecting such statements, except as required by law.
We are required under generally accepted accounting principles to evaluate subsequent events and their impact, if any, on its financial statements as of December 31, 2013 through the date its financial statements are filed with the Securities and Exchange Commission. The December 31, 2013 financial statements included in this release will be adjusted if necessary to properly reflect the impact of subsequent events on estimates used to prepare those statements.
PART i
ITEM 1. BUSINESS
Business
General
We are a financial holding company headquartered in Stillwater, Oklahoma for our banking subsidiary Bank SNB, National Association (“Bank SNB”). We were organized in 1981 as the holding company for Bank SNB, which was chartered in 1894. We are registered as a financial holding company pursuant to the Bank Holding Company Act of 1956, as amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act (the "Holding Company Act"). As such, we are subject to supervision and regulation by the Federal Reserve. Bank SNB is a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (“OCC”). Bank SNB’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum permitted by law.
Effective as of the close of business on November 15, 2013, we merged our wholly-owned subsidiary state bank, Bank of Kansas, with and into our wholly-owned national bank, which was then known as The Stillwater National Bank and Trust Company (“Stillwater National”). Immediately following the merger, our national bank was renamed Bank SNB, National
Association, which is the new name for business in all markets. The consolidation and new name unified our brand as one bank to better serve our clients and prepares us for growth in the future.
Products and Services
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. 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 portfolio.
Our commercial lending services include (i) commercial real estate loans, (ii) working capital loans, (iii) construction loans, (iv) loans to small businesses (v) loans for equipment and general business expansion, (vi) loans to energy companies based on proved producing reserves and (vii) loans to a broad variety of healthcare providers, business, and related concerns. Consumer lending services include (i) residential real estate loans and mortgage banking services, and (ii) personal lines of credit (iii) loans for the purchase of automobiles, and (iv) other installment loans. We also offer deposit and personal banking services, including (i) commercial deposit services, commercial checking, money market, and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking accounts, NOW accounts, savings accounts, and automatic teller machine (“ATM”) access. Bank SNB offers personal brokerage services through a relationship with an independent institution.
We have developed internet banking services, called Bank SNB DirectBanker®, for consumer and commercial customers, a highly automated lockbox, document imaging, and information service for commercial customers called “Bank SNB Digital Lockbox,” and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds (“Sweep Agreements”).
Strategic Focus
Our bank has and will continue to position itself for future growth. We seek to produce consistent and sustainable revenue growth by enhancing, clarifying, and expanding our geographic markets and increasing and diversifying our revenue base. This consists of, but is not limited to: building out existing markets with robust and profitable growth potential; expanding our professional team; identifying, targeting, and acquiring earning assets under appropriate risk guidelines; and continuing to source, evaluate, and execute acquisitions.
We also seek to provide customers with exceptional service while, at the same time, improving operating efficiency. Over many years, we have refined our approach to customer service by listening to our customers’ needs and desires. We actively seek to make the customer experience consistent over time and across all of our locations. We improve operating efficiency by focusing on internal policy, process and procedure, along with technology, with the goal of continuous improvement while providing an exceptional experience to our clients. We build close relationships with businesses and their principals, business professionals and individuals by providing personalized financial solutions that gives them more control over their financial futures. We also apply a philosophy of continuous improvement to internal and external information reporting to improve our decision making processes and product delivery.
Organization
Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and an Other Operations segment that includes funds management (investment portfolio and funding) and corporate investments. Our organizational structure is designed to facilitate high-level customer service, prompt response, efficiency, and appropriate, uniform credit standards and other controls.
Banking Segments – Our banking segments include Oklahoma Banking, which includes the Stillwater division, the Central Oklahoma division based in Oklahoma City, and the Tulsa division; Texas Banking, which includes the Dallas-Frisco division, the Dallas-Preston Center division, the Austin division, and the San Antonio division; and Kansas Banking, which includes the Harper and Anthony Branches, the Hutchinson division, the Wichita division, and the Kansas City division. Emphasizing both commercial and consumer lending, the Stillwater division, Harper and Anthony Branches, and Hutchinson
divisions serve their respective markets as full-service community banks. The other eight divisions pursue a more focused marketing strategy, targeting managers, professionals, and businesses for lending, and offering more specialized services. All of the regional divisions focus on commercial and consumer financial services to local businesses and their senior employees and to other managers and professionals living and working in our market areas. We manage our mortgage and student lending operations through our home office located in Stillwater, Oklahoma. We originate first mortgage loans for sale to the Federal National Mortgage Association (“FNMA”) or private investors. Servicing on these loans may be released or retained in connection with the sale.
Support and Control Functions – Support and control functions are centralized, although each segment has support and control personnel. Costs of centrally managed support and control functions other than funds management (which is included in the Other Operations segment) are allocated to the Banking segments. Our philosophy of customer service extends to our support and control functions. We manage and offer products that are technology based, or that otherwise are more efficiently offered centrally through our home office. These include products that are marketed through the regional offices, such as our internet banking product for commercial and retail customers (Bank SNB DirectBanker®), commercial information, and item processing services (Bank SNB Digital Lockbox). Our technology products are marketed to existing customers and to help develop new customer relationships. Use of these products by customers enables us to serve our customers more effectively, use our resources more efficiently, and increase our fee income.
For additional information regarding our operating segments, please see “Note 18 Operating Segments” in the Notes to the Consolidated Financial Statements.
Banking Offices and Geographic Markets
Through Bank SNB, we have twenty-three full-service banking offices primarily located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas. We have four located in Stillwater, Oklahoma, four located in the Oklahoma City, Oklahoma, metropolitan area, two each located in the Tulsa, Oklahoma and Dallas, Texas metropolitan areas, two each located in Hutchinson, Kansas and in Wichita, Kansas and, one each in Chickasha, Oklahoma, Austin, San Antonio, and Tilden, Texas, and Anthony, Harper, and Overland Park, Kansas. On January 16, 2014, we announced the execution of agreements to sell branch banks in Anthony, Harper, and Overland Park, Kansas.
We focus our efforts on markets with characteristics that will allow us to capitalize on our strengths and to continue establishing new offices in those markets. Beyond Oklahoma, Texas, and Kansas, loans are extended to borrowers in other states. Acquisitions of other financial institutions and other companies are considered as opportunities become available.
Employees
Another major component of our strategy is to be an employer of choice in our markets. We aim to employ talented and devoted people who embrace our vision and feel invested in our success. As of December 31, 2013, we employed 402 persons on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others. None of our employees or any of our consolidated subsidiary employees are represented by a union or covered under a collective bargaining agreement. Our management considers our employee relations to be excellent.
Competition
We encounter competition in seeking deposits and in obtaining loan, cash management, investment, and other customers. The level of competition for deposits is high. Our principal competitors for deposits are other financial institutions, including other national banks, state banks, federal savings banks, and credit unions. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from U.S. Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors, such as securities firms. Competition from credit unions has intensified as historic federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over national banks, federal savings banks, and state banks, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are more competitive than those offered by national banks, federal savings banks, and state banks.
We also compete in our lending activities with other financial institutions such as securities firms, insurance companies, credit unions, small loan companies, finance companies, mortgage companies, real estate investment trusts, and other sources of funds. Many of our nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks. As a result, such nonbank competitors have advantages over us in providing certain services. A number of the financial institutions with which we compete in lending, deposit, investment, cash management, and other activities are larger than us or have a significantly larger market share. Our Texas and Kansas divisions compete for loans, deposits, and other services against local and nationally based financial institutions, many of which have much larger market shares and widespread office networks. In recent periods, competition has increased in our Oklahoma market areas as new entrants and existing competitors have sought to more aggressively expand their loan and deposit market shares.
The business of mortgage banking is highly competitive. We compete for loan originations with other financial institutions, such as mortgage bankers, state and national banks, federal savings banks, credit unions, and insurance companies. Many of our competitors have financial resources that are substantially greater than those available to us. We compete principally by providing competitive pricing, by motivating our sales force through the payment of commissions on loans originated and by providing high quality service to builders, borrowers, and realtors.
Supervision and Regulation
We are a financial holding company under the Holding Company Act and are regulated by the Federal Reserve. Bank SNB is a national banking association and is subject to regulation, supervision, and examination by the OCC. This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the protection of our shareholders. For ease of reference the term “banks” is used below to include national and federal savings banks and state banks, unless otherwise indicated. The term “commercial banks” includes national and state banks but excludes federal savings associations or federal savings banks.
The following summarizes certain provisions of existing laws and regulations that affect our operations and those of Bank SNB. Any discussion of laws and regulations applicable to a bank holding company also apply to us as a financial holding company. This summary does not address all aspects of these laws and regulations or include all laws and regulations that affect us now or may affect us in the future.
General – On December 11, 2013, we changed from being a bank holding company to a financial holding company. To be eligible to make this change, Bank SNB had to be well-capitalized and well-managed and have a satisfactory or better rating under the Community Reinvestment Act. As a financial holding company, we are still regulated under the Holding Company Act and remain subject to supervision and regular examination by the Federal Reserve. Under the Holding Company Act, we are required to furnish to the Federal Reserve annual and quarterly reports of our operations and additional information and reports.
A financial holding company may engage in certain financial activities, including, without limitation, securities underwriting and dealing, insurance agency and underwriting activities and merchant banking activities. To engage in any such new financial activity, each insured depository institution of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the Community Reinvestment Act, and the financial holding company must notify the Federal Reserve within 30 days of engaging in such new activity. We are currently eligible to engage in new financial activities but have no immediate plan to do so.
Under the Holding Company Act, a financial holding company must obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control of any class of voting securities of any national or state bank or bank holding company if, after the acquisition, the bank holding company would directly or indirectly own or control more than 5% of the class; (2) acquiring all or substantially all of the assets of another national bank or bank holding company; or (3) merging or consolidating with another bank holding company.
Also under the Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of us or Bank SNB. For purposes of the Holding Company Act, "control" is defined as ownership of more than 25% of any class of voting securities, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies.
The federal Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act) to file a written notice with the Federal Reserve before the person or persons acquire control of us or Bank SNB. The Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank.
The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a commercial bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing, or controlling commercial banks, providing services for its subsidiaries, non-bank activities that are closely related to banking and other financially related activities. Our activities are subject to these legal and regulatory limitations under the Holding Company Act and Federal Reserve regulations. Non-bank and financially related activities of bank holding companies also may be subject to regulation and oversight by regulators other than the Federal Reserve.
The Federal Reserve also has the power to order a bank holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any banking subsidiary of that holding company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “Regulatory Capital Requirements” on page 9 of this report.
The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition.
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”) – The Dodd-Frank Act, enacted in July 2010, made significant changes in laws regarding the structure of banking regulation, the powers of the Federal Reserve and other federal banking regulators, deposit insurance assessments, the handling of troubled institutions, regulatory capital calculations, reporting and governance obligations of public companies, and many other provisions affecting supervision of banks, bank holding companies, and other financial services organizations. Among other things, the Dodd-Frank Act:
| · | | Created the Consumer Financial Protection Bureau, whose regulations may adversely affect the business operations of financial institutions offering consumer financial products or services, including us. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to Bank SNB through the adoption of similar policies by the Federal Reserve, OCC, and FDIC. |
| · | | Weakened federal preemption rules permitting states more authority to enforce consumer protection laws against national banks like Bank SNB. |
| · | | Made permanent the $250,000 deposit insurance limit for insured deposits. |
| · | | Revised the assessment base for calculating an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund to be based on average consolidated total assets minus average tangible equity rather than on deposits, and makes changes to the minimum designated reserve ratio of the Deposit Insurance Fund. |
| · | | Eliminated the prohibition against payment of interest on demand deposits, which allows businesses to have interest bearing demand accounts formerly prohibited by law and Federal Reserve regulations. |
| · | | Changed the requirements for certain transactions with affiliates and insiders. |
| · | | Required banking regulators to establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company that provides an insider or other employee with excessive compensation or compensation that gives rise to excessive risk or could lead to a material financial loss to the institution. |
| · | | Limited the use of new trust preferred securities issued after May 19, 2010 as regulatory capital. |
| · | | Permitted banks to engage in de novo branching outside of their home states, provided that the laws of the target state permit banks chartered in that state to branch within that state. |
Significant elements of the Dodd-Frank Act have been implemented, but implementation of other elements of the Act requires additional regulations, many of which have not yet been established. It is too early to fully assess the effects of the Dodd-Frank Act and related regulations on our business, financial condition, or results of operations.
Source of Strength Doctrine – Federal Reserve policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and does not permit a bank holding company to conduct its operations in an unsafe or unsound manner. Under this "source of strength doctrine," a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment of deposits and to certain other indebtedness of such subsidiary banks. The Holding Company Act provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. In addition, under the National Bank Act, if the capital stock of Bank SNB is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon us. If the assessment is not paid within three months, the OCC could order a sale of Bank SNB stock held by us to make good the deficiency. Furthermore, the Federal Reserve has the right to order a bank holding company to terminate any activity that the Federal Reserve believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. The Dodd-Frank Act codifies the "source of strength doctrine."
National Bank Regulation – As a national bank, Bank SNB is subject to the primary supervision of the OCC under the National Bank Act. The prior approval of the OCC is required for a national bank to establish or relocate a branch office or to engage in any merger, consolidation, or significant purchase or sale of assets.
The OCC regularly examines the operations and condition of Bank SNB including but not limited to its capital adequacy, loans, allowance for loan losses, investments, liquidity, interest rate risk, and management practices. In addition, Bank SNB is required to furnish quarterly and annual reports to the OCC. The OCC's enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a national bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.
Dividend Restrictions – Dividends from Bank SNB constitute the principal source of our cash revenues. The payment of dividends by Bank SNB is subject to regulatory restrictions. No national bank may pay dividends from its paid-in capital. All dividends must be paid out of current or retained net profits. The National Bank Act further restricts the payment of dividends out of net profits by prohibiting a national bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until one-tenth of a national bank's net profits for the preceding half year in the case of quarterly or semi-annual dividends, or the preceding two half-year periods in the case of annual dividends, are transferred to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for that year combined with its retained net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. In addition, Bank SNB is prohibited by federal statute from paying dividends or making any other capital distribution that would cause Bank SNB to fail to meet its regulatory capital requirements. Further, the OCC has authority to prohibit the payment of dividends by a national bank when it determines that their payment would be an unsafe and unsound banking practice.
Limits on Loans to One Borrower – National banks are subject to limits on the amount of loans they can make to one borrower. With certain limited exceptions, loans and extensions of credit from national banks outstanding to any borrower (including certain related entities of the borrower) at any one time may not exceed 15% of the unimpaired capital and surplus of the institution. A national bank may lend an additional amount, equal to 10% of unimpaired capital and surplus, if the loan is fully secured by readily marketable collateral. Certain types of loans are exempted from the lending limits, including loans secured by in-bank deposits.
Transactions with Affiliates – Bank SNB is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, us and other affiliates and on investments in our and their stock or other securities. These restrictions prevent us and our nonbanking subsidiaries from borrowing from Bank SNB unless the loans are secured by
specified collateral. Additionally, the restrictions require our transactions with Bank SNB to have terms comparable to terms of arms-length transactions with third persons. In addition, secured loans and investments by Bank SNB are generally limited to 10% of Bank SNB’s capital and surplus with respect to us and Bank SNB’s other affiliates on an individual basis, and to 20% of Bank SNB’s capital and surplus with respect to us and all other Bank SNB affiliates in the aggregate. Certain exemptions to these limitations apply to extensions of credit by, and other transactions between, Bank SNB and our other subsidiaries. These regulations and restrictions may limit our ability to obtain funds from Bank SNB for our cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses.
Real Estate Lending Guidelines – Under federal banking regulations, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or interests in real estate or that are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting requirements. A bank’s real estate lending policy must reflect consideration of the Guidelines for Real Estate Lending Policies (the "Guidelines") adopted by the federal banking regulators. The Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the limits specified in the Guidelines. The Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits.
Federal Deposit Insurance – Bank SNB pays deposit insurance premiums to the FDIC. For additional information, see “Management’s Discussion and Analysis – FDIC and other insurance” on page 32 of this report.
Regulatory Capital Requirements – The Federal Reserve, the OCC, and the FDIC have established guidelines for maintenance of appropriate levels of capital by bank holding companies, national banks, state banks, and federal savings banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total average assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets.
Federal regulations require bank holding companies and banks to maintain a minimum leverage ratio of Tier 1 capital (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the strongest bank holding companies and banks with composite examination ratings of 1 under the rating system used by the federal banking regulators would be permitted to operate at or near this minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization's capital adequacy by its primary regulator. A bank or bank holding company experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. In addition, the Federal Reserve has indicated that it also may consider the level of an organization's ratio of Tier 1 capital to total assets in making an overall assessment of capital.
The risk-based capital rules require bank holding companies and banks to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders' equity, and subject to certain limitations, qualifying perpetual preferred stock (noncumulative perpetual preferred stock with respect to national banks), trust preferred securities, minority interests in the equity accounts of consolidated subsidiaries, and deferred tax assets, less all intangible assets, except for certain mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases, and the amount of perpetual preferred stock and trust preferred securities that does not qualify as Tier 1 capital, long-term preferred stock with an original maturity of at least 20 years from issuance, hybrid capital instruments, including perpetual debt and mandatory convertible securities, subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax net unrealized gains on available for sale equity securities.
The Dodd-Frank Act includes certain provisions concerning the components of regulatory capital. Certain of these provisions are intended to eliminate or significantly reduce use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under these provisions, trust preferred securities issued before May 19, 2010 by a company, such as us, with total consolidated assets of less than $15 billion and are eligible to be treated as regulatory capital, but any such securities issued after May 19, 2010 are not eligible to be treated as regulatory capital.
The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and
off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50%, and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses that may be included in capital to 1.25% of total risk-weighted assets.
The federal banking regulatory agencies have established a joint policy regarding the evaluation of banks' capital adequacy for interest rate risk. Under the policy, the assessment of a bank's capital adequacy includes an assessment of exposure to adverse changes in interest rates. Management believes our interest rate risk management systems and our capital relative to our interest rate risk are adequate.
Federal banking regulations also require banks with significant trading assets or liabilities to maintain supplemental risk-based capital based upon their levels of market risk. Bank SNB did not have any trading assets or liabilities during 2013, 2012, or 2011 and was not required to maintain such supplemental capital.
The federal banking regulators have established regulations that classify banks by capital levels and provide for various "prompt corrective actions" to resolve the problems of any bank that fails to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank that does not meet these standards is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized, depending on its capital levels. A bank that falls within any of these three undercapitalized categories is subject to severe regulatory sanctions. As of December 31, 2013, Bank SNB was well-capitalized as defined in applicable banking regulations. For information regarding Bank SNB’s compliance with its regulatory capital requirements, see “Management's Discussion and Analysis – Capital Resources” on page 43 of this report and in the Notes to the Consolidated Financial Statements in this report, “Note 14 Capital Requirements and Regulatory Matters”.
Basel III – United States banking regulators are members of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee issues accords, which include capital guidelines for use by regulators in individual countries, generally referred to as Basel I (1988), Basel II (2004), and Basel III (2011). Basel III is intended for institutions with assets of $250 million or more or significant foreign exposure. However, United States banking regulators are considering the Basel III guidelines in their determination of appropriate capital standards for all banking institutions. These may result in higher minimum capital requirements, a countercyclical capital buffer requirement, and liquidity standards. U.S. banking agencies have not yet published the final proposed rules to implement Basel III in the United States.
Brokered Deposits – Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew, or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Bank SNB is well-capitalized and therefore is eligible to accept brokered deposits without limitation. Bank SNB makes use of brokered deposits, but has reduced its reliance on brokered deposits and other non-core funding sources, and does not anticipate any increase in the usage of brokered deposits.
Supervision and Regulation of Mortgage Banking Operations – Bank SNB’s mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development ("HUD"), the Federal Housing Administration ("FHA"), the Veterans' Administration ("VA"), and FNMA with respect to originating, processing, selling, and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as Bank SNB are required to submit financial statements to FNMA, FHA, and VA annually. Each regulatory entity has its own financial requirements. Lenders’ affairs are also subject to examination by the Federal Reserve, FNMA, FHA, and VA at all times to assure compliance with the applicable regulations, policies, and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Home Mortgage Disclosure Act, Fair Credit Reporting Act, the National Flood Insurance Act, and the Real Estate Settlement Procedures Act, and related regulations that prohibit
discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Bank SNB mortgage banking operations are also affected by various state and local laws and regulations and the requirements of various private mortgage investors.
Community Reinvestment – Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s record of making loans in its assessment areas; (b) investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (c) service, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches, and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. Our banking subsidiary was assigned a “satisfactory” rating as a result of its last CRA examination.
Bank Secrecy Act; Patriot Act – Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA PATRIOT Act” or the “Patriot Act,” enacted in response to the September 11, 2001 terrorist attacks, contains prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations, and money launderers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
Other Laws and Regulations – Some of the aspects of the lending and deposit business of Bank SNB are subject to regulation by the Federal Reserve and the FDIC, including reserve requirements and disclosure requirements in connection with personal and mortgage loans and deposit accounts. Bank SNB’s federal student lending activities are subject to regulation and examination by the United States Department of Education. In addition, Bank SNB is subject to numerous federal and state laws and regulations that include specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of credit terms, and discrimination in credit transactions.
Enforcement Actions – Federal statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease-and-desist orders, receivership, conservatorship, or the termination of deposit insurance.
Available Information
We provide internet access to Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports through our Investor Relations section at www.oksb.com (This site is also accessible through Bank SNB’s website at www.banksnb.com.) The SEC maintains a website (www.sec.gov) where these filings also are available through the SEC’s EDGAR system. There is no charge for access to these filings through either our site or the SEC’s site, although users should understand that there may be costs associated with electronic
access, such as usage charges from Internet access providers and telephone companies, that they may bear. The public also may read and copy materials filed by Southwest with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
The following are some important risk factors that could affect our future financial performance or could cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, or which we do not believe are material, may also impair or adversely affect our business, financial condition or results of operation.
Risks Relating to our Business
Difficult and unsettled market conditions may affect our profits and loan quality and may continue to do so for an unknown period.
Unsettled market conditions may increase the likelihood and the severity of adverse effects discussed in the following risk factors, in particular:
| · | | There may be less demand for our products and services; |
| · | | Competition in our industry could intensify as a result of increased consolidation of the banking industry; |
| · | | It may become more difficult to estimate losses inherent in our loan portfolio; |
| · | | Loan delinquencies and problem assets may increase; |
| · | | Collateral for loans may decline in value, increasing loan to value ratios and reducing our customers’ borrowing power and the security for our loans; |
| · | | Deposits and borrowings may become even more expensive relative to yields on loans and securities, reducing our net interest margin, and making it more difficult to maintain adequate sources of liquidity; |
| · | | Asset based liquidity, which depends upon the marketability of assets such as student loans and mortgages, may be reduced; and |
| · | | Compliance with banking regulations enacted in connection with stimulus legislation and other legislation may increase our costs, limit our ability to pursue business opportunities, and impair our ability to hire and retain talented managers. |
Changes in interest rates and other factors beyond our control may adversely affect our earnings and financial condition.
Our net income depends to a great extent upon the level of our net interest income. Changes in interest rates can increase or decrease net interest income and net income. Net interest income is the difference between the interest income we earn on loans, investments, and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in world financial markets. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. Changes in the market interest rates for types of products and services in our various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors. The results of our interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that we will be able to successfully manage our interest rate risk.
Changes in local economic conditions could adversely affect our business.
Our commercial and commercial real estate lending operations are concentrated in the metropolitan areas of Oklahoma City, Stillwater, Edmond, and Tulsa, Oklahoma; Dallas, Austin, San Antonio, and Houston, Texas; and Hutchinson, Wichita, and Kansas City, Kansas. Our success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase our problem loans and charge-offs and otherwise negatively affect our performance and financial condition.
Adverse changes in healthcare-related businesses could lead to slower loan growth and higher levels of problem loans and charge-offs.
We have approximately 33% of noncovered loans to individuals and businesses involved in the healthcare industry, including business and personal loans to physicians, dentists, and other healthcare professionals, and loans to for-profit hospitals, nursing homes, suppliers and other healthcare-related businesses. Our strategy calls for continued growth in healthcare lending. This concentration exposes us to the risk that adverse developments in the healthcare industry could hurt our profitability and financial condition as a result of increased levels of nonperforming loans and charge-offs and reduced loan demand and deposit growth.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Educations Reconciliations Act of 2010, is expected to have effects on the provision of healthcare in the United States. We have assessed its potential outcome on the market for healthcare and our services for the healthcare industry, and believe it is too early to conclude the impact on them. The law is complex and implementation requires the adoption of significant regulations. As a result, the new laws could have adverse effects on the growth and profitability of our healthcare business.
Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.
We maintain an allowance for loan losses in an amount that we believe is appropriate to provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the allowance. Federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations.
Commercial and commercial real estate loans comprise a significant portion of our total loan portfolio. These types of loans typically are larger than residential real estate loans and other consumer loans. Because our loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
The results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy’s performance is worse than we expect.
We perform internal assessments of our capital and asset quality as part of our planning process. Our process includes stress tests using alternative credit quality assumptions in order to estimate their effects on loan loss provisions, net income, and regulatory capital ratios. The alternative assumptions include mild and severe credit quality stress scenarios.
The results of these stress tests involve assumptions about the economy, future loan losses and default rates, which may not accurately reflect the impact on our earnings or financial condition or actual future conditions. Actual future economic conditions may result in significantly higher credit losses than we assume in our stress tests, with a corresponding negative impact on our earnings, financial condition, and capital than those predicted by our internal stress test.
We may not realize our deferred tax assets.
We may experience negative or unforeseen tax consequences. We review the probability of the realization of our deferred tax assets based on forecasts of taxable income quarterly. This review uses historical results, projected future operating results based on approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of a valuation allowance to reduce our deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition.
Our earnings and financial condition may be adversely affected by changes in accounting principles and in tax laws, or the interpretation of them.
Changes in U.S. generally accepted accounting principles could have negative effects on our reported earnings and financial condition.
Changes in tax laws, rules, and regulations, including changes in the interpretation or implementation of tax laws, rules, and regulations by the Internal Revenue Service or other governmental bodies, could affect us in significant and unpredictable ways. Such changes could subject us to additional costs, among other things. Failure to comply with tax laws, rules, and regulations could result in sanctions by regulatory agencies, civil money penalties, and reputation damage.
Additionally, we conduct quarterly assessments of our deferred tax assets. The carrying value of these assets is dependent upon earnings forecasts and prior period changes, among other things. A significant change in our assumptions could affect the carrying value of our deferred tax assets on our balance sheet.
Government regulation significantly affects our business.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Bank SNB is subject to regulation and supervision by the OCC. We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies.
Changes in the laws, regulations, and regulatory practices affecting the banking industry may limit our ability to increase or assess fees for services provided, increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability and financial condition. Federal economic and monetary policy may also affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads.
The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Economic conditions in the past several years have increased bank failures. The FDIC may increase our deposit insurance costs by increasing regular assessment rates and levying special assessments, which may in the future significantly and adversely affect our net income.
The Dodd-Frank Act will continue to increase our regulatory compliance burden and costs, may place restrictions on certain products and services, and limit our future capital raising alternatives.
The Dodd-Frank Act made significant, wide-ranging changes in the regulation of the financial services industry that affect all financial institutions, including us. The Dodd-Frank Act is likely to continue to increase our regulatory compliance
burden, increase the costs associated with regulatory examinations and compliance measures, and increase other operating costs.
Among other things, the Dodd-Frank Act eliminated the prohibition of paying interest on commercial demand deposits, which may increase our funding costs, and limits the use of new trust preferred securities as regulatory capital. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau, whose regulations may adversely affect our business operations. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to us through the adoption of similar policies by the Federal Reserve or OCC.
Significant elements of the Dodd-Frank Act have been implemented, but implementation of other elements of the Dodd-Frank Act requires additional regulations, many of which have not yet been established.
Examination reports may include significant findings and assessments about our condition and operations that are not publicly disclosed. Assessments by bank examiners may cause us to increase our publicly reported problem assets and potential problem loans, charge-offs, or provisions for loan losses.
Examinations by federal regulatory agencies include assessments of risk, financial health, capital adequacy, loan risk, and other factors that federal banking laws do not allow to be publicly disclosed. The assignment of loans to credit risk categories involves judgment and the application of credit policies. In their examinations, federal banking examiners may assign different risk categories to loans than those assigned by management. In that case, we must amend our risk categorizations to match those assigned by the bank examiners, which may result in increases in publicly reported problem and potential problem loans, charge-offs, or provisions for loan losses.
Our decisions regarding the fair value of assets acquired could be inaccurate and our estimated loss share receivable in FDIC-assisted acquisitions may be inadequate, which could adversely affect our business, financial condition, results of operations, and future prospects.
In accordance with generally accepted accounting principles, we record assets acquired and liabilities assumed in business combinations at their fair values. The determination of the initial fair values can be complex and involves a high degree of judgment. Goodwill is initially recorded as the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination, and thereafter is tested for impairment at least annually. If the current fair value is determined to be less than the carrying value, an impairment loss is recorded.
Management makes various assumptions and judgments about the collectability of acquired loan portfolios, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss share agreements, we may record a loss share receivable that we consider adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss share receivable, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information.
If our assumptions are incorrect, our current loss share receivable may be insufficient to cover future loan losses, and increased loss reserves may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future loan losses could have a negative effect on our operating results.
The acquisition of banks, bank branches, and other businesses involves risks.
In the future we may acquire additional banks, branches or other financial institutions, or other businesses. We cannot assure you that we will be able to adequately or profitably manage any such acquisitions. The acquisition of banks, bank branches, and other businesses involves risk, including exposure to unknown or contingent liabilities, the uncertainties of asset quality assessment, the difficulty and expense of integrating the operations and personnel of the acquired companies with ours, the potential negative effects on our other operations of the diversion of management’s time and attention, and the possible loss of key employees and customers of the banks, businesses, or branches we acquire. Our failure to execute our internal growth strategy or our acquisition strategy could adversely affect our business, results of operations, financial condition, and future prospects.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial condition.
Competition may decrease our growth or profits.
We compete for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than ours. Credit unions have federal tax exemptions, which they may take advantage of to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably.
Risks Related to Ownership of Our Common Stock
The market price for our common stock may be highly volatile, which may make it difficult for investors to resell shares of common stock at times they desire or at prices they find attractive.
The overall market and the price of our common stock may continue to fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, in addition to those described in these Risk Factors:
| · | | Actual or anticipated quarterly fluctuations in our operating results and financial condition; |
| · | | Changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions; |
| · | | Speculation in the press or investment community generally or relating to our reputation or the financial services industry; |
| · | | The size of the public float of our common stock; |
| · | | Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings; |
| · | | Fluctuations in the stock price and operating results of our competitors; |
| · | | Future sales of our equity or equity-related securities; |
| · | | Proposed or adopted regulatory changes or developments; |
| · | | Anticipated or pending investigations, proceedings, or litigation that involve or affect us; |
| · | | Domestic and international economic factors unrelated to our performance; and |
| · | | General market conditions and, in particular, developments related to market conditions for the financial services industry. |
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations as a result of general economic instability and recession. This volatility has had a significant effect on the market price of securities issued by many companies, including volatility resulting from reasons unrelated to their performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our future operating results. We expect that the market price of our common stock will continue to fluctuate, and there can be no assurance about the levels of the market prices for our common stock.
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.
Although our common shares are listed for trading on the NASDAQ Global Select Market, the trading in our common shares has less liquidity than many other companies quoted on the NASDAQ Global Select Market. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the market of
willing buyers and sellers for our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common shares will increase in the future. Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically.
Future sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our board of directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued stock, including shares authorized and unissued under our 2008 Stock Based Award Plan. In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock or reduce the market price for our common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms.
The sale, or availability for sale, of a substantial number of shares of common stock in the public market could adversely affect the price of our common stock and could impair our ability to raise additional capital through the sale of equity securities.
Our ability to pay dividends is limited by law, contract, and banking agency discretion.
In January 2014, our board of directors reinstated quarterly common stock dividends with their approval of a quarterly cash dividend of $0.04 per share. This is the first time dividends on our common stock have been declared since 2009.
Our ability to pay dividends to our shareholders depends on our receipt of dividends from Bank SNB. The amount of dividends Bank SNB may pay to us is limited by federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.
Our ability to pay dividends to our shareholders is further limited because the Federal Reserve has the power to prohibit payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by financial holding companies, which expresses the Federal Reserve's view that a financial holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition.
Restrictions on unfriendly acquisitions could prevent a takeover.
Our certificate of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by our board of directors. The Oklahoma General Corporation Act includes provisions that make an acquisition of us more difficult. These provisions may prevent a future takeover attempt in which our shareholders otherwise might receive a substantial premium for their shares over then-current market prices. These provisions include supermajority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. Our certificate of incorporation also authorizes the issuance of additional shares without shareholder approval on terms or in circumstances that could deter a future takeover attempt.
ITEM 1B. UNRESOLVED STAFF COMMMENTS
NONE.
ITEM 2. Properties
The locations of Southwest and its banking subsidiary are shown below:
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Southwest Bancorp, Inc. Location Corporate Headquarters | | |
608 S. Main Street P.O. Box 1988 www.oksb.com | Stillwater, Oklahoma 74076 | 405-742-1800 |
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Bank SNB Locations | | |
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Corporate Headquarters 608 S. Main Street P.O. Box 1988 www.banksnb.com | Stillwater, Oklahoma 74076 | 405-372-2230 |
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Drive-in Facility 308 S. Main Street P.O. Box 1988 | Stillwater, Oklahoma 74076 | 405-372-2230 |
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Operations Center 1624 Cimarron Plaza* P.O. Box 1988 | Stillwater, Oklahoma 74076 | 405-372-2230 |
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19th & Sangre Branch 1908 S. Sangre P.O. Box 1988 | Stillwater, Oklahoma 74074 | 405-372-2230 |
OSU Campus Branch Bank 1102 W. Hall of Fame Avenue* P.O. Box 1988 OSU-Student Union Student Union, Room 056* P.O. Box 1988 | Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 | 405-372-2230 405-744-5962 |
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Waterford Branch 6301 Waterford Boulevard Suite 101 & 102* | Oklahoma City, Oklahoma 73118 | 405-427-4000 |
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South OKC Branch 8101 S. Walker Avenue Suite B OUHSC-OKC Branch 1106 N. Stonewall* | Oklahoma City, Oklahoma 73139 Oklahoma City, Oklahoma 73117 | 405-427-4000 405-271-3113 |
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Edmond Branch 1440 S. Bryant Avenue* | Edmond, Oklahoma 73034 | 405-427-4000 |
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Chickasha Branch 500 W. Grand Avenue | Chickasha, Oklahoma 73018 | 405-427-3100 |
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Tulsa Utica Branch 1500 S. Utica Avenue P.O. Box 521500 | Tulsa, Oklahoma 74152 | 918-523-3600 |
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Tulsa 61st Branch 2431 E. 61st Suite 170* P.O. Box 521500 | Tulsa, Oklahoma 74152 | 918-523-3600 |
Tilden Branch 205 Elm Street P.O. Box 299 | Tilden, Texas 78072 | 361-274-3391 |
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Frisco Branch 5300 Town and Country Boulevard Suite 100* | Frisco, Texas 75034 | 972-624-2900 |
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Preston Center Branch 5950 Berkshire Lane Suite 350* | Dallas, Texas 75225 | 972-624-2900 |
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Austin Branch 3900 N. Capital of Texas HWY Suite 100* | Austin, Texas 78746 | 512-314-6700 |
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Medical Hill Branch 9324 Huebner Road | San Antonio, Texas 78240 | 210-442-6100 |
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Anthony 203 W. Main Street P.O. Box 484 Harper 1002 Central Street* P.O. Box 7 hutchinson 100 East 30th Avenue P.O. Box 1707 524 N. Main Street South Hutchinson, Kansas 67505 P.O. Box 1707 Overland Park 14435 Metcalf Avenue Wichita - East 8415 E. 21st Street North Suite 150* Wichita - West 10111 W. 21st Street North | Anthony, Kansas 67003 Harper, Kansas 67058 Hutchinson, Kansas 67502 South Hutchinson, Kansas 67505 P.O. Box 1707 Overland Park, Kansas 66223 Wichita, Kansas 67206 Wichita, Kansas 67205 | 620-842-1000 620-896-1035 620-728-3000 620-728-3000 913-906-4444 316-315-1600 316-315-1600 |
*Leased from third parties. Other properties are owned. | |
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are regularly subject to various claims and legal actions arising in the normal course of business. While the outcome of these legal matters cannot be predicted with certainty, we do not expect them to have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Listing
Common shares of Southwest Bancorp, Inc. are traded on NASDAQ Global Select Market under the symbol OKSB.
Transfer Agents and Registrars
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For Southwest Bancorp, Inc.: | |
Computershare Investor Services, LLC | |
2 North LaSalle St. | |
Chicago, IL 60602 | |
Recent Stock Prices, Dividends, and Equity Compensation Plan Information
Our board of directors decides whether or not to pay dividends on common stock, and the amount of any such dividends, each quarter. In making its decisions on dividends, the board of directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. Our ability to pay dividends depends upon regulatory approval and cash resources, which include dividend payments from our banking subsidiary. For information regarding the ability of Bank SNB to pay dividends to us and the restrictions on bank dividends under federal banking laws, see “Note 14 Capital Requirements & Regulatory Matters” in the Notes to the Consolidated Financial Statements, “Certain Regulatory Matters” on page 45 of this report, and “Risk Factors” on page 12 of this report.
As shown on the table below, common shareholders received no cash dividends in 2013 or 2012. In January 2014, our board of directors reinstated quarterly common stock dividends with their approval of a quarterly cash dividend of $0.04 per share.
In July 2012, we made payments of deferred and arrears interest and dividends on our Series B Preferred Securities issued under the U.S. Treasury Department’s Capital Purchase Program that were deferred since August 1, 2011. Further, in August 2012, we announced our repurchase of all $70 million of our Series B Preferred Securities. See further discussion at “Note 12 Shareholders’ Equity” in the Notes to the Consolidated Financial Statements.
As of March 3, 2014, there were approximately 400 holders of record of our common stock. The following table sets forth the common stock dividends declared for each quarter during 2013 and 2012, and the range of high and low closing trade prices for the common stock for those periods.
| | | | | | | | | | | | | | | | | | |
| 2013 | | 2012 |
| | | | | | | Dividend | | | | | | | | Dividend | |
| High | | Low | | Declared | | High | | Low | | Declared | |
For the Quarter Ending: | | | | | | | | | | | | | | | | | | |
March 31 | $ | 13.48 | | $ | 11.41 | | $ | - | | $ | 9.50 | | $ | 5.95 | | $ | - | |
June 30 | | 14.22 | | | 11.82 | | | - | | | 9.81 | | | 8.02 | | | - | |
September 30 | | 16.18 | | | 13.36 | | | - | | | 11.45 | | | 9.07 | | | - | |
December 31 | | 17.21 | | | 14.11 | | | - | | | 11.47 | | | 9.57 | | | - | |
Stock Performance
The following table compares the cumulative total return on a hypothetical investment of $100 in our common stock at the closing price on December 31, 2008 through December 31, 2013, with the hypothetical cumulative total return on the NASDAQ Stock Market Index (U.S. Companies) and the NASDAQ Bank Index for the comparable period.
| | | | | | |
| Period ending |
Index | 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 |
Southwest Bancorp, Inc. | 100.00 | 54.21 | 96.87 | 46.56 | 87.49 | 124.37 |
NASDAQ Bank Index | 100.00 | 83.70 | 95.55 | 85.52 | 101.50 | 143.84 |
NASDAQ Total U.S. | 100.00 | 145.36 | 171.74 | 170.38 | 200.63 | 281.22 |
Equity Compensation Plan Information
The following table presents disclosure regarding equity compensation plans in existence at December 31, 2013, consisting of the 2008 stock based award plan, which was approved by our shareholders.
| | | |
Plan category | Number of securities to be issued upon exercise of outstanding options warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities available for future issuance under equity compensation plans excluding securities reflected in column (a) (c) |
Plan approved by shareholders | 0 | N/A | 449,554 |
Total | 0 | N/A | 449,554 |
ITEM 6. Selected Financial Data
The following table presents our selected consolidated financial data for each of the five years in the period ended December 31, 2013. The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements, including the accompanying Notes to the Consolidated Financial Statements, presented elsewhere in this report.
| | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | |
(Dollars in thousands, except per share data) | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
Operations Data | | | | | | | | | | | | | | | | | | | |
Interest income | $ | 73,914 | | | $ | 93,171 | | | $ | 120,745 | | | $ | 142,807 | | | $ | 150,399 | |
Interest expense | | 11,264 | | | | 16,608 | | | | 24,413 | | | | 35,476 | | | | 51,708 | |
Net interest income | | 62,650 | | | | 76,563 | | | | 96,332 | | | | 107,331 | | | | 98,691 | |
Provision for loan losses (1) | | (7,209) | | | | 3,107 | | | | 132,101 | | | | 35,560 | | | | 39,176 | |
Gain on sales of loans and securities, net | | 2,649 | | | | 3,133 | | | | 1,658 | | | | 2,736 | | | | 5,888 | |
Noninterest income (2) | | 10,994 | | | | 12,803 | | | | 12,360 | | | | 15,828 | | | | 16,048 | |
Noninterest expense (1) (3) | | 55,311 | | | | 63,322 | | | | 90,201 | | | | 69,230 | | | | 60,858 | |
Income (loss) before taxes | | 28,191 | | | | 26,070 | | | | (111,952) | | | | 21,105 | | | | 20,593 | |
Taxes on income | | 10,756 | | | | 9,883 | | | | (43,657) | | | | 9,738 | | | | 7,611 | |
Net income (loss) | $ | 17,435 | | | $ | 16,187 | | | $ | (68,295) | | | $ | 11,367 | | | $ | 12,982 | |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) available | | | | | | | | | | | | | | | | | | | |
to common shareholders | $ | 17,435 | | | $ | 12,446 | | | $ | (72,548) | | | $ | 7,180 | | | $ | 8,837 | |
| | | | | | | | | | | | | | | | | | | |
Dividends | | | | | | | | | | | | | | | | | | | |
Preferred stock - declared and paid (4) | $ | - | | | $ | 4,405 | | | $ | 1,750 | | | $ | 3,500 | | | $ | 3,500 | |
Preferred stock - in arrears | | - | | | | - | | | | 1,772 | | | | - | | | | - | |
Common stock | | - | | | | - | | | | - | | | | - | | | | 1,398 | |
Ratio of total dividends to net income (loss) | | - | % | | | 13.56 | % | | | (5.16) | % | | | 30.79 | % | | | 37.73 | % |
Per Common Share Data | | | | | | | | | | | | | | | | | | | |
Basic earnings | $ | 0.89 | | | $ | 0.64 | | | $ | (3.73) | | | $ | 0.40 | | | $ | 0.60 | |
Diluted earnings | | 0.89 | | | | 0.64 | | | | (3.73) | | | | 0.40 | | | | 0.60 | |
Cash dividends | | - | | | | - | | | | - | | | | - | | | | 0.10 | |
Book value (5) | | 13.13 | | | | 12.60 | | | | 11.99 | | | | 15.68 | | | | 16.46 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | |
Basic, net of unvested restricted stock | | 19,516,776 | | | | 19,374,098 | | | | 19,414,231 | | | | 17,848,610 | | | | 14,625,847 | |
Diluted, net of unvested restricted stock | | 19,604,245 | | | | 19,416,090 | | | | 19,433,883 | | | | 17,894,011 | | | | 14,689,448 | |
Financial Condition Data (5) | | | | | | | | | | | | | | | | | | | |
Investment securities | $ | 394,199 | | | $ | 377,112 | | | $ | 275,352 | | | $ | 262,525 | | | $ | 244,373 | |
Noncovered portfolio loans (6) | | 1,251,416 | | | | 1,321,346 | | | | 1,687,178 | | | | 2,331,293 | | | | 2,539,294 | |
Loans held for sale (6) | | 3,060 | | | | 31,682 | | | | 38,695 | | | | 35,194 | | | | 43,134 | |
Total noncovered loans (6) (7) | | 1,254,476 | | | | 1,353,028 | | | | 1,725,873 | | | | 2,366,487 | | | | 2,582,428 | |
Covered portfolio loans (8) | | 16,427 | | | | 25,707 | | | | 37,615 | | | | 53,628 | | | | 85,405 | |
Interest-earning assets | | 1,925,019 | | | | 2,007,412 | | | | 2,248,936 | | | | 2,723,658 | | | | 2,996,849 | |
Total assets | | 1,981,423 | | | | 2,122,255 | | | | 2,377,276 | | | | 2,814,944 | | | | 3,108,291 | |
Interest-bearing deposits | | 1,139,290 | | | | 1,285,570 | | | | 1,520,397 | | | | 1,875,546 | | | | 2,267,901 | |
Total deposits | | 1,584,086 | | | | 1,709,578 | | | | 1,921,382 | | | | 2,252,728 | | | | 2,592,730 | |
Other borrowings | | 80,632 | | | | 70,362 | | | | 56,479 | | | | 94,602 | | | | 103,022 | |
Subordinated debentures | | 46,393 | | | | 81,963 | | | | 81,963 | | | | 81,963 | | | | 81,963 | |
Total shareholders' equity (9) | | 259,187 | | | | 246,056 | | | | 301,589 | | | | 372,215 | | | | 309,778 | |
Common shareholders' equity | | 259,187 | | | | 246,056 | | | | 233,134 | | | | 304,491 | | | | 242,741 | |
Financial Ratios | | | | | | | | | | | | | | | | | | | |
Return on average assets | | 0.86 | % | | | 0.72 | % | | | (2.54) | % | | | 0.38 | % | | | 0.43 | % |
Return on average total shareholders' equity | | 6.90 | | | | 5.71 | | | | (18.33) | | | | 3.16 | | | | 4.20 | |
Return on average common equity | | 6.90 | | | | 5.14 | | | | (23.83) | | | | 2.46 | | | | 3.65 | |
Net interest margin | | 3.19 | | | | 3.64 | | | | 3.74 | | | | 3.67 | | | | 3.38 | |
Efficiency ratio (10) | | 72.50 | | | | 68.46 | | | | 81.74 | | | | 54.99 | | | | 50.45 | |
Average assets per employee (11) | $ | 5,048 | | | $ | 5,317 | | | $ | 6,185 | | | $ | 6,942 | | | $ | 6,411 | |
Selected Financial Data (Continued)
| | | | | | | | | | | | | | | | | | | |
| At December 31, | |
(Dollars in thousands, except per share data) | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
Asset Quality | | | | | | | | | | | | | | | | | | | |
Net loan charge-offs (5) | $ | 2,846 | | | $ | 1,073 | | | $ | 152,646 | | | $ | 32,744 | | | $ | 16,536 | |
Net loan charge-offs to average portfolio loans | | 0.22 | % | | | 0.07 | % | | | 7.01 | % | | | 1.29 | % | | | 0.63 | % |
Noncovered: | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses (5) | $ | 36,607 | | | $ | 46,494 | | | $ | 44,233 | | | $ | 65,229 | | | $ | 62,413 | |
Allowance for loan losses to portfolio loans | | 2.93 | % | | | 3.52 | % | | | 2.62 | % | | | 2.80 | % | | | 2.46 | % |
Nonperforming loans (5) (12) | $ | 18,613 | | | $ | 38,394 | | | $ | 13,549 | | | $ | 107,083 | | | $ | 106,197 | |
Nonperforming loans to portfolio loans | | 1.49 | % | | | 2.91 | % | | | 0.80 | % | | | 4.59 | % | | | 4.18 | % |
Allowance for loan losses to nonperforming loans | | 196.67 | | | | 121.10 | | | | 326.47 | | | | 60.91 | | | | 58.77 | |
Nonperforming assets (5) (13) | $ | 19,173 | | | $ | 49,709 | | | $ | 33,393 | | | $ | 144,805 | | | $ | 124,629 | |
Nonperforming assets to portfolio loans and | | | | | | | | | | | | | | | | | | | |
other real estate | | 1.53 | % | | | 3.73 | % | | | 1.96 | % | | | 6.11 | % | | | 4.87 | % |
Covered: | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses (5) | $ | 56 | | | $ | 224 | | | $ | 451 | | | $ | - | | | $ | - | |
Allowance for loan losses to portfolio loans | | 0.34 | % | | | 0.87 | % | | | 1.20 | % | | | - | % | | | - | % |
Nonperforming loans (5) (8) (12) | $ | 1,259 | | | $ | 3,595 | | | $ | 7,128 | | | $ | 10,806 | | | $ | 13,458 | |
Nonperforming loans to portfolio loans (8) | | 7.66 | % | | | 13.98 | % | | | 18.95 | % | | | 20.15 | % | | | 15.76 | % |
Nonperforming assets (5) (8) (12) | $ | 3,353 | | | $ | 7,238 | | | $ | 11,657 | | | $ | 14,993 | | | $ | 18,206 | |
Nonperforming assets to portfolio loans and | | | | | | | | | | | | | | | | | | | |
other real estate | | 18.10 | % | | | 24.66 | % | | | 27.66 | % | | | 25.93 | % | | | 20.19 | % |
Capital Ratios | | | | | | | | | | | | | | | | | | | |
Average shareholders' equity to average assets | | | | | | | | | | | | | | | | | | | |
Total | | 12.45 | % | | | 12.64 | % | | | 13.84 | % | | | 11.99 | % | | | 10.34 | % |
Common | | 12.45 | | | | 10.80 | | | | 11.31 | | | | 9.74 | | | | 8.11 | |
Tier I capital to risk-weighted assets (5) (14) | | 20.28 | | | | 20.28 | | | | 19.51 | | | | 17.78 | | | | 13.28 | |
Total capital to risk-weighted assets (5) (14) | | 21.59 | | | | 21.56 | | | | 20.78 | | | | 19.06 | | | | 14.55 | |
Leverage ratio (14) | | 14.86 | | | | 15.01 | | | | 14.50 | | | | 15.55 | | | | 12.42 | |
(1) Provision for loan losses includes $74.9 million and noninterest expense includes $23.6 million from the sales of loans and other real estate transactions that occurred in December 2011.
(2) Noninterest income in 2009 includes $3.3 million resulting from the gain on acquisition related to the FDIC-assisted acquisition.
(3) Noninterest expense for 2010 includes the $5.6 goodwill impairment on the Kansas segment.
(4) Preferred stock - declared and paid includes a one-time non-cash equity charge of $1.2 million for 2012 to reflect the accelerated accretion of the remaining discount on the Series B Preferred securities repurchased in August of 2012. Please see “Note 12 Shareholders’ Equity” in the Notes to the Consolidated Financial Statements.
(5) At period end.
(6) Net of unearned discounts but before deduction of allowance for loan losses.
(7) Total loans include loans held for sale.
(8) These loans are covered by the FDIC loss share agreements, including the amount of expected reimbursements from the FDIC, and are shown net of unearned discounts. Please see “Note 3 Loans and Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements.
(9) Reflects the repurchase of preferred securities in 2012, issuance of common stock through an offering in 2010. Please see “Capital Resources” on page 43 and “Note 12 Shareholders’ Equity” in the Notes to the Consolidated Financial Statements.
(10) The efficiency ratio = noninterest expenses / (net interest income + total noninterest income) as shown on the Consolidated Statements of Operations.
(11) Ratio = average assets for year divided by the number of full-time equivalent employees at year-end.
(12) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more, and restructured loans not performing in accordance with restructured terms.
(13) Nonperforming assets consist of nonperforming loans and other real estate.
(14) 2010 reflects the effects of capital raised through the public common stock offering. Please see “Note 12 Shareholders’ Equity” and “Note 14 Capital Requirements and Regulatory Matters” in the Notes to the Consolidated Financial Statements.
| For the Quarter Ended |
(Dollars in thousands, except per share data) | 12-31-13 | | 09-30-13 | | 06-30-13 | | 03-31-13 |
Operations Data | | | | | | | | | | | |
Interest income | $ | 18,578 | | $ | 18,135 | | $ | 18,264 | | $ | 18,937 |
Interest expense | | 1,941 | | | 2,862 | | | 3,130 | | | 3,331 |
Net interest income | | 16,637 | | | 15,273 | | | 15,134 | | | 15,606 |
Provision for loan losses | | (6,502) | | | (329) | | | (876) | | | 498 |
Gain on sales of securities and loans | | 385 | | | 619 | | | 831 | | | 814 |
Noninterest income | | 2,683 | | | 2,928 | | | 2,660 | | | 2,723 |
Noninterest expenses | | 15,065 | | | 13,019 | | | 12,839 | | | 14,388 |
Income before taxes | | 11,142 | | | 6,130 | | | 6,662 | | | 4,257 |
Taxes on income | | 4,310 | | | 2,330 | | | 2,248 | | | 1,868 |
Net income | $ | 6,832 | | $ | 3,800 | | $ | 4,414 | | $ | 2,389 |
Net income available to common shareholders | $ | 6,832 | | $ | 3,800 | | $ | 4,414 | | $ | 2,389 |
Per Share Data | | | | | | | | | | | |
Basic earnings per common share | $ | 0.35 | | $ | 0.19 | | $ | 0.22 | | $ | 0.12 |
Diluted earnings per common share | | 0.35 | | | 0.19 | | | 0.22 | | | 0.12 |
Weighted average common shares outstanding | | | | | | | | | | | |
Basic | | 19,517,264 | | | 19,492,171 | | | 19,492,020 | | | 19,451,490 |
Diluted | | 19,517,264 | | | 19,492,171 | | | 19,492,020 | | | 19,451,490 |
| | | | | | | | | | | |
| For the Quarter Ended |
(Dollars in thousands, except per share data) | 12-31-12 | | 09-30-12 | | 06-30-12 | | 03-31-12 |
Operations Data | | | | | | | | | | | |
Interest income | $ | 21,008 | | $ | 22,616 | | $ | 24,040 | | $ | 25,507 |
Interest expense | | 3,723 | | | 3,934 | | | 4,293 | | | 4,658 |
Net interest income | | 17,285 | | | 18,682 | | | 19,747 | | | 20,849 |
Provision for loan losses | | 3,085 | | | (1,726) | | | 32 | | | 1,716 |
Gain on sales of securities and loans | | 1,712 | | | 1,106 | | | 617 | | | 535 |
Noninterest income | | 3,159 | | | 2,844 | | | 2,984 | | | 2,979 |
Noninterest expenses | | 17,653 | | | 14,591 | | | 16,769 | | | 14,309 |
Income before taxes | | 1,418 | | | 9,767 | | | 6,547 | | | 8,338 |
Taxes on income | | 446 | | | 3,880 | | | 2,430 | | | 3,127 |
Net income | $ | 972 | | $ | 5,887 | | $ | 4,117 | | $ | 5,211 |
Net income available to common shareholders | $ | 972 | | $ | 4,344 | | $ | 3,011 | | $ | 4,119 |
Per Share Data | | | | | | | | | | | |
Basic earnings per common share | $ | 0.05 | | $ | 0.22 | | $ | 0.15 | | $ | 0.21 |
Diluted earnings per common share | | 0.05 | | | 0.22 | | | 0.15 | | | 0.21 |
Weighted average common shares outstanding | | | | | | | | | | | |
Basic | | 19,397,573 | | | 19,447,952 | | | 19,446,086 | | | 19,444,698 |
Diluted | | 19,397,573 | | | 19,447,952 | | | 19,446,086 | | | 19,444,698 |
item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The purpose of this discussion and analysis is to provide an understanding of our financial results and condition through the eyes of management for the year ended December 31, 2013. This report should be read in conjunction with our Consolidated Financial Statements including the notes thereto, and the other financial information appearing elsewhere in this report.
Executive Summary
We are a financial holding company for Bank SNB, National Association, which has been providing banking services since 1894. Through Bank SNB, we have twenty-three 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.
Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations.
Business Strategy
Our bank has and will continue to position itself for future growth. We seek to produce consistent and sustainable revenue growth by enhancing, clarifying, and expanding our geographic markets and increasing and diversifying our revenue base. This consists of, but is not limited to: building out existing markets with robust and profitable growth potential; expanding our professional team; identifying, targeting, and acquiring earning assets under appropriate risk guidelines; and continuing to source, evaluate, and execute acquisitions.
We also seek to provide customers with exceptional service while, at the same time, improving operating efficiency. Over many years, we have refined our approach to customer service by listening to our customers’ needs and desires. We actively seek to make the customer experience consistent over time and across all of our locations. We improve operating efficiency by focusing on internal policy, process and procedure, along with technology, with the goal of continuous improvement while providing an exceptional experience to our clients. We build close relationships with businesses and their principals, business professionals and individuals by providing personalized financial solutions that gives them more control over their financial futures. We also apply a philosophy of continuous improvement to internal and external information reporting to improve our decision making processes and product delivery.
Another major component of our strategy is to be an employer of choice in our markets. We aim to employ talented and devoted people who embrace our vision and feel invested in our success. As of December 31, 2013, we employed 402 people on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others.
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.
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 December 31, 2013, approximately $417.4 million, or 33%, of our non-covered loans were loans to individuals and businesses in the healthcare industry. We conduct regular market reviews of current and potential healthcare lending business and make determinations with respect to the appropriate concentrations within healthcare based upon economic and regulatory conditions.
As of December 31, 2013, approximately 60% of our loan portfolio was concentrated in commercial real estate. 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, high unemployment rate, uncertainty over government regulation and fiscal policy, and a concern about the rising cost of debt capital are all industry risk factors.
Economic Overview
The United States economy continued to indicate a steady upward trend, despite the relatively slow pace of overall growth in 2013. Growth is expected to accelerate in 2014, driven by an increase in consumption, further investment growth, a resilient housing market, and abating uncertainty. Of equal importance, the economy suggests tepid inflationary pressures and less urgency for the Federal Reserve to hike interest rates despite improving growth. With subdued indications of inflation, the U.S. government has provided accommodative economic policy to support progression in the economy and further reduction in the unemployment rate. National unemployment rates have improved from 7.8% in December of 2012 to 7.0% in December of 2013, but are still above targeted rates. For 2013, job growth was steady but modest. Long-term and short-term interest rates remained low throughout the year, albeit with bouts of volatility, and are likely to rise in 2014.
The banking environment is changing rapidly. Industry consolidation is occurring due to factors such as increased regulatory pressure, declining margins, limited revenue growth, and larger capital requirements. Loan demand across the United States has been advancing slowly for several years, but is expected to grow above 5% in 2014. Deposits had been growing over the last several years but abated during 2013 due to large liquidity holders not getting the yield they were seeking at banks. Also, the low interest rate environment has forced declining margins in the banking system. Mortgage operations boosted many bank’s non-interest income numbers over the last several years, but the growth may taper as the mortgage business has seen lower re-financing numbers and the threat of higher rates in the future could impact earnings negatively. Credit quality improved across all sectors causing banks to release reserves, thus pushing earnings up during 2013.
Significant Developments
In 2013, we took several positive steps to restructure our balance sheet. On May 29, 2013, we repurchased the warrant issued to the United States Department of the Treasury (the “Treasury”) as part of the TARP Capital Purchase Program (the “CPP”) for a purchase price of $2.3 million. The warrant provided the Treasury the right to purchase up to 703,753 shares of our common stock at a price of $14.92 per share. The repurchase of the warrant completes our repurchase of all securities issued to the Treasury in connection with the CPP. In August 2012, we repurchased all of the 70,000 outstanding shares of our Fixed Rate Cumulative Perpetual Preferred Stock issued to the Treasury under the CPP.
Further restructuring of the balance sheet occurred on September 15, 2013, as we redeemed all of the 10.5% trust preferred securities of our subsidiary Southwest Capital Trust II (the “OKSBP Trust Preferred”) pursuant to the optional redemption provisions provided in the documents governing the OKSBP Trust Preferred. The OKSBP Trust Preferred, par value of $34.5 million with a coupon of 10.5%, were redeemed at the liquidation amount of $25 per trust preferred security plus accrued and unpaid distributions to the redemption date of September 15, 2013. We also redeemed $1.07 million in common securities issued by Southwest Capital Trust II and related to the OKSBP Trust Preferred. Following the redemption, our capital levels remain well in excess of the regulatory minimum for well capitalized status. The redemption was funded with cash on hand.
Effective as of the close of business on November 15, 2013, we merged our wholly-owned subsidiary Bank of Kansas with and into our wholly-owned subsidiary Stillwater National. The consolidated bank was renamed and does business in all markets under the new name, Bank SNB. The consolidation and new name unified our brand as one bank to better serve our clients and prepares us for growth in the future.
Results of Operations
Net income (loss) available to common shareholders totaled $17.4 million, or $0.89 diluted per common share, in 2013 compared to $12.4 million, or $0.64 diluted per common share, in 2012 and ($72.5) million, or ($3.73) diluted per common share, in 2011.
The following table presents components of consolidated net income and selected ratios for the years 2013, 2012, and 2011 and the annual changes between those years.
| | | | | | | | | | | | | | | | | | | |
| | | | | 2013 Change | | | | | | 2012 Change | | | | |
(Dollars in thousands, | 2013 | | | From 2012 | | | 2012 | | | From 2011 | | | 2011 | |
except per share data) | | | | | | | | | | | | | | | | | | | |
Operations Data | | | | | | | | | | | | | | | | | | | |
Interest income | $ | 73,914 | | | $ | (19,257) | | | $ | 93,171 | | | $ | (27,574) | | | $ | 120,745 | |
Interest expense | | 11,264 | | | | (5,344) | | | | 16,608 | | | | (7,805) | | | | 24,413 | |
Net interest income | | 62,650 | | | | (13,913) | | | | 76,563 | | | | (19,769) | | | | 96,332 | |
Provision for loan losses | | (7,209) | | | | (10,316) | | | | 3,107 | | | | (128,994) | | | | 132,101 | |
Noninterest income | | 13,643 | | | | (2,293) | | | | 15,936 | | | | 1,918 | | | | 14,018 | |
Noninterest expense | | 55,311 | | | | (8,011) | | | | 63,322 | | | | (26,879) | | | | 90,201 | |
Income (loss) before taxes | | 28,191 | | | | 2,121 | | | | 26,070 | | | | 138,022 | | | | (111,952) | |
Taxes on income | | 10,756 | | | | 873 | | | | 9,883 | | | | 53,540 | | | | (43,657) | |
Net income (loss) | $ | 17,435 | | | $ | 1,248 | | | $ | 16,187 | | | $ | 84,482 | | | $ | (68,295) | |
Net income (loss) available | | | | | | | | | | | | | | | | | | | |
to common shareholders | $ | 17,435 | | | $ | 4,989 | | | $ | 12,446 | | | $ | 84,994 | | | $ | (72,548) | |
| | | | | | | | | | | | | | | | | | | |
Per Common Share Data | | | | | | | | | | | | | | | | | | | |
Basic earnings | $ | 0.89 | | | $ | 0.25 | | | $ | 0.64 | | | $ | 4.37 | | | $ | (3.73) | |
Diluted earnings | | 0.89 | | | | 0.25 | | | | 0.64 | | | | 4.37 | | | | (3.73) | |
Financial Condition Data | | | | | | | | | | | | | | | | | | | |
- Averages | | | | | | | | | | | | | | | | | | | |
Investment securities | $ | 377,460 | | | $ | 27,439 | | | $ | 350,021 | | | $ | 86,015 | | | $ | 264,006 | |
Total loans | | 1,315,001 | | | | (252,317) | | | | 1,567,318 | | | | (646,589) | | | | 2,213,907 | |
Interest-earning assets | | 1,965,401 | | | | (139,416) | | | | 2,104,817 | | | | (469,849) | | | | 2,574,666 | |
Total assets | | 2,029,266 | | | | (214,480) | | | | 2,243,746 | | | | (446,739) | | | | 2,690,485 | |
Interest-bearing deposits | | 1,200,094 | | | | (174,892) | | | | 1,374,986 | | | | (364,540) | | | | 1,739,526 | |
Total deposits | | 1,620,441 | | | | (150,636) | | | | 1,771,077 | | | | (346,229) | | | | 2,117,306 | |
Other borrowings | | 74,115 | | | | 12,293 | | | | 61,822 | | | | (22,916) | | | | 84,738 | |
Subordinated debentures | | 71,243 | | | | (10,720) | | | | 81,963 | | | | - | | | | 81,963 | |
Total shareholders' equity | | 252,542 | | | | (30,974) | | | | 283,516 | | | | (88,971) | | | | 372,487 | |
Selected Ratios | | | | | | | | | | | | | | | | | | | |
Return on average assets | | 0.86 | % | | | 0.14 | % | | | 0.72 | % | | | 3.26 | % | | | (2.54) | % |
Return on average total | | | | | | | | | | | | | | | | | | | |
shareholders' equity | | 6.90 | | | | 1.19 | | | | 5.71 | | | | 24.04 | | | | (18.33) | |
Return on average common equity | | 6.90 | | | | 1.77 | | | | 5.14 | | | | 28.97 | | | | (23.83) | |
Net interest margin | | 3.19 | | | | (0.45) | | | | 3.64 | | | | (0.10) | | | | 3.74 | |
Net income available to common shareholders for 2013 increased $5.0 million compared to 2012. The increase was primarily the result of a $10.3 million decrease in provision for loan losses and an $8.0 million decrease in noninterest expense, both due to the resolution of nonperforming loans, potential problem loans, and other real estate during the year. This increase was offset in part by a $2.3 million decrease in noninterest income and a $13.9 million decrease in net interest income primarily due to lower loan volume.
Net income available to common shareholders for 2012 increased $85.0 million compared to 2011. The increase was primarily the result of a $129.0 million decrease in provision for loan losses and a $26.9 million decrease in noninterest expense, both due to the sale of nonperforming loans, potential problem loans, and other real estate during the fourth quarter of 2011. This increase was offset in part by a $1.9 million increase in noninterest income and a $19.8 million decrease in net interest income primarily due to lower loan volume.
Details of the changes in various components of net income are further discussed below.
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue representing 82% of total revenue in 2013. Net interest margin is net interest income as a percentage of average earning assets for the period. Net interest income and net interest margin increase or decrease as a result of changes in the levels of interest rates, the volume and the mix of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets funded by noninterest-bearing funding sources.
The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, has been at 3.25% since 2008. Our loan portfolio is also affected, to a lesser extent, by changes in the London Interbank Offered Rate (“LIBOR”). At December 31, 2013, the one-month and three-month U.S. dollar LIBOR rates were 0.17% and 0.25%, respectively, while at December 31, 2012 these rates were 0.21% and 0.31%, respectively, and at December 31, 2011 these rates were 0.30% and 0.58%, respectively.
The intended federal fund rate, which is the cost of immediately available overnight funds, fluctuates in a similar manner to the prime interest rate. It has been at or below 0.25% since 2008.
Net interest income for 2013 was $62.7 million, a decrease of $13.9 million, or 18%, from the $76.6 million earned in 2012. Net interest margin was 3.19% for the year ended December 31, 2013, a decrease of 45 basis points from 2012. Net interest income for 2012 was $76.6 million, a decrease of $19.8 million, or 21%, from the $96.3 million earned in 2011. Net interest margin was 3.64% for the year ended December 31, 2012, a decrease of ten basis points from 2011. The decline in net interest income for 2013 and 2012 was due to the decrease in interest earning assets, primarily loans, and the continued repricing of existing loans and deposits as interest rates remain at historical lows. The yield on noncovered loans decreased to 4.99% for 2013 from 5.36% for 2012 primarily as a result of the reduction in the loan portfolio offset in part by a decrease in nonaccrual loans.
Interest rate spread, which represents the difference between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities, was 2.92% for 2013, compared to 3.34% for 2012, and 3.41% for 2011.
We have seen growth in noninterest-bearing deposit accounts, which are a core funding source with our interest-bearing deposits and other borrowings. The average balance of noninterest-bearing deposit accounts increased to $420.3 million in 2013 from $396.1 million in 2012 and $377.8 million in 2011.
For further analysis of asset sensitivity please see tables showing the effects of changes in interest rates and changes in volume of interest related assets and liabilities on page 30 of this report and the discussion of Quantitative and Qualitative Disclosures about Market Risk on page 46 of this report.
The following table provides information relating to our average consolidated statements of financial condition and reflects the interest income on interest-earning assets, interest expense of interest-bearing liabilities, and the average yields earned and rates paid for the periods indicated. Yields and rates are derived by dividing income or expense reflected in our Consolidated Statements of Operations by the average daily balance of the related assets or liabilities, respectively, for the periods presented. Nonaccrual loans have been included in the average balances of total loans.
The changes in the composition of interest-earning assets and their funding sources reflect market demand and management’s efforts to maximize net interest margin while controlling interest rate, credit, and other risks.
Consolidated Average Balances, Yields and Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the twelve months ended December 31, |
| 2013 | | 2012 | | 2011 |
| Average | | | | | Average | | Average | | | | | Average | | Average | | | | | Average |
(Dollars in thousands) | Balance | | Interest | | Yield/Rate | | Balance | | Interest | | Yield/Rate | | Balance | | Interest | | Yield/Rate |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noncovered loans (1) (2) | $ | 1,293,596 | | $ | 64,555 | | 4.99 | % | | $ | 1,536,494 | | $ | 82,288 | | 5.36 | % | | $ | 2,168,458 | | $ | 109,839 | | 5.07 | % |
Covered loans (1) | | 21,405 | | | 1,607 | | 7.51 | | | | 30,824 | | | 2,314 | | 7.51 | | | | 45,449 | | | 3,384 | | 7.45 | |
Investment securities (2) | | 377,460 | | | 6,655 | | 1.76 | | | | 350,021 | | | 7,814 | | 2.23 | | | | 264,006 | | | 6,973 | | 2.64 | |
Other interest-earning assets | | 272,940 | | | 1,097 | | 0.40 | | | | 187,478 | | | 755 | | 0.40 | | | | 96,753 | | | 549 | | 0.57 | |
Total interest-earning assets | | 1,965,401 | | | 73,914 | | 3.76 | | | | 2,104,817 | | | 93,171 | | 4.43 | | | | 2,574,666 | | | 120,745 | | 4.69 | |
Other assets | | 63,865 | | | | | | | | | 138,929 | | | | | | | | | 115,819 | | | | | | |
Total assets | $ | 2,029,266 | | | | | | | | $ | 2,243,746 | | | | | | | | $ | 2,690,485 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 122,106 | | $ | 148 | | 0.12 | % | | $ | 114,974 | | $ | 219 | | 0.19 | % | | $ | 108,808 | | $ | 382 | | 0.35 | % |
Money market accounts | | 420,767 | | | 790 | | 0.19 | | | | 381,292 | | | 1,077 | | 0.28 | | | | 483,373 | | | 2,154 | | 0.45 | |
Savings accounts | | 39,397 | | | 44 | | 0.11 | | | | 35,741 | | | 53 | | 0.15 | | | | 29,862 | | | 49 | | 0.16 | |
Time deposits | | 617,824 | | | 4,577 | | 0.74 | | | | 842,979 | | | 8,354 | | 0.99 | | | | 1,117,483 | | | 14,208 | | 1.27 | |
Total interest-bearing deposits | | 1,200,094 | | | 5,559 | | 0.46 | | | | 1,374,986 | | | 9,703 | | 0.71 | | | | 1,739,526 | | | 16,793 | | 0.97 | |
Other borrowings | | 74,115 | | | 892 | | 1.20 | | | | 61,822 | | | 895 | | 1.45 | | | | 84,738 | | | 1,799 | | 2.12 | |
Subordinated debentures | | 71,243 | | | 4,813 | | 6.76 | | | | 81,963 | | | 6,010 | | 7.33 | | | | 81,963 | | | 5,821 | | 7.10 | |
Total interest-bearing liabilities | | 1,345,452 | | | 11,264 | | 0.84 | | | | 1,518,771 | | | 16,608 | | 1.09 | | | | 1,906,227 | | | 24,413 | | 1.28 | |
Noninterest-bearing demand deposits | | 420,347 | | | | | | | | | 396,091 | | | | | | | | | 377,780 | | | | | | |
Other liabilities | | 10,925 | | | | | | | | | 45,368 | | | | | | | | | 33,991 | | | | | | |
Shareholders' equity | | 252,542 | | | | | | | | | 283,516 | | | | | | | | | 372,487 | | | | | | |
Total liabilities and shareholders' equity | $ | 2,029,266 | | | | | | | | $ | 2,243,746 | | | | | | | | $ | 2,690,485 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income and interest rate spread | | | | $ | 62,650 | | 2.92 | % | | | | | $ | 76,563 | | 3.34 | % | | | | | $ | 96,332 | | 3.41 | % |
Net interest margin (3) | | | | | | | 3.19 | % | | | | | | | | 3.64 | % | | | | | | | | 3.74 | % |
Ratio of average interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
to average interest-bearing liabilities | | 146.08 | % | | | | | | | | 138.59 | % | | | | | | | | 135.07 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Yields, interest rate spreads, and net interest margins are calculated using income recorded in accordance with GAAP. | |
(2) Fees included in interest income on loans receivable are not considered material. | |
(3) Net interest margin = net interest income / total average interest-earning assets. | |
The following table analyzes our changes in interest income and interest expense for the periods indicated. Information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period’s rate); and (ii) changes in rates (changes in rate multiplied by prior period’s volume). Changes in rate-volume (changes in rate multiplied by changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
Effect of Volume and Rate Changes on Net Interest Income
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 2013 vs. 2012 | | 2012 vs. 2011 |
| Increase | | Due to Change | | Increase | | Due to Change |
| Or | | In Average: | | Or | | In Average: |
| (Decrease) | | Volume | | Rate | | (Decrease) | | Volume | | Rate |
Interest earned on: | | | | | | | | | | | | | | | | | |
Noncovered loans receivable (1) | $ | (17,733) | | $ | (12,389) | | $ | (5,344) | | $ | (27,551) | | $ | (33,544) | | $ | 5,993 |
Covered loans receivable | | (707) | | | (707) | | | - | | | (1,070) | | | (1,098) | | | 28 |
Investment securities | | (1,159) | | | 578 | | | (1,737) | | | 842 | | | 2,033 | | | (1,192) |
Other interest-earning assets | | 342 | | | 343 | | | (1) | | | 205 | | | 401 | | | (195) |
Total interest income | | (19,257) | | | (12,175) | | | (7,082) | | | (27,574) | | | (21,089) | | | (6,485) |
| | | | | | | | | | | | | | | | | |
Interest paid on: | | | | | | | | | | | | | | | | | |
Interest-bearing demand | | (71) | | | 13 | | | (84) | | | (163) | | | 21 | | | (184) |
Money market accounts | | (287) | | | 103 | | | (390) | | | (1,077) | | | (394) | | | (683) |
Savings accounts | | (9) | | | 5 | | | (14) | | | 4 | | | 9 | | | (5) |
Time deposits | | (3,777) | | | (1,956) | | | (1,821) | | | (5,854) | | | (3,103) | | | (2,751) |
Other borrowings | | (3) | | | 162 | | | (165) | | | (904) | | | (415) | | | (489) |
Subordinated debentures | | (1,197) | | | (747) | | | (450) | | | 189 | | | - | | | 189 |
Total interest expense | | (5,344) | | | (2,421) | | | (2,923) | | | (7,805) | | | (4,540) | | | (3,265) |
| | | | | | | | | | | | | | | | | |
Net interest income | $ | (13,913) | | $ | (9,754) | | $ | (4,159) | | $ | (19,769) | | $ | (16,549) | | $ | (3,220) |
| | | | | | | | | | | | | | | | | |
(1) Average balances included nonaccrual loans. Fees included in interest income on loans receivable are not considered material. Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis, because it is not considered material. |
Provision for Loan Losses
The provision for loan losses is the amount that, based on our judgment, is required to maintain the allowance for loan losses at an appropriate level based upon the inherent risks in the loan portfolio. 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 were $2.8 million for the year ended December 31, 2013, $1.1 million for the year ended December 31, 2012, and $152.6 million for the year ended December 31, 2011. Included in 2011 net charge-offs was $88.6 million resulting from the fourth quarter 2011 sale of nonperforming assets. The provisions for loan losses was a credit of ($7.2) million for the year ended December 31, 2013, $3.1 million for the year ended December 31, 2012, and $132.1 million for the year ended December 31, 2011. Included in the 2011 provision for loan losses was $74.9 million resulting from the fourth quarter 2011 sale of nonperforming assets.
See the section captioned “Allowance for Loan Losses” on page 40 of this report for further analysis of the provision for loss losses.
Noninterest Income
Noninterest income was $13.6 million for 2013, a decrease of $2.3 million, or 14%, from 2012. Noninterest income was $15.9 million for 2012, an increase of $1.9 million, or 14%, when compared with 2011.
| | | | | | | | | | | | | | |
| | | | 2013 Change | | | | | 2012 Change | | | |
(Dollars in thousands) | 2013 | | From 2012 | | 2012 | | From 2011 | | 2011 |
Service charges and fees | $ | 10,491 | | $ | (1,068) | | $ | 11,559 | | $ | (516) | | $ | 12,075 |
Other noninterest income | | 503 | | | 96 | | | 407 | | | 122 | | | 285 |
Gain on sales of loans | | 2,649 | | | (484) | | | 3,133 | | | 1,475 | | | 1,658 |
Gain on sales/calls of investment securities | | - | | | (837) | | | 837 | | | 837 | | | - |
Total noninterest income | $ | 13,643 | | $ | (2,293) | | $ | 15,936 | | $ | 1,918 | | $ | 14,018 |
Service charges and fees – Service charges and fees decreased $1.1 million, or 9%, in 2013 as a result of decreased brokerage fees. Service charges and fees decreased $0.5 million, or 4%, in 2012 as a result of decreased overdraft charge and the decrease in the fair market value of mortgage servicing rights.
Other noninterest income – Other noninterest income includes rent income and other miscellaneous income items.
Gain on sales of loans – Gain on sales of loans includes the net gains recognized from the sale of mortgage loans that are classified as held for sale. For 2013, the decrease relates to a decrease in mortgage lending activity during the year. For 2012, the increase relates to our increased mortgage lending activity during the year.
Gain on sales/calls of investment securities – In 2013, sales of investment securities netted to no gains on sales or calls of investment securities. The 2012 gain on sales or calls of investment securities was primarily the result of a single security held at cost. There were no investment securities sold or called in 2011.
Noninterest Expense
Noninterest expense was $55.3 million for 2013, a decrease of $8.0 million, or 13%, from 2012. Noninterest expense was $63.3 million for 2012, a decrease of $26.9 million, or 30%, from 2011.
| | | | | | | | | | | | | | |
| | | | 2013 Change | | | | | 2012 Change | | |
(Dollars in thousands) | 2013 | | From 2012 | | 2012 | | From 2011 | | 2011 |
Salaries and employee benefits | $ | 31,877 | | $ | 1,958 | | $ | 29,919 | | $ | 39 | | $ | 29,880 |
Occupancy | | 10,779 | | | 198 | | | 10,581 | | | (234) | | | 10,815 |
FDIC and other insurance | | 1,764 | | | (767) | | | 2,531 | | | (1,331) | | | 3,862 |
Other real estate, net | | (1,098) | | | (7,663) | | | 6,565 | | | (24,287) | | | 30,852 |
General and administrative | | 11,989 | | | (1,737) | | | 13,726 | | | (1,066) | | | 14,792 |
Total noninterest expense | $ | 55,311 | | $ | (8,011) | | $ | 63,322 | | $ | (26,879) | | $ | 90,201 |
Salaries and employee benefits – Salaries and employee benefits increased $2.0 million, or 7% for 2013 primarily due to an increase in employee benefits costs and incentives. Salaries and employee benefits remained flat for 2012. The number of full-time equivalent employees decreased from 422 at the beginning of the year to 402 as of December 31, 2013. As of December 31, 2012 the number of full-time equivalent employees had decreased to 422 from 435 at the beginning of that year.
Occupancy – Occupancy expense increased $0.2 million, or 2%, in 2013 primarily due to increased data processing expense and increased building rental expense. Occupancy expense decreased $0.2 million, or 2%, in 2012 primarily due to decreased depreciation expense and decreased building rental expense.
FDIC and other insurance – Bank SNB pays deposit insurance premiums to the FDIC based on assessment rates. In 2013, the decrease of $0.8 million, or 30%, from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and the decrease in the assessment rates. In 2012, the decrease of $1.3 million, or 34%, from prior year is primarily the result of the decrease in assets, which is the basis for the premium calculation, and a decrease in the assessment rates. This decrease in the FDIC assessment rates reflects improvement in asset quality for both 2013 and 2012.
Other real estate, net – The $7.7 million decrease in other real estate expense for 2013 is primarily due to the decreased write downs and net gains on sales. The $24.3 million decrease in other real estate expense for 2012 is primarily due to the 2011 fourth quarter sales. Other real estate was $2.7 million at December 31, 2013, $15.0 million at December 31, 2012, and $24.4 million at December 31, 2011. The 2011 other real estate expense includes $23.6 million resulting from the fourth quarter 2011 sale of nonperforming assets.
General and administrative – Other general and administrative expenses decreased $1.7 million, or 13%, in 2013 due to lower consulting fees and legal fees, partially offset by charter consolidation and rebranding expenses. Other general and administrative expenses decreased $1.1 million, or 7%, in 2012 due to lower collections costs and legal fees, partially offset by the prior year settlement of Oklahoma state tax claims for less than the amount accrued.
Operating Segments
| | | | | | | | |
| For the Year Ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Oklahoma banking | $ | 8,754 | | $ | 9,808 | | $ | (7,748) |
Texas banking | | 10,615 | | | 5,484 | | | (58,190) |
Kansas banking | | 646 | | | 660 | | | (6,912) |
Mortgage banking | | 579 | | | 1,062 | | | 374 |
Other operations | | (3,159) | | | (827) | | | 4,181 |
Consolidated net income (loss) | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
| | | | | | | | |
Oklahoma banking | $ | 681,991 | | $ | 652,121 | | $ | 858,212 |
Texas banking | | 366,697 | | | 520,481 | | | 653,199 |
Kansas banking | | 198,992 | | | 174,451 | | | 213,382 |
Mortgage banking | | 23,215 | | | 31,682 | | | 38,695 |
Other operations | | 8 | | | - | | | - |
Consolidated total loans | $ | 1,270,903 | | $ | 1,378,735 | | $ | 1,763,488 |
| | | | | | | | |
Oklahoma banking | $ | 686,736 | | $ | 664,607 | | $ | 888,839 |
Texas banking | | 361,058 | | | 515,675 | | | 653,146 |
Kansas banking | | 203,631 | | | 178,291 | | | 219,481 |
Mortgage banking | | 26,162 | | | 34,304 | | | 40,876 |
Other operations | | 703,836 | | | 729,378 | | | 574,934 |
Consolidated total assets | $ | 1,981,423 | | $ | 2,122,255 | | $ | 2,377,276 |
| | | | | | | | |
Oklahoma banking | $ | 1,113,715 | | $ | 1,254,348 | | $ | 1,406,361 |
Texas banking | | 207,227 | | | 166,919 | | | 156,101 |
Kansas banking | | 247,884 | | | 270,368 | | | 276,757 |
Mortgage banking | | 1,895 | | | 2,420 | | | 1,430 |
Other operations | | 13,365 | | | 15,523 | | | 80,733 |
Consolidated total deposits | $ | 1,584,086 | | $ | 1,709,578 | | $ | 1,921,382 |
We have five reportable operating segments: Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. Prior to 2013, the Mortgage Banking segment included all loans available for sale in the secondary market. These business segments were identified through the products and services that are offered within each segment and the geographic area they serve.
Effective January 1, 2013, portfolio loans are allocated based upon the geographic location of the relationship manager.
The contribution of the Oklahoma Banking segment decreased $1.1 million in 2013 as a result of an $3.2 million decrease in net interest income and a $0.8 million decrease in noninterest income, offset in part by a $1.4 million decrease in noninterest expense, a $0.9 million decrease in the provision for loan losses and a $0.6 million decrease in income tax expense. The contribution of the Oklahoma Banking segment increased $17.6 million in 2012 as a result of a $26.6 million decrease in the provision for loan losses and a $7.0 million decrease in noninterest expense, offset in part by a $10.9 million increase in income tax expense and a $5.1 million decrease in net interest income.
The contribution of the Texas Banking segment increased $5.1 million in 2013 as a result of a $11.8 million decrease in the provision for loan losses and a $3.4 million decrease in noninterest expense, offset in part by a $6.2 million decrease in net interest income, a $3.2 million increase in income tax expense, and a $0.5 million decrease in noninterest income. The contribution of the Texas Banking segment increased $63.7 million in 2012 as a result of a $93.0 million decrease in the provision for loan losses and a $15.9 million decrease in noninterest expense, offset in part by a $40.5 million increase in income tax expense and a $4.6 million decrease in net interest income.
The contribution of the Kansas Banking segment remained flat in 2013, primarily as a result of a $2.3 million increase in the provision for loan losses and a $0.5 million decrease in noninterest income, offset in part by a $1.9 million decrease in noninterest expense and a $0.9 million increase in net interest income. The contribution of the Kansas Banking segment increased $7.6 million in 2012, primarily as a result of a $9.4 million decrease in the provision for loan losses and a $5.4
million decrease in noninterest expense, offset in part by a $4.8 million increase in income tax expense and a $2.7 million decrease in net interest income.
At December 31, 2013, our eleven Oklahoma offices accounted for $682.0 million in loans, or 54% of total portfolio loans, our five Texas offices accounted for $366.7 million in loans, or 29% of total portfolio loans, and our seven Kansas offices accounted for $199.0 million in loans, or 16% of total portfolio loans.
The Mortgage Banking segment contributed net income of $0.6 million and $1.1 million in 2013 and 2012, respectively. The decrease is primarily a result of decreased noninterest income from the sales of loans held for sale.
For 2013 and 2012, the Other Operations segment, which includes our funds management unit and corporate investments, incurred a loss of $3.2 million and $0.8 million, respectively. The decrease is primarily a result of decreased net interest income. The value of funds provided and cost of funds borrowed from the funds management unit by the operating segments are internally priced at rates that approximate market rates for funds with similar duration.
The Oklahoma Banking, Texas Banking, and Kansas Banking segments provide the majority of consolidated net interest income and net earnings, and for the year ended December 31, 2013 accounted for approximately $1.3 billion, or 63%, of total assets.
The segment disclosures are based upon a number of assumptions and allocations of expense. We allocate resources and evaluate performance of our segments after allocation of funds, indirect expenses, taxes, and capital costs. Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk factors.
Taxes on Income
The income tax expense for 2013 totaled $10.8 million, compared to income tax expense of $9.9 million for 2012 and income tax benefit for 2011 of ($43.7) million. The income tax expense (benefit) fluctuates in relation to pre-tax income levels. The effective tax rate for the year ended December 31, 2013 was 38.2%, compared to 37.9% for the year ended December 31, 2012 and (39.0%) for the year ended December 31, 2011. Our effective tax rate differs from the statutory rates primarily due to our investments in bank qualified municipal securities offset in part by certain non-deductible expense items.
Total Assets
Our total assets decreased by $140.8 million, or 7%, to $2.0 billion at December 31, 2013, compared to $2.1 billion at December 31, 2012 after decreasing by $255.0 million, or 11%, between December 31, 2011 and December 31, 2012. The decline in assets in 2013 was primarily attributable to the $107.8 million, or 7%, decrease in total loans, a $24.5 million, or 100% decrease in income tax receivable, a 12.3 million or 82% decrease in other real estate properties, and the $13.3 million, or 26%, decrease in other assets, offset in part by the increase in our investment securities portfolio by $17.1 million, or 5%. The decline in assets in 2012 was primarily attributable to the $384.8 million, or 22%, decrease in total loans and the $12.8 million, or 20%, decrease in other assets, offset in part by the increase in our investment securities portfolio by $101.8 million, or 37%.
Investment Securities Portfolio
We maintain an investment securities portfolio consisting of securities issued by U.S. Government sponsored entities, state and political subdivisions, mortgage-backed, asset-backed securities, and other investments. Mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”). Investment securities are held in safekeeping by an independent custodian. Asset-backed securities are collateralized by student loans.
Investment securities assigned to the available for sale portfolio are generally used to supplement our liquidity, provide a prudent yield, and provide collateral for public deposits and other borrowing facilities. Unrealized net gains and losses on available for sale securities are recorded as an adjustment to equity, net of taxes, but are not reflected in our current earnings. If management determines that any impairment in any available for sale security is “other-than-temporary,” a
securities loss will be recognized as a charge to earnings. If a security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31, 2013, we held $382.5 million in securities classified as available for sale with an unrealized loss of $2.9 million, $1.8 million net of taxes, related to these securities included in shareholders’ equity.
Investment securities assigned to the held to maturity portfolio earn a prudent yield, provide liquidity from maturities and paydowns, and provide collateral to pledge for federal, state, and local government deposits and other borrowing facilities. The held to maturity investment portfolio at December 31, 2013 included $11.7 million in fixed-rate securities. If management determines any impairment in any held to maturity security is “other-than-temporary,” a securities loss will be recognized as a charge to earnings.
We had no trading securities at December 31, 2013, 2012, or 2011.
A summary of the investment securities portfolio is as follows for the years ended December 31, 2013, 2012, and 2011.
| | | | | | | | |
| At December 31, |
(Dollars in thousands) | | 2013 | | | 2012 | | | 2011 |
Federal agency securities | | 120,773 | | | 115,614 | | | 65,553 |
Obligations of states and political subdivisions | | 44,356 | | | 48,355 | | | 26,355 |
Residential mortgage-backed securities | | 183,170 | | | 203,675 | | | 182,147 |
Asset-backed securities | | 9,482 | | | 7,671 | | | - |
Other investments | | 36,418 | | | 1,797 | | | 1,297 |
Total investment securities | $ | 394,199 | | $ | 377,112 | | $ | 275,352 |
| | | | | | | | |
Available for sale (fair value) | | 382,479 | | | 364,315 | | | 260,100 |
Held to maturity (amortized cost) | | 11,720 | | | 12,797 | | | 15,252 |
Total investment securities | $ | 394,199 | | $ | 377,112 | | $ | 275,352 |
We do not have any material amounts of investment securities or other interest-earning assets, other than loans, that would have been classified as nonperforming if such assets were loans or which were recognized by management as potential problem assets based upon known information about possible credit problems of the borrower or issuer.
The following table shows the maturities, carrying value (amortized cost for investment securities being held to maturity or estimated fair value for investment securities available for sale), estimated fair market values, and average yields for our investment portfolio at December 31, 2013. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed securities are based on expected maturities. Expected maturities differ from contractual maturities because borrowers of the underlying mortgages may have the right to call or prepay obligations with or without prepayment penalties. The securities of no single issuer (other than the United States or its agencies), or in the case of securities issued by state and political subdivisions, no source or group of sources of repayment, accounted for more than 10% of our shareholders’ equity at December 31, 2013.
| | | | | | | | After One | | After Five | | | | | | | | | | | | | | | |
| One Year | | | Year through | | Years through | | After | | Total Investment |
| or Less | | | Five Years | | Ten Years | | Ten Years | | Securities |
(Dollars in thousands) | Cost | | Yield | | | Cost | | Yield | | Cost | | Yield | | Cost | | Yield | | Cost | | Market | | Yield |
Held to Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of states and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
political subdivisions | $ | 1,941 | | 1.79 | % | | $ | 2,227 | | 2.30 | % | | $ | 4,151 | | 2.43 | % | | $ | 3,401 | | 3.65 | % | | $ | 11,720 | | $ | 12,115 | | 2.65 | % |
Total Held to Maturity | $ | 1,941 | | 1.79 | % | | $ | 2,227 | | 2.30 | % | | $ | 4,151 | | 2.43 | % | | $ | 3,401 | | 3.65 | % | | $ | 11,720 | | $ | 12,115 | | 2.65 | % |
Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal agency securities | $ | 5,926 | | 1.28 | % | | $ | 24,161 | | 1.19 | % | | $ | 69,655 | | 1.72 | % | | $ | 23,590 | | 1.08 | % | | $ | 123,332 | | $ | 120,773 | | 1.47 | % |
Obligations of states and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
political subdivisions | | 509 | | 1.20 | | | | 3,823 | | 2.23 | | | | 22,011 | | 2.51 | | | | 7,342 | | 3.18 | | | | 33,685 | | | 32,636 | | 2.60 | |
Residential mortgage- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
backed securities | | 13,121 | | 1.45 | | | | 128,197 | | 2.04 | | | | 37,496 | | 1.28 | | | | 4,698 | | 2.60 | | | | 183,512 | | | 183,170 | | 2.42 | |
Asset-backed securities | | - | | - | | | | - | | - | | | | - | | - | | | | 9,578 | | 0.77 | | | | 9,578 | | | 9,482 | | 0.77 | |
Other securities | | 1,250 | | - | | | | 11,295 | | - | | | | 22,771 | | - | | | | - | | - | | | | 35,316 | | | 36,418 | | 1.27 | |
Total Available for Sale | $ | 20,806 | | 1.31 | % | | $ | 167,476 | | 1.78 | % | | $ | 151,933 | | 1.47 | % | | $ | 45,208 | | 1.51 | % | | $ | 385,423 | | $ | 382,479 | | 1.87 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | $ | 22,747 | | | | | $ | 169,703 | | | | | $ | 156,084 | | | | | $ | 48,609 | | | | | $ | 397,143 | | $ | 394,594 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note: Average yields for investments held for sale is based on amortized cost. Yields on tax-exempt securities are shown on a tax-equivalent basis.
Loan Portfolio
The following table presents the composition of the loan portfolio over the previous five years.
| | | | | | | | | | | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
Noncovered: | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | |
Commercial | $ | 740,997 | | $ | 870,975 | | $ | 1,028,561 | | $ | 1,310,464 | | $ | 1,212,409 |
One-to-four family residential | | 80,058 | | | 70,954 | | | 80,375 | | | 89,800 | | | 114,614 |
Real estate construction: | | | | | | | | | | | | | | |
Commercial | | 143,650 | | | 130,753 | | | 227,098 | | | 441,265 | | | 618,078 |
One-to-four family residential | | 4,646 | | | 3,656 | | | 4,987 | | | 27,429 | | | 41,109 |
Commercial | | 254,087 | | | 240,498 | | | 346,266 | | | 452,626 | | | 520,505 |
Installment and consumer: | | | | | | | | | | | | | | |
Guaranteed student loans | | 4,394 | | | 4,680 | | | 5,396 | | | 5,843 | | | 36,163 |
Other | | 26,644 | | | 31,512 | | | 33,190 | | | 39,060 | | | 39,550 |
| | 1,254,476 | | | 1,353,028 | | | 1,725,873 | | | 2,366,487 | | | 2,582,428 |
Less: Allowance for loan losses | | (36,607) | | | (46,494) | | | (44,233) | | | (65,229) | | | (62,413) |
Total noncovered loans, net | $ | 1,217,869 | | $ | 1,306,534 | | $ | 1,681,640 | | $ | 2,301,258 | | $ | 2,520,015 |
| | | | | | | | | | | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
Covered: | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | |
Commercial | $ | 11,282 | | $ | 18,298 | | $ | 23,686 | | $ | 30,997 | | $ | 39,836 |
One-to-four family residential | | 3,930 | | | 4,881 | | | 7,072 | | | 9,122 | | | 12,630 |
Real estate construction: | | | | | | | | | | | | | | |
Commercial | | 198 | | | 382 | | | 3,746 | | | 6,840 | | | 12,515 |
One-to-four family residential | | - | | | - | | | - | | | 439 | | | 5,324 |
Commercial | | 971 | | | 2,037 | | | 2,841 | | | 5,554 | | | 13,412 |
Installment and consumer | | 46 | | | 109 | | | 270 | | | 676 | | | 1,688 |
| | 16,427 | | | 25,707 | | | 37,615 | | | 53,628 | | | 85,405 |
Less: Allowance for loan losses | | (56) | | | (224) | | | (451) | | | - | | | - |
Total covered loans, net | $ | 16,371 | | $ | 25,483 | | $ | 37,164 | | $ | 53,628 | | $ | 85,405 |
Included in covered loans above are $1.8 million, $6.7 million, $10.1 million, $14.4 million, and $23.9 million for 2013, 2012, 2011, 2010 and 2009, respectively, of loss share receivable from the FDIC.
We have a strategic focus on providing loans and other services to healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. At December 31, 2013 and 2012, loans to individuals and businesses in the healthcare industry totaled $417.4 million, or 33%, and $502.2 million, or 38% of noncovered loans, respectively.
The decline in loans in 2013 was due in part to the change in our lending focus away from larger average size loans and a refocus to our primary markets.
The following table sets forth the remaining maturities for certain loan categories (including loans held for sale) at December 31, 2013. Student loans that do not have stated maturities are treated as due in one year or less. Real estate construction includes certain loans which will convert to permanent financing at the point when construction is completed; these loans are reported according to their final maturity.
| | | | | | | | | | | |
| | | | After one | | | | | | |
| One year | | year through | | After | | | |
(Dollars in thousands) | or less | | five years | | five years | | Total |
Noncovered: | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 206,842 | | $ | 407,829 | | $ | 126,326 | | $ | 740,997 |
One-to-four family residential | | 10,786 | | | 32,720 | | | 36,552 | | | 80,058 |
Real estate construction | | 68,154 | | | 71,419 | | | 8,723 | | | 148,296 |
Commercial | | 80,754 | | | 118,460 | | | 54,873 | | | 254,087 |
Installment and consumer: | | | | | | | | | | | |
Guaranteed student loans | | 4,394 | | | - | | | - | | | 4,394 |
Other | | 13,090 | | | 11,606 | | | 1,948 | | | 26,644 |
Total noncovered | | 384,020 | | | 642,034 | | | 228,422 | | | 1,254,476 |
Covered: | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | |
Commercial | | 3,824 | | | 1,256 | | | 6,202 | | | 11,282 |
One-to-four family residential | | 763 | | | 658 | | | 2,509 | | | 3,930 |
Real estate construction | | 41 | | | - | | | 157 | | | 198 |
Commercial | | 884 | | | 70 | | | 17 | | | 971 |
Installment and consumer | | 39 | | | 7 | | | - | | | 46 |
Total covered | | 5,551 | | | 1,991 | | | 8,885 | | | 16,427 |
Total | $ | 389,571 | | $ | 644,025 | | $ | 237,307 | | $ | 1,270,903 |
As of December 31, 2013 any floating rate loans that reached a contractual floor or ceiling level are treated as fixed rate rather than floating rate until the rate is again free to float. The following table sets forth at December 31, 2013 the dollar amount of all loans due more than one year after December 31, 2013.
| | | | | | | | |
(Dollars in thousands) | Fixed | | Variable | | Total |
Noncovered: | | | | | | | | |
Real estate mortgage: | | | | | | | | |
Commercial | $ | 288,247 | | $ | 245,908 | | $ | 534,155 |
One-to-four family residential | | 40,004 | | | 29,268 | | | 69,272 |
Real estate construction | | 23,354 | | | 56,789 | | | 80,143 |
Commercial | | 74,268 | | | 99,064 | | | 173,332 |
Installment and consumer | | 5,204 | | | 8,350 | | | 13,554 |
Total noncovered | | 431,077 | | | 439,379 | | | 870,456 |
Covered: | | | | | | | | |
Real estate mortgage: | | | | | | | | |
Commercial | | 1,575 | | | 5,883 | | | 7,458 |
One-to-four family residential | | 426 | | | 2,741 | | | 3,167 |
Real estate construction | | - | | | 157 | | | 157 |
Commercial | | 22 | | | 65 | | | 87 |
Installment and consumer | | 7 | | | - | | | 7 |
Total covered | | 2,030 | | | 8,846 | | | 10,876 |
Total | $ | 433,107 | | $ | 448,225 | | $ | 881,332 |
Nonperforming Assets and Potential Problem Loans
The following table shows the amounts of nonperforming assets at the end of the periods indicated. Please see “Note 1 Summary of Significant Accounting and Reporting Polices” in the Notes to the Consolidated Financial Statements for a description of our policy for placing loans on nonaccrual status. Nonperforming troubled debt restructurings are included in nonaccrual loans.
| | | | | | | | | | | | | | | | | | | |
| At December 31, | |
(Dollars in thousands) | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Noncovered: | | | | | | | | | | | | | | | | | | | |
Nonaccrual loans: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 6,564 | | | $ | 18,337 | | | $ | 4,667 | | | $ | 29,996 | | | $ | 28,351 | |
One-to-four family residential | | 456 | | | | 563 | | | | 1,468 | | | | 1,984 | | | | 9,387 | |
Real estate construction | | 2,721 | | | | 3,355 | | | | 3,877 | | | | 67,571 | | | | 57,586 | |
Commercial | | 8,769 | | | | 12,761 | | | | 3,371 | | | | 6,977 | | | | 10,404 | |
Other consumer | | 50 | | | | 88 | | | | 123 | | | | 38 | | | | 159 | |
Total nonaccrual loans | | 18,560 | | | | 35,104 | | | | 13,506 | | | | 106,566 | | | | 105,887 | |
| | | | | | | | | | | | | | | | | | | |
Past due 90 days or more: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | - | | | | - | | | | - | | | | 514 | | | | 100 | |
One-to-four family residential | | - | | | | 747 | | | | 23 | | | | - | | | | 76 | |
Commercial | | 50 | | | | 2,471 | | | | 3 | | | | - | | | | 18 | |
Other consumer | | 3 | | | | 72 | | | | 17 | | | | 3 | | | | 116 | |
Total past due 90 days or more | | 53 | | | | 3,290 | | | | 43 | | | | 517 | | | | 310 | |
Total nonperforming loans | | 18,613 | | | | 38,394 | | | | 13,549 | | | | 107,083 | | | | 106,197 | |
Other real estate | | 560 | | | | 11,315 | | | | 19,844 | | | | 37,722 | | | | 18,432 | |
Total nonperforming assets | $ | 19,173 | | | $ | 49,709 | | | $ | 33,393 | | | $ | 144,805 | | | $ | 124,629 | |
| | | | | | | | | | | | | | | | | | | |
Nonperforming assets to portfolio loans | | | | | | | | | | | | | | | | | | | |
and other real estate | | 1.53 | % | | | 3.73 | % | | | 1.96 | % | | | 6.11 | % | | | 4.87 | % |
Nonperforming loans to portfolio loans | | 1.49 | | | | 2.91 | | | | 0.80 | | | | 4.59 | | | | 4.18 | |
Allowance for loan losses to nonperforming loans | | 196.67 | | | | 121.10 | | | | 326.47 | | | | 60.91 | | | | 58.77 | |
Government-guaranteed portion of nonperforming loans | $ | 72 | | | $ | 76 | | | $ | 76 | | | $ | 10 | | | $ | 277 | |
| | | | | | | | | | | | | | | | | | | |
| At December 31, | |
(Dollars in thousands) | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Covered: | | | | | | | | | | | | | | | | | | | |
Nonaccrual loans: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 1,202 | | | $ | 3,087 | | | $ | 3,554 | | | $ | 4,391 | | | $ | 1,847 | |
One-to-four family residential | | 57 | | | | 52 | | | | 188 | | | | 932 | | | | 2,243 | |
Real estate construction | | - | | | | 130 | | | | 3,009 | | | | 4,897 | | | | 7,525 | |
Commercial | | - | | | | 324 | | | | 370 | | | | 581 | | | | 665 | |
Other consumer | | - | | | | 2 | | | | 7 | | | | 5 | | | | 42 | |
Total nonaccrual loans | | 1,259 | | | | 3,595 | | | | 7,128 | | | | 10,806 | | | | 12,322 | |
| | | | | | | | | | | | | | | | | | | |
Past due 90 days or more: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | - | | | | - | | | | - | | | | - | | | | 542 | |
Real estate construction | | - | | | | - | | | | - | | | | - | | | | 574 | |
Other consumer | | - | | | | - | | | | - | | | | - | | | | 20 | |
Total past due 90 days or more | | - | | | | - | | | | - | | | | - | | | | 1,136 | |
Total nonperforming loans | | 1,259 | | | | 3,595 | | | | 7,128 | | | | 10,806 | | | | 13,458 | |
Other real estate | | 2,094 | | | | 3,643 | | | | 4,529 | | | | 4,187 | | | | 4,748 | |
Total nonperforming assets | $ | 3,353 | | | $ | 7,238 | | | $ | 11,657 | | | $ | 14,993 | | | $ | 18,206 | |
Nonperforming assets to portfolio loans | | | | | | | | | | | | | | | | | | | |
and other real estate | | 18.10 | % | | | 24.66 | % | | | 27.66 | % | | | 25.93 | % | | | 20.19 | % |
Nonperforming loans to portfolio loans | | 7.66 | | | | 13.98 | | | | 18.95 | | | | 20.15 | | | | 15.76 | |
Allowance for loan losses to nonperforming loans | | 4.45 | | | | 6.23 | | | | 6.33 | | | | - | | | | - | |
Government-guaranteed portion of nonperforming loans | $ | 803 | | | $ | 2,456 | | | $ | 4,764 | | | $ | 6,948 | | | $ | 3,853 | |
At December 31, 2013, five credit relationships represented 79% of noncovered nonperforming loans and 76% of noncovered nonperforming assets, while at December 31, 2012, six credit relationships represented 81% of noncovered nonperforming loans and 63% of noncovered nonperforming assets.
Included in noncovered nonaccrual loans as of December 31, 2013 are five collateral dependent lending relationships with aggregate principal balances of approximately $14.6 million and related impairment reserves of $2.9 million which were established based on recent financials and appraisal values obtained. Three of these lending relationships were secured by commercial real estate.
Included in noncovered nonaccrual loans as of December 31, 2012 are six collateral dependent lending relationships with aggregate principal balances of approximately $31.2 million and related impairment reserves of $6.8 million which were established based on recent financials and appraisal values obtained. Five of these lending relationships were secured by commercial real estate.
Noncovered nonperforming assets may fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, collateral values, or factors particular to the borrower. No assurance can be given that additional increases in noncovered nonaccrual loans will not occur in the future.
Performing loans considered potential problem loans, loans which are not included in the past due, nonaccrual, or restructured categories, but for which known information about possible credit problems cause management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, amounted to approximately $99.8 million at December 31, 2013, compared to $97.5 million at December 31, 2012. Included are $1.7 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 in 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. These loans are subject to continued management attention and are considered by management in determining the level of the allowance for loan losses.
Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to us but that have not been identified as
nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets, the provision for loan losses, and charge-offs.
We began 2011 with continued high levels of nonperforming and potential problem assets. In the spring of 2011, we reorganized and took actions intended to strengthen the credit, loan review, and workout functions. During the year, we had success in resolving some credits, but downgrades and new problem assets, mainly driven by real estate appraisal decreases with respect to collateral dependent loans, kept the total levels of unresolved credits unsatisfactorily high. The levels significantly affected our earnings.
The board of directors carefully considered the potential costs and benefits of various alternatives to us and our shareholders, in consultation with financial and legal advisors and management. Management and the board of directors concluded that a sale of assets in the near-term was in the best interests of our shareholders.
Based on this determination, we sold nonperforming loans, potential problem loans, and other real estate with a carrying value before transfer to assets held for sale, of approximately $300.3 million; and sold related other loans with a carrying value before transfer to assets held for sale of $1.3 million during the fourth quarter of 2011.
The loans were transferred to loans held for sale at fair values. The actual sale price reflected a bulk sale discount, which resulted in charge-offs of $88.6 million at the time of transfer. The sales completed in the fourth quarter of 2011 resulted in net proceeds to us of approximately $187.0 million. The results for the year ended December 31, 2011 include a provision for loan losses of $74.9 million and a fair value adjustment in other real estate expenses of $23.6 million in connection with the fourth quarter sales. The provision expense was calculated in accordance with our standard methodology and was based on the amount needed to replenish the allowance for loan losses back to the required level for the remaining loan portfolio.
As of September 30, 2011, the assets sold were loans with an aggregate fair value of $229.5 million and other real estate properties with an aggregate fair value of $67.3 million.
Allowance for Loan Losses
We make provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level we determine is appropriate. The amount of the allowance is based on careful, continuous review and evaluation of the loan portfolio and ongoing quarterly assessments of the probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and GAAP. See “Allowance for Loan Losses” in “Note 1 Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements for a description of our allowance for loan losses methodology.
Based upon this methodology, management established an allowance of $36.6 million, or 2.93% of total noncovered portfolio loans, at December 31, 2013, compared to an allowance of $46.5 million, or 3.52% of total noncovered portfolio loans, at December 31, 2012. This represents a decrease in the allowance of $9.9 million, or 21%.
Changes in the amount of the allowance resulted from the application of the methodology, which is designed to estimate inherent losses on total noncovered portfolio loans, including nonperforming loans. At December 31, 2013, the allowance on the $17.9 million in noncovered nonaccrual loans was $4.3 million (24%), compared with an allowance on the $35.1 million in noncovered nonaccrual loans at December 31, 2012 of $7.7 million (22%), representing an decrease in the allowance of $3.4 million. At December 31, 2013, the allowance on the $42.7 million noncovered performing troubled debt restructured loans was $3.6 million, compared with an allowance on $40.6 million in noncovered performing troubled debt restructured loans of $4.0 million at December 31, 2012, representing a decrease in the allowance of $0.4 million.
Excluding the impaired loans mentioned above, at December 31, 2013, the allowance for the remaining other noncovered loans was $28.7 million (2.4%), compared to $34.8 million (2.7%) at December 31, 2012, creating a decrease in the allowance of $6.1 million. The decrease in the allowance related to these other noncovered loans mainly resulted from the decline in loans and portfolio loss trends. This was partially offset by consideration of certain trends and qualitative factors. These included management’s assessment of economic risk (particularly with respect to commercial and
commercial real estate loans), portfolio loss trends, and asset quality trends, including levels of potential problem loans and loan concentrations in commercial real estate mortgage and construction loans, which together comprised approximately 71% of our noncovered portfolio loans at December 31, 2013. Based on its analysis management believes the amount of the allowance is appropriate.
Covered loans were $16.4 million at December 31, 2013. These loans are subject to protection under the loss sharing agreements with the FDIC and currently have an allowance for loan losses of $0.06 million based on analysis of expected future cash flows and collateral valuations.
At December 31, 2013, the allowance for loan losses was 196.67% of noncovered nonperforming loans, compared to 121.10% of noncovered nonperforming loans at December 31, 2012. Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $18.6 million as of December 31, 2013, a decrease of $16.5 million, or 47%, from December 31, 2012. Noncovered nonaccrual loans at December 31, 2013 were comprised of 32 relationships and were primarily concentrated in commercial loans (47%), commercial real estate loans (35%), and real estate construction (15%) loans. All noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. Covered nonperforming loans of $1.3 million at December 31, 2013 and $3.6 million at December 31, 2012 are subject to protection under the loss share agreements with the FDIC.
The following table presents a five-year history of the allocation of the allowance for loan losses along with the percentage of total noncovered loans in each category.
| | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, | |
(Dollars in thousands) | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | $ | 18,851 | 59 | % | | $ | 27,069 | 64 | % | | $ | 21,609 | 60 | % | | $ | 32,508 | 55 | % | | $ | 26,670 | 47 | % |
One-to-four family | | | | | | | | | | | | | | | | | | | | | | | | |
residential | | 797 | 6 | | | | 792 | 5 | | | | 1,002 | 5 | | | | 1,597 | 4 | | | | 2,454 | 5 | |
Real estate construction | | 5,523 | 12 | | | | 5,271 | 10 | | | | 10,919 | 13 | | | | 19,605 | 20 | | | | 22,241 | 25 | |
Commercial | | 10,985 | 20 | | | | 12,603 | 18 | | | | 9,788 | 20 | | | | 10,605 | 19 | | | | 10,052 | 20 | |
Installment and consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Guaranteed student loans | | - | - | | | | - | - | | | | - | - | | | | - | - | | | | - | 1 | |
Other | | 451 | 3 | | | | 759 | 3 | | | | 915 | 2 | | | | 914 | 2 | | | | 996 | 2 | |
Total | $ | 36,607 | 100 | % | | $ | 46,494 | 100 | % | | $ | 44,233 | 100 | % | | $ | 65,229 | 100 | % | | $ | 62,413 | 100 | % |
The following table analyzes our noncovered allowance for loan losses for the periods indicated.
| | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | |
(Dollars in thousands) | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
Balance at beginning of period | $ | 46,494 | | | $ | 44,233 | | | $ | 65,229 | | | $ | 62,413 | | | $ | 39,773 | |
| | | | | | | | | | | | | | | | | | | |
Loans charged-off: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 741 | | | | 2,158 | | | | 71,066 | | | | 4,571 | | | | 3,622 | |
One-to-four family residential | | 578 | | | | 268 | | | | 346 | | | | 2,649 | | | | 1,476 | |
Real estate construction | | (246) | | | | - | | | | 62,070 | | | | 20,910 | | | | 7,464 | |
Commercial | | 8,599 | | | | 4,448 | | | | 22,103 | | | | 5,182 | | | | 5,223 | |
Other consumer | | 267 | | | | 649 | | | | 1,040 | | | | 1,127 | | | | 1,128 | |
Total charge-offs | | 9,939 | | | | 7,523 | | | | 156,625 | | | | 34,439 | | | | 18,913 | |
| | | | | | | | | | | | | | | | | | | |
Recoveries: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 171 | | | | 58 | | | | 411 | | | | 204 | | | | 438 | |
One-to-four family residential | | 252 | | | | 260 | | | | 67 | | | | 234 | | | | 430 | |
Real estate construction | | 4,527 | | | | 1,972 | | | | 1,521 | | | | 610 | | | | 344 | |
Commercial | | 2,049 | | | | 3,671 | | | | 1,864 | | | | 421 | | | | 893 | |
Other consumer | | 159 | | | | 495 | | | | 116 | | | | 226 | | | | 272 | |
Total recoveries | | 7,158 | | | | 6,456 | | | | 3,979 | | | | 1,695 | | | | 2,377 | |
| | | | | | | | | | | | | | | | | | | |
Net loans charged-off | | 2,781 | | | | 1,067 | | | | 152,646 | | | | 32,744 | | | | 16,536 | |
Provision for loan losses | | (7,106) | | | | 3,328 | | | | 131,650 | | | | 35,560 | | | | 39,176 | |
Balance at end of period | $ | 36,607 | | | $ | 46,494 | | | $ | 44,233 | | | $ | 65,229 | | | $ | 62,413 | |
| | | | | | | | | | | | | | | | | | | |
Portfolio loans: | | | | | | | | | | | | | | | | | | | |
Noncovered end of period balance | $ | 1,251,416 | | | $ | 1,321,346 | | | $ | 1,687,178 | | | $ | 2,331,293 | | | $ | 2,539,294 | |
Noncovered average balance | | 1,284,182 | | | | 1,501,164 | | | | 2,131,063 | | | | 2,466,552 | | | | 2,614,045 | |
Ratio of allowance for loan losses to noncovered | | | | | | | | | | | | | | | | | | | |
portfolio loans at end of period | | 2.93 | % | | | 3.52 | % | | | 2.62 | % | | | 2.80 | % | | | 2.46 | % |
Ratio of net charge-offs to noncovered average | | | | | | | | | | | | | | | | | | | |
portfolio loans during the period | | 0.22 | % | | | 0.07 | % | | | 7.16 | % | | | 1.33 | % | | | 0.63 | % |
Short-term Borrowings
Our primary source of short-term borrowings is securities sold under agreements to repurchase. During 2013, 2012, and 2011, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with GAAP, the full notional amounts of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit and are discussed further in “Note 17 Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contractual Obligations” in the Notes to the Consolidated Financial Statements.
We have various contractual obligations that require future cash payment. The following table presents, as of December 31, 2013, significant fixed and determinable contractual obligations to third parties by payment date.
| | | | | | | | | | | | | | |
| Payments due by period |
| Less than | | 1-3 | | 3-5 | | Over | | | |
(Dollars in thousands) | 1 Year | | Years | | Years | | 5 Years | | Total |
Deposits without stated maturity: (1) | | | | | | | | | | | | | | |
Noninterest bearing | $ | 444,796 | | $ | - | | $ | - | | $ | - | | $ | 444,796 |
Interest bearing | | 601,864 | | | - | | | - | | | - | | | 601,864 |
Time deposits (2) | | 381,510 | | | 129,722 | | | 30,831 | | | - | | | 542,063 |
Other borrowings (2) | | 56,487 | | | 1,711 | | | 25,718 | | | - | | | 83,916 |
Subordinated debentures (2) | | 1,488 | | | 2,976 | | | 2,976 | | | 69,656 | | | 77,096 |
Operating leases | | 2,407 | | | 3,248 | | | 214 | | | - | | | 5,869 |
Total | $ | 1,488,552 | | $ | 137,657 | | $ | 59,739 | | $ | 69,656 | | $ | 1,755,604 |
(1) Excludes Interest.
(2) Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2013. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.
At December 31, 2013, the notional or principal amount of such obligations are reflected on the Consolidated Statements of Financial Condition, with the exception of operating leases.
For additional information regarding contractual obligations, please see “Quantitative and Qualitative Disclosures about Market Risk” on page 46 and in the Notes to the Consolidated Financial Statements in this report, “Note 4 Premises and Equipment”, “Note 7 Deposits”, “Note 8 Borrowed Funds” “Note 9 Trust Preferred Securities and Subordinated Debentures”, and “Note 17 Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies”.
Capital Resources
At December 31, 2013, total shareholders’ equity was $259.2 million, compared to $246.1 million at December 31, 2012, an increase of $13.1 million. The increase was primarily due to the $17.4 million of income, offset by other comprehensive loss of $4.7 million, for the year. Net unrealized losses on available for sale investment securities and derivative instruments (net of tax) decreased to ($3.0) million at December 31, 2013, from net unrealized gains of $1.7 million at December 31, 2012.
At December 31, 2012, total shareholders’ equity was $246.1 million, compared to $301.6 million at December 31, 2011 a decrease of $55.5 million. The decrease was primarily due to the $70 million repurchase of our Series B Preferred Securities, offset in part by income, net of preferred dividends, for the year. Net unrealized gains on available for sale investment securities and derivative instruments (net of tax) decreased to $1.7 million at December 31, 2012, from $2.1 million at December 31, 2011.
Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board. The guidelines are commonly known as Risk-Based Capital Guidelines. On December 31, 2013, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 21.59%, a Tier 1 risk-based capital ratio of 20.28%, and a Tier 1 leverage ratio of 14.86%. Banking subsidiaries are also required to maintain capital ratios in accordance with guidelines adopted by their primary regulators. The general regulatory minimums to be well-capitalized are a total capital to risk weighted assets ratio of 10.00%, a Tier I risk-based capital ratio of 6.00%, and a Tier 1 leverage ratio of 5.00%. As of December 31, 2013, we and Bank SNB each met the criteria for classification as a “well-
capitalized” institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of us or Bank SNB by Federal bank regulators. See “Certain Regulatory Matters” below.
Liquidity
Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of highly marketable assets, such as available for sale investments, in order to meet current and future cash flow needs as they become due. Additional sources of liquidity, including cash flow from the repayment of loans and maturities of investment securities, are also considered in determining whether liquidity is satisfactory. Other sources of liquidity can be provided by FHLB/FRB, and correspondent lines of credit. Liquidity is also achieved through growth of deposits and liquid assets and accessibility to the capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, purchase securities, and operate the organization.
The following table indicates the amount of our certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2013:
| | |
(Dollars in thousands) | Amount |
Three months or less (1) | $ | 12,368 |
Over three through six months (1) | | 7,908 |
Over six through 12 months (1) | | 60,128 |
Over 12 months | | 170,781 |
Total | $ | 251,185 |
(1) The amount of certificates of deposits of $100,000 and more that matures within 12 months is $80.4 million.
The following table illustrates, during the years presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of Southwest’s average total assets for the period indicated. Average assets totaled $2.0 billion in 2013, compared to $2.2 billion in 2012 and $2.7 billion in 2011.
| | | | | |
| Percentage of Total Average Assets | |
| 2013 | | | 2012 | |
Sources of Funds: | | | | | |
Deposits: | | | | | |
Noninterest-bearing demand | 20.71 | % | | 17.65 | % |
Interest-bearing demand and money market accounts | 26.75 | | | 22.12 | |
Time and savings deposits | 32.39 | | | 39.16 | |
Other borrowings | 3.65 | | | 2.76 | |
Subordinated debentures | 3.51 | | | 3.65 | |
Other liabilities | 0.54 | | | 2.02 | |
Equity capital | 12.45 | | | 12.64 | |
Total | 100.00 | % | | 100.00 | % |
| | | | | |
Uses of Funds: | | | | | |
Loans | 64.80 | % | | 69.85 | % |
Investment securities | 18.60 | | | 15.60 | |
Other interest-earning assets | 13.45 | | | 8.36 | |
Noninterest-earning assets | 3.15 | | | 6.19 | |
Total | 100.00 | % | | 100.00 | % |
Sources and uses of cash are presented in the Consolidated Statements of Cash Flows on page 53 of this report. Total cash and cash equivalents decreased by $8.2 million to $279.8 million in 2013 from $288.1 million at year-end 2012. This decrease was the net result of cash provided by investing activities of $99.4 million, primarily from a decrease in principal repayments, net of loan originated, and cash provided by operating activities of $45.2 million, offset by cash used in financing activities of $152.8 million, primarily from decreased deposits and other borrowings.
Total cash and cash equivalents increased by $58.2 million to $288.1 million in 2012 from $229.9 million at year-end 2011. This increase was the net result of cash provided by investing activities of $285.3 million, primarily from principal repayments, net of loan originated, and proceeds from sales of loans, and cash provided by operating activities of $45.1 million, offset by cash used in financing activities of $272.3 million, primarily from decreased deposits and other borrowings.
Effects of Inflation
The consolidated financial statements and related consolidated financial data in this report have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry that require the measurement of financial position and operating results in terms of historical dollars without considering fluctuations in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Certain Regulatory Matters
Like all national banks, Bank SNB remains subject to legal and regulatory limitations on the amount of dividends that it may pay without prior approval of the OCC. Under these regulations, the total amount of dividends that may be paid in any calendar year by Bank SNB to us without OCC approval is limited to the current year’s net profits, combined with the retained profits of the preceding two years. Losses experienced in 2011, primarily attributable to the fourth quarter sale of approximately $300.3 million in loans and other real estate, affect Bank SNB’s ability to pay dividends without prior OCC approval. In July 2012, with the consent of the Federal Reserve we terminated the supervisory resolution that was adopted at the request of the Federal Reserve in July 2009. This resolution included providing prior notice to the Federal Reserve of planned dividends to security holders and planned receipts of dividends from our banking subsidiary.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information that is subject to change. Certain policies inherently rely more on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management is required to use estimates, assumptions, and judgments when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available.
The most significant accounting policies we follow are presented in “Note 1 Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management has identified the allowance for loan losses, goodwill and other intangible assets, and income tax accounting policies to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revisions as new information becomes available.
Allowance for Loan Losses – The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310.10.35, Receivables: Subsequent Measurement, which requires that losses be accrued when it is probable that we will not collect all principal and interest payments according to the loan’s contractual terms.
The allowance determination process requires significant judgment. Estimates of probable losses inherent in the loan portfolio can vary significantly from the amounts that actually occur. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by us, periodically review the loan portfolio and the allowance. These reviews may result in additional provisions based on the agencies’ judgments based upon information available at the time of each examination. Because the loan portfolio contains a significant number of commercial mortgage and commercial real estate construction loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in the provision for loan losses and nonperforming assets, and may lead to material increases in charge-offs and the provision for loan losses in future periods.
Our methodology for assessing the appropriateness of the allowance is in accordance with regulatory guidelines and GAAP, as described in “Provision for Loan Losses” on page 31 and in “Note 1 Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements.
Goodwill and Other Intangible Assets – Goodwill and other intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate impairment. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of our reporting units compared with its carrying value. We define reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As of December 31, 2013, we have eight reporting units. If the carrying value exceeds the fair value of a reporting unit, a second test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment.
Other identifiable intangible assets are amortized on an accelerated basis over the years expected to be benefited, which we believe are up to ten years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their carrying value may not be recoverable based on a comparison to fair value. See “Note 5 Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements for further information.
Income Taxes – Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to the income tax laws of the United States and various state jurisdictions. These tax laws are complex and require significant judgment and interpretation by the taxpayer.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet. A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. The determination of the realizability of deferred taxes is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence.
Income tax expense or benefit is estimated based on amounts expected to be owed to the various tax jurisdictions in which we conduct business. On a quarterly basis, management assesses the reasonableness of our effective tax rate based upon the current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The tax expense or benefit is allocated among continuing operations and other comprehensive income (loss), as applicable. See “Note 11 Taxes on Income” in the Notes to the Consolidated Financial Statements for further information.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Our income is largely dependent on our net interest income. We seek to maximize our net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds such as noninterest-bearing deposits and shareholders’ equity.
We attempt to manage interest rate risk while enhancing net interest margin by adjusting our asset/liability position. At times, depending on the level of general interest rates, the relationship between long-term and other interest rates, market conditions, and competitive factors, we may increase our interest rate risk position in order to increase our net interest margin. We monitor interest rate risk and adjust the composition of our rate-sensitive assets and liabilities in order to limit our exposure to changes in interest rates on net interest income over time. Our asset/liability committee reviews our interest rate risk position and profitability and recommends adjustments. Our asset/liability committee also reviews the securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions. Notwithstanding our interest rate risk management activities, the actual magnitude, direction, and relationship of future interest rates are uncertain and can have adverse effects on net income and liquidity.
Interest rate sensitivity analysis measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods.
The following table shows our interest rate sensitivity gaps for selected maturity or repricing periods at December 31, 2013:
| | | | | | | | | | | | | | | | | | | |
| 0 to 3 | | | 4 to 12 | | | Over 1 to | | | Over | | | | | |
(Dollars in thousands) | Months | | | Months | | | 5 Years | | | 5 Years | | | Total | |
Rate-sensitive assets: | | | | | | | | | | | | | | | | | | | |
Total loans | $ | 324,338 | | | $ | 198,913 | | | $ | 571,798 | | | $ | 175,854 | | | $ | 1,270,903 | |
Investment securities | | 90,628 | | | | 14,503 | | | | 44,663 | | | | 244,405 | | | | 394,199 | |
Other investments at costs | | 8,140 | | | | - | | | | - | | | | - | | | | 8,140 | |
Due from banks | | 251,777 | | | | - | | | | - | | | | - | | | | 251,777 | |
Total | | 674,883 | | | | 213,416 | | | | 616,461 | | | | 420,259 | | | | 1,925,019 | |
| | | | | | | | | | | | | | | | | | | |
Rate-sensitive liabilities: | | | | | | | | | | | | | | | | | | | |
Money market deposit accounts | | 439,981 | | | | - | | | | - | | | | - | | | | 439,981 | |
Time deposits | | 118,027 | | | | 261,129 | | | | 158,270 | | | | - | | | | 537,426 | |
Savings accounts | | 41,727 | | | | - | | | | - | | | | - | | | | 41,727 | |
Interest-bearing demand | | 120,156 | | | | - | | | | - | | | | - | | | | 120,156 | |
Other borrowings | | 55,632 | | | | - | | | | 25,000 | | | | - | | | | 80,632 | |
Subordinated debentures (1) | | 46,393 | | | | - | | | | - | | | | - | | | | 46,393 | |
Total | | 821,916 | | | | 261,129 | | | | 183,270 | | | | - | | | | 1,266,315 | |
| | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | $ | (147,033) | | | $ | (47,713) | | | $ | 433,191 | | | $ | 420,259 | | | $ | 658,704 | |
| | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | $ | (147,033) | | | $ | (194,746) | | | $ | 238,445 | | | $ | 658,704 | | | $ | 658,704 | |
Percentage of rate-sensitive assets | | | | | | | | | | | | | | | | | | | |
to rate-sensitive liabilities | | 82.11 | % | | | 81.73 | % | | | 336.37 | % | | | 0.00 | % | | | 152.02 | % |
Percentage of cumulative gap to | | | | | | | | | | | | | | | | | | | |
total assets | | (7.42) | % | | | (9.83) | % | | | 12.03 | % | | | 33.24 | % | | | 33.24 | % |
(1) The SBI Capital Trust II preferred securities have an associated interest rate swap contract in the amount of $25 million with a fixed interest rate of 6.15%. The swap is a hedging instrument that in essence establishes a fixed interest rate until the contract expires on April 7, 2018. Please see “Note 10 Derivative Instruments” in the Notes to the Consolidated Financial Statements.
The percentage of rate-sensitive assets to rate-sensitive liabilities presents a static position as of a single day, is not necessarily indicative of our position at any other point in time, and does not take into account the sensitivity of yields and costs of specific assets and liabilities to changes in market rates. The foregoing analysis assumes that our mortgage-backed securities mature during the period in which they are estimated to be prepaid. No other prepayment or repricing assumptions have been applied to our interest-earning assets for this analysis.
A principal objective of our asset/liability management effort is to balance the various factors that generate interest rate risk, thereby maintaining our interest rate sensitivity within acceptable risk levels. To measure our interest rate sensitivity
position, we utilize a simulation model that facilitates the forecasting of net interest income over the next twelve month period under a variety of interest rate and growth scenarios.
The earnings simulation model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net income. Actual results differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions, cash flows, and management strategies, among other factors.
The balance sheet is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, and 300 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at various interest rate shock levels.
Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.
Estimated Change in Net Interest Income
| | | | | |
Changes in Interest Rates: | + 300 bp | | +200 bp | | +100 bp |
| | | | | |
December 31, 2013 | 6.25% | | 2.99% | | (0.03)% |
December 31, 2012 | 0.55% | | (2.10)% | | (3.64)% |
The current overnight rate as established by the Federal Open Market Committee is in the 0% to 0.25% range. We believe that all down rate scenarios are impractical since they would result in an overnight rate of less than 0%. As a result, the down 100 bp, down 200 bp and down 300 bp scenarios have been excluded. Net interest income at risk as of December 31, 2013 improved in each of the three rising interest rate scenarios when compared to the December 31, 2012 risk position. Our greatest exposure to changes in interest rate is in the +300 bp scenario with an increase in net interest income of 6.25% on December 31, 2013, a 5.70% increase from the December 31, 2012 level of 0.55%. Bank SNB is in compliance with all policy limits established for net interest income at risk.
The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our cash flows and discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of our net assets.
Estimated Change in Economic Value of Equity (EVE)
| | | | | |
Changes in Interest Rates: | +300 bp | | +200 bp | | +100 bp |
| | | | | |
December 31, 2013 | (6.69)% | | (4.63)% | | (2.91)% |
December 31, 2012 | (8.12)% | | (6.00)% | | (3.64)% |
As of December 31, 2013 the economic value of equity measure improved in each of the three rising interest rate scenarios when compared to the December 31, 2012 percentages. Our largest economic value of equity exposure is the +300 bp scenario. The +300 bp scenario was (6.69)% on December 31, 2013, an 1.43% increase over the December 31, 2012 value of (8.12)%. Bank SNB is in compliance with all policy limits established for the economic value of equity.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition of Southwest Bancorp, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Bancorp, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Southwest Bancorp, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 7, 2014 expressed an unqualified opinion thereon.
| | |
| | |
/s/ Ernst & Young LLP Tulsa, Oklahoma March 7, 2014 | | |
SOUTHWEST BANCORP, INC.
Consolidated Statements of Financial Condition
| | | | | |
| | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 |
Assets: | | | | | |
Cash and due from banks | $ | 28,062 | | $ | 45,045 |
Interest-bearing deposits | | 251,777 | | | 243,034 |
Cash and cash equivalents | | 279,839 | | | 288,079 |
Securities held to maturity (fair values of $12,115 and $13,659, respectively) | | 11,720 | | | 12,797 |
Securities available for sale (amortized cost of $385,423 and $358,317 respectively) | | 382,479 | | | 364,315 |
Loans held for sale | | 3,060 | | | 31,682 |
Noncovered loans receivable | | 1,251,416 | | | 1,321,346 |
Less: Allowance for loan losses | | (36,607) | | | (46,494) |
Net noncovered loans receivable | | 1,214,809 | | | 1,274,852 |
Covered loans receivable (includes loss share: $1,812 and $6,714, respectively) | | 16,427 | | | 25,707 |
Less: Allowance for loan losses | | (56) | | | (224) |
Net covered loans receivable | | 16,371 | | | 25,483 |
Net loans receivable | | 1,231,180 | | | 1,300,335 |
Accrued interest receivable | | 5,335 | | | 6,365 |
Income tax receivable | | - | | | 24,525 |
Premises and equipment, net | | 20,833 | | | 21,691 |
Noncovered other real estate | | 560 | | | 11,315 |
Covered other real estate | | 2,094 | | | 3,643 |
Goodwill | | 1,214 | | | 1,214 |
Other intangible assets, net | | 4,980 | | | 4,864 |
Other assets | | 38,129 | | | 51,430 |
Total assets | $ | 1,981,423 | | $ | 2,122,255 |
| | | | | |
Liabilities: | | | | | |
Deposits: | | | | | |
Noninterest-bearing demand | $ | 444,796 | | $ | 424,008 |
Interest-bearing demand | | 120,156 | | | 112,012 |
Money market accounts | | 439,981 | | | 423,417 |
Savings accounts | | 41,727 | | | 37,693 |
Time deposits of $100,000 or more | | 251,185 | | | 351,273 |
Other time deposits | | 286,241 | | | 361,175 |
Total deposits | | 1,584,086 | | | 1,709,578 |
Accrued interest payable | | 832 | | | 1,116 |
Income tax payable | | 78 | | | - |
Other liabilities | | 10,215 | | | 13,180 |
Other borrowings | | 80,632 | | | 70,362 |
Subordinated debentures | | 46,393 | | | 81,963 |
Total liabilities | | 1,722,236 | | | 1,876,199 |
Shareholders' equity: | | | | | |
Common stock - $1 par value; 40,000,000 shares authorized; | | | | | |
19,732,926, 19,529,705, shares issued and outstanding, respectively | | 19,733 | | | 19,530 |
Paid in capital | | 99,937 | | | 99,705 |
Retained earnings | | 142,528 | | | 125,093 |
Accumulated other comprehensive income (loss) | | (3,011) | | | 1,728 |
Total shareholders' equity | | 259,187 | | | 246,056 |
Total liabilities and shareholders' equity | $ | 1,981,423 | | $ | 2,122,255 |
| | | | | |
The accompanying notes are an integral part of this statement. | | | | | |
SOUTHWEST BANCORP, INC.
Consolidated Statements of Operations
| | | | | | | | | |
| | | | | | | | | |
| | For the year ended December 31, |
(Dollars in thousands, except earnings per share data) | | 2013 | | 2012 | | 2011 |
Interest income: | | | | | | | | | |
Interest and fees on loans | | $ | 66,162 | | $ | 84,602 | | $ | 113,223 |
Investment securities: | | | | | | | | | |
U.S. Government and agency obligations | | | 1,745 | | | 1,714 | | | 1,500 |
Mortgage-backed securities | | | 3,481 | | | 4,718 | | | 5,046 |
State and political subdivisions | | | 1,203 | | | 1,060 | | | 411 |
Other securities | | | 226 | | | 322 | | | 16 |
Other interest-earning assets | | | 1,097 | | | 755 | | | 549 |
Total interest income | | | 73,914 | | | 93,171 | | | 120,745 |
| | | | | | | | | |
Interest expense: | | | | | | | | | |
Interest-bearing demand | | | 148 | | | 219 | | | 382 |
Money market accounts | | | 790 | | | 1,077 | | | 2,154 |
Savings accounts | | | 44 | | | 53 | | | 49 |
Time deposits of $100,000 or more | | | 2,338 | | | 4,302 | | | 7,617 |
Other time deposits | | | 2,239 | | | 4,052 | | | 6,591 |
Other borrowings | | | 892 | | | 895 | | | 1,799 |
Subordinated debentures | | | 4,813 | | | 6,010 | | | 5,821 |
Total interest expense | | | 11,264 | | | 16,608 | | | 24,413 |
| | | | | | | | | |
Net interest income | | | 62,650 | | | 76,563 | | | 96,332 |
| | | | | | | | | |
Provision for loan losses | | | (7,209) | | | 3,107 | | | 132,101 |
Net interest income (loss) after provision for loan losses | | | 69,859 | | | 73,456 | | | (35,769) |
| | | | | | | | | |
Noninterest income: | | | | | | | | | |
Service charges and fees | | | 10,491 | | | 11,559 | | | 12,075 |
Other noninterest income | | | 503 | | | 407 | | | 285 |
Gain on sales of loans, net | | | 2,649 | | | 3,133 | | | 1,658 |
Gain on sale/call of investment securities, net | | | - | | | 837 | | | - |
Total noninterest income | | | 13,643 | | | 15,936 | | | 14,018 |
| | | | | | | | | |
Noninterest expense: | | | | | | | | | |
Salaries and employee benefits | | | 31,877 | | | 29,919 | | | 29,880 |
Occupancy | | | 10,779 | | | 10,581 | | | 10,815 |
FDIC and other insurance | | | 1,764 | | | 2,531 | | | 3,862 |
Other real estate, net | | | (1,098) | | | 6,565 | | | 30,852 |
General and administrative | | | 11,989 | | | 13,726 | | | 14,792 |
Total noninterest expense | | | 55,311 | | | 63,322 | | | 90,201 |
Income (loss) before taxes | | | 28,191 | | | 26,070 | | | (111,952) |
Taxes on income | | | 10,756 | | | 9,883 | | | (43,657) |
Net income (loss) | | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
Net income (loss) available to common shareholders | | $ | 17,435 | | $ | 12,446 | | $ | (72,548) |
| | | | | | | | | |
Basic earnings per common share | | $ | 0.89 | | $ | 0.64 | | $ | (3.73) |
Diluted earnings per common share | | | 0.89 | | | 0.64 | | | (3.73) |
Common dividends declared per share | | | - | | | - | | | - |
| | | | | | | | | |
The accompanying notes are an integral part of this statement. | | | | | | | | |
SOUTHWEST BANCORP, INC.
Consolidated Statements of Comprehensive Income
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| For the year ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
| | | | | | | | |
Net income (loss) | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
| | | | | | | | |
Other comprehensive income: | | | | | | | | |
Unrealized gain (loss) on available for sale securities | | (8,942) | | | (133) | | | 4,659 |
Reclassification adjustment for net gains arising during the period | | - | | | (100) | | | - |
Change in fair value of derivative used for cash flow hedge | | 1,228 | | | (361) | | | (2,834) |
Other comprehensive income (loss), before tax | | (7,714) | | | (594) | | | 1,825 |
Tax (expense) benefit related to items of other comprehensive | | | | | | | | |
income (loss) | | 2,975 | | | 211 | | | (693) |
Other comprehensive income (loss), net of tax | | (4,739) | | | (383) | | | 1,132 |
Comprehensive income (loss) | $ | 12,696 | | $ | 15,804 | | $ | (67,163) |
| | | | | | | | |
The accompanying notes are an integral part of this statement. | | | | | | | | |
SOUTHWEST BANCORP, INC.
Consolidated Statements of Cash Flows
| | | | | | | | |
| For the year ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Operating activities: | | | | | | | | |
Net income (loss) | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
Provision for loan losses | | (7,209) | | | 3,107 | | | 132,101 |
Adjustments to other real estate | | 2,222 | | | 5,089 | | | - |
Deferred tax expense (benefit) | | 10,220 | | | 8,939 | | | (20,463) |
Depreciation and amortization | | 2,450 | | | 2,460 | | | 2,581 |
Securities premium amortization, net of discount accretion | | 3,454 | | | 3,308 | | | 2,197 |
Amortization of intangibles | | 1,315 | | | 1,609 | | | 1,374 |
Stock based compensation expense | | 742 | | | 115 | | | 333 |
Net gain on sales/calls of investment securities | | - | | | (837) | | | - |
Net gain on sales of available for sale loans | | (2,649) | | | (3,133) | | | (1,658) |
Net (gain) loss on sales of premises/equipment | | 195 | | | (2) | | | (20) |
Net (gain) loss on sales of other real estate | | (3,897) | | | (301) | | | 23,357 |
Proceeds from sales of held for sale loans | | 121,020 | | | 150,621 | | | 83,123 |
Held for sale loans originated | | (129,699) | | | (148,479) | | | (81,903) |
Net changes in assets and liabilities: | | | | | | | | |
Accrued interest receivable | | 1,030 | | | 811 | | | 1,414 |
Other assets | | 5,969 | | | 1,847 | | | 3,777 |
Income tax receivable / payable | | 24,618 | | | 4,074 | | | (31,762) |
Excess tax expense from share-based payment arrangements | | (15) | | | 67 | | | 218 |
Accrued interest payable | | (284) | | | (2,573) | | | 2,112 |
Other liabilities | | (1,678) | | | 2,225 | | | (1,790) |
Net cash provided by operating activities | | 45,239 | | | 45,134 | | | 46,696 |
Investing activities: | | | | | | | | |
Proceeds from sales of available for sale securities | | 2,744 | | | 6,588 | | | - |
Proceeds from principal repayments, calls and maturities: | | | | | | | | |
Held to maturity securities | | 5,000 | | | 2,375 | | | 2,470 |
Available for sale securities | | 108,498 | | | 88,109 | | | 68,709 |
Proceeds from sales of other investments | | - | | | 1,865 | | | - |
Redemptions (purchases) of other investments | | 391 | | | 179 | | | (50) |
Purchases of held to maturity securities | | (5,250) | | | - | | | (5,894) |
Purchases of available for sale securities | | (140,473) | | | (202,273) | | | (75,650) |
Principal repayments, net of loans originated | | 113,588 | | | 382,669 | | | 288,795 |
Proceeds from sales of loans, net | | - | | | - | | | 153,713 |
Purchases of premises and equipment | | (1,855) | | | (1,619) | | | (1,686) |
Proceeds from sales of premises and equipment | | 68 | | | 170 | | | 239 |
Proceeds from sales of other real estate | | 16,645 | | | 7,261 | | | 56,425 |
Net cash provided by investing activities | | 99,356 | | | 285,324 | | | 487,071 |
Financing activities: | | | | | | | | |
Net decrease in deposits | | (125,492) | | | (211,804) | | | (331,346) |
Net increase (decrease) in other borrowings | | 10,270 | | | 13,883 | | | (38,123) |
Net proceeds from issuance of common stock | | 229 | | | 127 | | | 64 |
Repurchase of common stock warrant | | (2,287) | | | - | | | - |
Redemptions of preferred stock | | - | | | (70,000) | | | - |
Redemption of trust preferred securities | | (35,570) | | | - | | | - |
Excess tax expense from share-based payment arrangements | | 15 | | | (67) | | | (218) |
Preferred stock dividends paid | | - | | | (4,407) | | | (1,751) |
Net cash used in financing activities | | (152,835) | | | (272,268) | | | (371,374) |
Net increase (decrease) in cash and cash equivalents | | (8,240) | | | 58,190 | | | 162,393 |
Cash and cash equivalents: | | | | | | | | |
Beginning of period | | 288,079 | | | 229,889 | | | 67,496 |
End of period | $ | 279,839 | | $ | 288,079 | | $ | 229,889 |
The accompanying notes are an integral part of this statement. | | | | | | | | |
SOUTHWEST BANCORP, INC.
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | Total |
| | | | | | Additional | | | Other | Share- |
(Dollars in thousands, | Preferred | Common Stock | Paid-in | Retained | Comprehensive | holders' |
except per share data) | Stock | Shares | Amount | Capital | Earnings | Income (Loss) | Equity |
Balance, December 31, 2010 | $ | 67,724 | 19,421,900 | $ | 19,422 | $ | 98,894 | $ | 185,196 | $ | 979 | $ | 372,215 |
Dividends (paid and/or accrued): | | | | | | | | | | | | | |
Preferred | | - | - | | - | | - | | (3,523) | | - | | (3,523) |
Warrant amortization | | 731 | - | | - | | - | | (731) | | - | | - |
Common stock issued | | - | 16,100 | | 16 | | 214 | | - | | - | | 230 |
Net common stock issued under employee | | | | | | | | | | | | | |
plans and related tax expense | | - | 6,213 | | 6 | | (176) | | - | | - | | (170) |
Other comprehensive income, | | | | | | | | | | | | | |
net of tax | | - | - | | - | | - | | - | | 1,132 | | 1,132 |
Net income (As Restated) | | - | - | | - | | - | | (68,295) | | - | | (68,295) |
Balance, December 31, 2011 | $ | 68,455 | 19,444,213 | $ | 19,444 | $ | 98,932 | $ | 112,647 | $ | 2,111 | $ | 301,589 |
Dividends (paid and/or accrued): | | | | | | | | | | | | | |
Preferred | | - | - | | - | | - | | (2,196) | | - | | (2,196) |
Redemption of preferred stock / | | | | | | | | | | | | | |
Warrant amortization | | (68,455) | - | | - | | - | | (1,545) | | - | | (70,000) |
Common stock issued | | - | 80,500 | | 81 | | 799 | | - | | - | | 880 |
Net common stock issued under employee | | | | | | | | | | | | | |
plans and related tax expense | | - | 4,992 | | 5 | | (26) | | - | | - | | (21) |
Other comprehensive loss, | | | | | | | | | | | | | |
net of tax | | - | - | | - | | - | | - | | (383) | | (383) |
Net loss | | - | - | | - | | - | | 16,187 | | - | | 16,187 |
Balance, December 31, 2012 | $ | - | 19,529,705 | $ | 19,530 | $ | 99,705 | $ | 125,093 | $ | 1,728 | $ | 246,056 |
| | | | | | | | | | | | | |
Warrant repurchase | | - | - | | - | | (2,287) | | - | | - | | (2,287) |
Common stock issued | | - | 201,046 | | 201 | | 2,478 | | - | | - | | 2,679 |
Net common stock issued under employee | | | | | | | | | | | | | |
plans and related tax expense | | - | 2,175 | | 2 | | 41 | | - | | - | | 43 |
Other comprehensive loss, | | | | | | | | | | | | | |
net of tax | | - | - | | - | | - | | - | | (4,739) | | (4,739) |
Net income | | - | - | | - | | - | | 17,435 | | - | | 17,435 |
Balance, December 31, 2013 | $ | - | 19,732,926 | $ | 19,733 | $ | 99,937 | $ | 142,528 | $ | (3,011) | $ | 259,187 |
The accompanying notes are an integral part of this statement.
SOUTHWEST BANCORP, INC.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013, 2012 and 2011
Note 1: Summary of Significant Accounting and Reporting Policies
Organization and Nature of Operations – Southwest Bancorp Inc. (“we”, “our”, “us”, or “Southwest”), incorporated in 1981, is a financial holding company headquartered in Stillwater, Oklahoma engaged primarily in commercial and consumer banking services in the states of Oklahoma, Texas, and Kansas. The accompanying consolidated financial statements include the accounts of Bank SNB, a national bank established in 1894, and SNB Capital Corporation, a lending and loan workout subsidiary established in 2009, and consolidated subsidiaries of Bank SNB, including SNB Real Estate Holdings, Inc. Bank SNB and SNB Capital Corporation are wholly owned, direct subsidiaries of ours. All significant intercompany balances and transactions have been eliminated in consolidation.
As of the close of business on November 15, 2013, we effected an affiliated merger of our wholly-owned subsidiary banks, Bank of Kansas and Stillwater National, whereby Bank of Kansas merged with and into Stillwater National. Stillwater National was rebranded Bank SNB (“Bank SNB”) in connection with the merger. The consolidated bank offers customers a greater banking experience across our three state region and now does business in all markets under the new name, Bank SNB.
Basis of Presentation – The accounting and reporting policies conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. The Consolidated Financial Statements include the accounts of Southwest and all other entities in which we have a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
We have evaluated subsequent events for potential recognition and disclosure through the issue date of the Consolidated Financial Statements included in this Annual Report on Form 10-K. See further discussion of subsequent events at “Note 20 – Subsequent Events”.
Management Estimates – In preparing our financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates shown on the consolidated statements of financial condition and revenues and expenses during the periods reported. Actual results could differ significantly from those estimates. Changes in economic conditions could affect the determination of material estimates such as the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, income taxes, and the fair value of financial instruments.
Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions, and federal funds sold. Interest-bearing balances held at depository institutions were $251.8 million at December 31, 2013 and $243.0 million at December 31, 2012. Federal funds sold are sold for one-to-four day periods.
Cash paid for interest totaled $11.5 million in 2013, $19.2 million in 2012, and $26.5 million in 2011. Cash paid for income taxes totaled $0.4 million in 2013, $1.0 million in 2012, and $5.9 million in 2011. Noncash transactions included transfer of loans to other real estate totaling $0.9 million in 2013, $2.6 million in 2012, and $62.3 million in 2011.
Bank SNB is required by the Federal Reserve Bank (“FRB”) to maintain average reserve balances. Cash and cash equivalents in the Consolidated Statements of Financial Condition include restricted amounts of $1.8 million and $3.0 million at December 31, 2013 and December 31, 2012, respectively.
Investment Securities – Investments in debt and equity securities are identified as held to maturity or available for sale based on management considerations of asset/liability strategy, changes in interest rates and prepayment risk, the need to increase liquidity, and other factors, including management’s intent and ability to hold securities to maturity. We have the ability and intent to hold to maturity our investment securities classified as held to maturity. We had no investments held for trading purposes for any period presented. Under certain circumstances (including the deterioration of the issuer’s creditworthiness, a change in tax law, or statutory or regulatory requirements), we may change the investment security classification. The classifications we utilize determine the related accounting treatment for each category of investments.
Available for sale securities are accounted for at fair value with unrealized gains or losses, net of taxes, excluded from operations and reported as accumulated other comprehensive income or loss. Held to maturity securities are accounted for at amortized cost. Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments, are carried at cost and included in other assets.
All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to operations over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method. Income earned on our investments in state and political subdivisions generally is not subject to ordinary Federal income tax.
In accordance with authoritative accounting guidance under ASC 320, Debt and Equity Securities, declines in fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. Under this guidance, we evaluate investment securities for other-than-temporary impairment on at least a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.
Federal Reserve Bank and Federal Home Loan Bank Stock – Bank SNB is a member of its regional FRB and Federal Home Loan Bank (“FHLB”) system. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional accounts. Both FRB and FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans – Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Loan origination fees and certain costs of originated loans are amortized as an adjustment to the yield over the term of the loan. Net unamortized deferred loan fees were $0.1 million at December 31, 2013 and 2012. Loans are reported at the principal balance outstanding net of the unamortized deferred loan fees.
In general, our policy for nonaccrual loans requires that accrued interest income on nonaccrual loans is written off after the loan is 90 days past due, and that subsequent interest income is recorded when cash receipts are received from the borrower. We identify past due loans based on contractual terms on a loan by loan basis.
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The allowance for loan losses related to loans that are evaluated for impairment is based either on the discounted cash flows using the loan’s initial effective interest rate or on the fair value of the collateral for certain collateral dependent loans. Smaller balance, homogeneous loans, including mortgage, student, and consumer, are collectively evaluated for impairment. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
We originate real estate mortgage loans for either portfolio investment or sale in the secondary market. During the period of origination, real estate mortgage loans are designated as held either for investment purposes or sale. Mortgage loans held for sale are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. We provide United States Department of Agriculture ("USDA”) government guaranteed commercial real estate lending services to rural healthcare providers. The loans are available for sale in the secondary market.
Loans Acquired through Transfer – The accounting guidance of ASC 310.30, Loan and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired through the completion of a transfer, including loans acquired in a business combination that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that we will be unable to collect all contractually required payment receivables. In accordance with this guidance, these loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield”, is recognized as interest income over the life of the loan on a method that approximates the level-yield method. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference”, are not recognized as a yield
adjustment, a loss accrual, or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
Loss Share Receivable – Bank SNB and the FDIC entered into loss sharing agreements that provide Bank SNB with significant protection against credit losses from loans and related assets acquired in the FNBA FDIC-assisted transaction. Under these agreements, the FDIC will reimburse Bank SNB 80% of net losses up to $35.0 million on covered assets, primarily acquired loans and other real estate, and 95% of any net losses above $35.0 million. Bank SNB services the covered assets. The loss sharing agreements have terms of ten years for one-to-four family residential loans and eight years for all other loan types. The expected payments from the FDIC under the loss sharing agreements are recorded as part of the covered loans in our Consolidated Statements of Financial Condition. Assets subject to these agreements are referred to as “covered”.
The difference between the undiscounted expected recoveries at acquisition and the fair value of the loss share receivable is the “accretable portion” and is recognized as interest income over the estimated life of the acquired loan portfolio. The initially recorded loss share receivable represented 85% of the aggregate loan discount related to the acquired loan portfolio. Because of the relationship of the loss share receivable to the loan discount, when an adjustment is made to a loan discount to reflect changes in the expected cash flows of the loan, an adjustment to the corresponding loss share receivable attributable to that loan will also occur.
Allowance for Loan Losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components, specific and general. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The specific component relates to loans that are individually classified as impaired. Loans deemed to be impaired are evaluated on an individual basis consistent with ASC 310.10.35, Receivables: Subsequent Measurement. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of the collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated value of the collateral. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and deemed as impaired, and classified as nonperforming, potential problem, or performing restructured as applicable. Charge-offs against the allowance of impaired loans are made when and to the extent the loan is deemed uncollectible.
The general component of the allowance is calculated based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into loan pools by type of loan. The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is located. Our primary markets are Oklahoma, Texas, and Kansas, and loans secured by real estate in those states are included in the “in-market” pool, with the remaining defaulting to the “out-of-market” pool. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us. The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.
Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and upon discovery of factors that may significantly affect the value of the collateral. Appraisals usually are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and also are reviewed monthly and considered in the determination of the allowance for loan losses. We are not aware of any significant time lapses in the process that have resulted, or would result in, a significant
delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment.
Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods.
Liability for Credit Losses on Unfunded Loan Commitments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
The reserve for unfunded loan commitments is a liability on our Consolidated Statement of Financial Condition in other liabilities. The reserve is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. At December 31, 2013 and 2012 the balance was $2.8 million and $2.9 million, respectively.
Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful life of each asset. Useful lives range from 10 years to 40 years for buildings and improvements, and 3 years to 10 years for furniture, fixtures, and equipment. We review the carrying value of long-lived assets used in operations when changes in events or circumstances indicate that the assets might have become impaired. This review initially includes a comparison of carrying value to the undiscounted cash flows estimated to be generated by those assets. If this review indicates that an asset is impaired, we record a charge to operations to reduce the asset’s carrying value to fair value, which is based on estimated discounted cash flows. Long-lived assets that are held for disposal are valued at the lower of the carrying amount or fair value less costs to sell.
Other Real Estate – Assets acquired through or instead of loan foreclosure are considered other real estate. Other real estate is initially recorded at the lesser of the carrying value or fair value less the estimated costs to sell the asset. Write-downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, and costs related to holding the property are expensed. Foreclosed property is subject to periodic revaluation based upon estimates of fair value. In determining the valuation of other real estate, management obtains independent appraisals for significant properties. Valuation adjustments are provided, as necessary, by charges to operations. Profits and losses from operations or sales of foreclosed property are recognized as incurred. At December 31, 2013 and 2012, the balances of noncovered other real estate were $0.6 million and $11.3 million, respectively.
Other real estate covered under the loss sharing agreements with the FDIC is reported exclusive of expected reimbursement cash flows from the FDIC. Fair value adjustments on covered other real estate result in a reduction of the covered other real estate carrying amount and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss charged against earnings. At December 31, 2013 and December 31, 2012, the balances of covered other real estate were $2.1 million and $3.6 million, respectively.
Goodwill and Other Intangible Assets – Intangible assets consist of goodwill, core deposit intangibles, and loan servicing rights. Goodwill and core deposit intangibles, which generally result from a business combination, are accounted for under the provisions of ASC 350, Intangibles - Goodwill and Other, and ASC 805, Business Combinations. Loan servicing rights are accounted for under the provisions of ASC 860, Transfers and Servicing.
Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired and is assigned to reporting units. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if conditions indicate impairment. The evaluation of possible impairment involves significant judgment based upon short-term and long-term projections of future performance of each reporting unit.
Core deposit intangibles are amortized using an economic life method based on deposit attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The net book value of core deposit intangibles is evaluated for impairment when economic conditions indicate impairment may exist.
When real estate mortgage loans and other loans are sold with servicing retained, an intangible servicing right is initially capitalized based on estimated fair value at the point of origination with the income statement effect recorded in gains on sales of loans. The servicing rights are amortized on an individual loan by loan basis over the period of estimated net servicing income. Impairment of loan servicing rights is assessed based on the fair value of those rights. We review the carrying value of loan servicing rights quarterly for impairment. At least annually, we obtain estimates of fair value from outside sources to corroborate the results of the valuation model. At December 31, 2013 and 2012, the fair values of loan servicing rights were $3.5 million and $2.3 million, respectively.
Fair Value Measurements – ASC 820, Fair Value Measurements and Disclosure, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
Derivative Financial Instruments – Our hedging policy permits the use of various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. All derivatives are recorded at fair value on our balance sheet.
To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. We consider a hedge to be highly effective if the change in fair value of the derivative hedging instrument is within 80% to 125% of the opposite change in the fair value of the hedged item attributable to the hedged risk. If derivative instruments are designated as hedges of fair values, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, we will formally assess whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, we will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value.
Loan Servicing Income – We earn fees for servicing real estate mortgages and other loans owned by others. These fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned.
Taxes on Income – We file consolidated income tax returns with our subsidiaries. Income tax expense is the total of the current year income tax due or refundable, adjusted for permanent differences between items reported in the financial statements and those reported for tax purposes and the change in deferred tax assets and liabilities. Under the asset and liability method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet.
A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-
planning strategies, and results of recent operations. Management reviewed all evidence and concluded that a valuation allowance was not needed.
Earnings per Common Share – ASC 260, Earnings Per Share, provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. We have determined that our unvested restricted stock awards are participating securities. Accordingly, earnings per common share is computed using the two-class method prescribed by ASC 260. Using this method, basic earnings per common share is computed based upon net income available to common shareholders divided by the weighted average number of common shares outstanding during each period, which exclude the outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock options using the treasury stock method. Stock options and warrants, where the exercise price was greater than the average market price of common shares, were not included in the computation of earnings per diluted share as they would have been antidilutive. For the years ended December 31, 2013, 2012, and 2011, we had 0, 5,000, and 73,814 in antidilutive options to purchase common shares, respectively. In 2013, an antidilutive warrant to purchase 703,753 shares of common stock was repurchased. This same warrant to purchase 703,753 shares of common stock was outstanding for the years ended December 31, 2012, and 2011.
A reconciliation of the weighted-average common shares used in the calculations of basic and diluted earnings per common share for the reported periods is provided at “Note 13 Earnings per Common Share”.
Share-Based Compensation – The Southwest Bancorp, Inc. 2008 Stock Based Award Plan (the “2008 Stock Plan”), provides selected key employees with the opportunity to acquire common stock through stock options or restricted stock awards. Compensation cost is recognized based on the fair value of these awards at the date of grant. The exercise price of all options granted under the 2008 Stock Plan is the fair market value on the grant date, while the market price of our common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Depending upon terms of the stock option agreements, stock options generally become exercisable on an annual basis and expire from five to ten years after the date of grant.
The 2008 Stock Plan authorized awards for up to 800,000 shares of our common stock over its ten-year term.
Comprehensive Income – Our comprehensive income (net income plus all other changes in shareholders’ equity from non-equity sources) consists of our net income, the after tax effect of changes in the net unrealized gains (losses) in our available for sale securities, and changes in the accumulated gain (loss) on the effective cash flow hedging instrument.
Note 2: Investment Securities
A summary of the amortized cost and fair values of investment securities follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortized | | Gross Unrealized | | Fair |
(Dollars in thousands) | Cost | | Gains | | Losses | | Value |
At December 31, 2013 | | | | | | | | | | | |
Held to Maturity: | | | | | | | | | | | |
Obligations of state and political subdivisions | $ | 11,720 | | $ | 395 | | $ | - | | $ | 12,115 |
Total | $ | 11,720 | | $ | 395 | | $ | - | | $ | 12,115 |
| | | | | | | | | | | |
Available for Sale: | | | | | | | | | | | |
Federal agency securities | $ | 123,332 | | $ | 330 | | $ | (2,889) | | $ | 120,773 |
Obligations of state and political subdivisions | | 33,685 | | | 36 | | | (1,085) | | | 32,636 |
Residential mortgage-backed securities | | 183,512 | | | 1,747 | | | (2,089) | | | 183,170 |
Asset-backed securities | | 9,578 | | | - | | | (96) | | | 9,482 |
Equity securities | | 35,316 | | | 1,267 | | | (165) | | | 36,418 |
Total | $ | 385,423 | | $ | 3,380 | | $ | (6,324) | | $ | 382,479 |
| | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | |
Held to Maturity: | | | | | | | | | | | |
Obligations of state and political subdivisions | $ | 12,797 | | $ | 862 | | $ | - | | $ | 13,659 |
Total | $ | 12,797 | | $ | 862 | | $ | - | | $ | 13,659 |
| | | | | | | | | | | |
Available for Sale: | | | | | | | | | | | |
Federal agency securities | $ | 114,159 | | $ | 1,474 | | $ | (19) | | $ | 115,614 |
Obligations of state and political subdivisions | | 34,754 | | | 887 | | | (83) | | | 35,558 |
Residential mortgage-backed securities | | 200,310 | | | 3,668 | | | (303) | | | 203,675 |
Asset-backed securities | | 7,794 | | | - | | | (123) | | | 7,671 |
Equity securities | | 1,300 | | | 497 | | | - | | | 1,797 |
Total | $ | 358,317 | | $ | 6,526 | | $ | (528) | | $ | 364,315 |
Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”).
Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments, are carried at cost and included in other assets on our Consolidated Statement of Financial Condition. Total investments carried at cost were $8.1 million and $8.5 million at December 31, 2013 and 2012, respectively. There are no identified events or changes in circumstances that may have a significant adverse effect on the investments carried at cost.
A comparison of the amortized cost and approximate fair value of our investment securities by maturity date at December 31, 2013 follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| Available for Sale | | Held to Maturity |
| Amortized | | Fair | | Amortized | | Fair |
(Dollars in thousands) | Cost | | Value | | Cost | | Value |
One year or less | $ | 20,806 | | $ | 21,151 | | $ | 1,941 | | $ | 1,957 |
More than one year through five years | | 167,476 | | | 168,675 | | | 2,227 | | | 2,282 |
More than five years through ten years | | 151,933 | | | 147,705 | | | 4,151 | | | 4,265 |
More than ten years | | 45,208 | | | 44,948 | | | 3,401 | | | 3,611 |
Total | $ | 385,423 | | $ | 382,479 | | $ | 11,720 | | $ | 12,115 |
The foregoing analysis assumes that our residential mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to our investment securities for this analysis.
Gain or loss on sale or call of investments is based upon the specific identification method. The 2013 sales of investment securities netted to zero gain. Sales of securities are as follows:
| | | | | | | | |
(Dollars in thousands) | | 2013 | | | 2012 | | | 2011 |
Proceeds from sales | $ | 2,744 | | $ | 6,588 | | $ | - |
Gross realized gains | | (0) | | | 45 | | | - |
Gross realized losses | | (0) | | | (10) | | | - |
The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at December 31, 2013 and 2012. Securities whose market values exceed cost are excluded from this table.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | Continuous Unrealized | | | |
| | | Amortized cost of | | Loss Existing for: | | Fair value of |
| Number of | | securities with | | Less Than | | More Than | | securities with |
(Dollars in thousands) | Securities | | unrealized losses | | 12 Months | | 12 Months | | unrealized losses |
At December 31, 2013 | | | | | | | | | | | | | |
Available for Sale: | | | | | | | | | | | | | |
Federal agency securities | 24 | | $ | 87,921 | | $ | (2,885) | | $ | (4) | | $ | 85,032 |
Obligations of state and political subdivisions | 20 | | | 31,579 | | | (887) | | | (198) | | | 30,494 |
Residential mortgage-backed securities | 53 | | | 104,667 | | | (2,015) | | | (74) | | | 102,578 |
Asset-backed securities | 3 | | | 9,578 | | | (96) | | | - | | | 9,482 |
Other Securities | 8 | | | 27,728 | | | (165) | | | - | | | 27,563 |
Total | 108 | | $ | 261,473 | | $ | (6,048) | | $ | (276) | | $ | 255,149 |
| | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | |
Available for Sale: | | | | | | | | | | | | | |
Federal agency securities | 5 | | $ | 9,887 | | $ | (19) | | $ | - | | $ | 9,868 |
Obligations of state and political subdivisions | 9 | | | 10,457 | | | (83) | | | - | | | 10,374 |
Residential mortgage-backed securities | 23 | | | 46,787 | | | (288) | | | (15) | | | 46,484 |
Asset-backed securities | 4 | | | 7,794 | | | (123) | | | - | | | 7,671 |
Total | 41 | | $ | 74,925 | | $ | (513) | | $ | (15) | | $ | 74,397 |
We evaluate all securities on an individual basis for other-than-temporary impairment on at least a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of us to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we expect to receive full value for the securities. Furthermore, as of December 31, 2013, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not more likely than not that we will have to sell any such securities before a recovery of cost. The declines in fair value were attributable to increases in market interest rates over the yields available at the time the underlying securities were purchased or increases in spreads over market interest rates. Management does not believe any of the securities are impaired due to credit quality. Accordingly, as of December 31, 2013, management believes the impairment of these investments is not deemed to be other-than-temporary.
As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $292.6 million and $284.2 million were pledged to meet such requirements at December 31, 2013 and 2012, respectively. Any amount over-pledged can be released at any time.
Note 3: Loans and Allowance for Loan Losses
We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas. Our commercial lending operations are concentrated in Oklahoma City, Dallas, Tulsa, and other metropolitan markets in Texas, Kansas, and Oklahoma. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see “Note 18 Operating Segments” for more detail regarding loans by market. At December 31, 2013 and 2012, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.
Our loan classifications were as follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| At December 31, 2013 | | At December 31, 2012 |
(Dollars in thousands) | Noncovered | | Covered | | Noncovered | | Covered |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 740,997 | | $ | 11,282 | | $ | 870,975 | | $ | 18,298 |
One-to-four family residential | | 80,058 | | | 3,930 | | | 70,954 | | | 4,881 |
Real estate construction: | | | | | | | | | | | |
Commercial | | 143,650 | | | 198 | | | 130,753 | | | 382 |
One-to-four family residential | | 4,646 | | | - | | | 3,656 | | | - |
Commercial | | 254,087 | | | 971 | | | 240,498 | | | 2,037 |
Installment and consumer: | | | | | | | | | | | |
Guaranteed student loans | | 4,394 | | | - | | | 4,680 | | | - |
Other | | 26,644 | | | 46 | | | 31,512 | | | 109 |
| | 1,254,476 | | | 16,427 | | | 1,353,028 | | | 25,707 |
Less: Allowance for loan losses | | (36,607) | | | (56) | | | (46,494) | | | (224) |
Total loans, net | $ | 1,217,869 | | $ | 16,371 | | $ | 1,306,534 | | $ | 25,483 |
Concentrations of Credit. At December 31, 2013, $417.4 million, or 33%, of our noncovered loans consisted of loans to individuals and businesses in the healthcare industry. We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.
Loans Held for Sale. We had loans which were held for sale of $3.1 million and $31.7 million at December 31, 2013 and 2012, respectively. The decline is due to reclassifying the guaranteed student loans and the United States Department of Agriculture (“USDA”) government guaranteed commercial real estate loans back into the loan portfolio and not actively looking to sell these loans. These loans were reclassified at their respective book value which approximated fair value. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of the one-to-four family residential loans and loan servicing rights, if not retained, are primarily sold to one investor. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan.
Loan Servicing. We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned.
The unpaid principal balance of real estate mortgage loans serviced for others totaled $390.7 million and $343.4 million at December 31, 2013 and 2012, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.
Acquired Loans. Changes in the carrying amounts and accretable yields for ASC 310.30 loans were as follows for the year ended December 31, 2013 and 2012.
| | | | | | | | | | | |
| | | | | | | | | | | |
| For the year ended December 31, |
| 2013 | | 2012 |
| | | | Carrying | | | | | Carrying |
| Accretable | | amount | | Accretable | | amount |
(Dollars in thousands) | Yield | | of loans | | Yield | | of loans |
Balance at beginning of period | $ | 1,904 | | $ | 25,707 | | $ | 2,402 | | $ | 37,615 |
Payments received | | - | | | (6,954) | | | - | | | (9,960) |
Transfers to other real estate / repossessed assets | | (36) | | | (2,110) | | | 27 | | | (2,365) |
Net charge-offs | | (1) | | | (468) | | | (5) | | | (151) |
Net reclassifications to / from nonaccretable amount | | 235 | | | - | | | 192 | | | - |
Accretion | | (505) | | | 252 | | | (712) | | | 568 |
Balance at end of period | $ | 1,597 | | $ | 16,427 | | $ | 1,904 | | $ | 25,707 |
Nonperforming / Past Due Loans. The following table shows the recorded investment in loans on nonaccrual status.
| | | | | | | | | | | |
| | | | | | | | | | | |
| At December 31, |
| 2013 | | 2012 |
(Dollars in thousands) | Noncovered | | Covered | | Noncovered | | Covered |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 6,564 | | $ | 1,202 | | $ | 18,337 | | $ | 3,087 |
One-to-four family residential | | 456 | | | 57 | | | 563 | | | 52 |
Real estate construction: | | | | | | | | | | | |
Commercial | | 2,721 | | | - | | | 3,355 | | | 130 |
Commercial | | 8,769 | | | - | | | 12,761 | | | 324 |
Other consumer | | 50 | | | - | | | 88 | | | 2 |
Total nonaccrual loans | $ | 18,560 | | $ | 1,259 | | $ | 35,104 | | $ | 3,595 |
If interest on nonaccrual loans had been accrued, the interest income as reported in the accompanying consolidated statement of operations would have increased by approximately $1.2 million, $1.2 million, and $5.7 million, for 2013, 2012, and 2011, respectively.
Net cumulative charge-offs against noncovered nonaccrual loans at December 31, 2013 and 2012 were $8.2 million and $8.3 million, respectively.
The following table shows an age analysis of past due loans at the end of the respective reporting period.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | 90 days and | | | | | | | | | | | Recorded loans |
| 30-89 days | | greater | | Total past | | | | | Total | | > 90 days and |
(Dollars in thousands) | past due | | past due | | due | | Current | | loans | | accruing |
At December 31, 2013 | | | | | | | | | | | | | | | | | |
Noncovered: | | | | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | |
Commercial | $ | 3,843 | | $ | 6,564 | | $ | 10,407 | | $ | 730,590 | | $ | 740,997 | | $ | - |
One-to-four family residential | | 284 | | | 456 | | | 740 | | | 79,318 | | | 80,058 | | | - |
Real estate construction: | | | | | | | | | | | | | | | | | |
Commercial | | 569 | | | 2,721 | | | 3,290 | | | 140,360 | | | 143,650 | | | - |
One-to-four family residential | | - | | | - | | | - | | | 4,646 | | | 4,646 | | | - |
Commercial | | 1,998 | | | 8,819 | | | 10,817 | | | 243,270 | | | 254,087 | | | 50 |
Other | | 128 | | | 53 | | | 181 | | | 30,857 | | | 31,038 | | | 3 |
Total - noncovered | | 6,822 | | | 18,613 | | | 25,435 | | | 1,229,041 | | | 1,254,476 | | | 53 |
| | | | | | | | | | | | | | | | | |
Covered: | | | | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | |
Commercial | | 8 | | | 1,202 | | | 1,210 | | | 10,072 | | | 11,282 | | | - |
One-to-four family residential | | 18 | | | 57 | | | 75 | | | 3,855 | | | 3,930 | | | - |
Real estate construction: | | | | | | | | | | | | | | | | | |
Commercial | | - | | | - | | | - | | | 198 | | | 198 | | | - |
Commercial | | - | | | - | | | - | | | 971 | | | 971 | | | - |
Other | | - | | | - | | | - | | | 46 | | | 46 | | | - |
Total - covered | | 26 | | | 1,259 | | | 1,285 | | | 15,142 | | | 16,427 | | | - |
Total | $ | 6,848 | | $ | 19,872 | | $ | 26,720 | | $ | 1,244,183 | | $ | 1,270,903 | | $ | 53 |
| | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | | | | |
Noncovered: | | | | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | |
Commercial | $ | 23,348 | | $ | 18,337 | | $ | 41,685 | | $ | 829,290 | | $ | 870,975 | | $ | - |
One-to-four family residential | | 1,479 | | | 1,310 | | | 2,789 | | | 68,165 | | | 70,954 | | | 747 |
Real estate construction: | | | | | | | | | | | | | | | | | |
Commercial | | 3,501 | | | 3,355 | | | 6,856 | | | 123,897 | | | 130,753 | | | - |
One-to-four family residential | | - | | | - | | | - | | | 3,656 | | | 3,656 | | | - |
Commercial | | 7,358 | | | 15,232 | | | 22,590 | | | 217,908 | | | 240,498 | | | 2,471 |
Other | | 538 | | | 160 | | | 698 | | | 35,494 | | | 36,192 | | | 72 |
Total - noncovered | | 36,224 | | | 38,394 | | | 74,618 | | | 1,278,410 | | | 1,353,028 | | | 3,290 |
| | | | | | | | | | | | | | | | | |
Covered: | | | | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | |
Commercial real estate | | 1,090 | | | 3,087 | | | 4,177 | | | 14,121 | | | 18,298 | | | - |
One-to-four family residential | | - | | | 52 | | | 52 | | | 4,829 | | | 4,881 | | | - |
Real estate construction: | | | | | | | | | | | | | | | | | |
Commercial | | - | | | 130 | | | 130 | | | 252 | | | 382 | | | - |
Commercial | | - | | | 324 | | | 324 | | | 1,713 | | | 2,037 | | | - |
Other | | - | | | 2 | | | 2 | | | 107 | | | 109 | | | - |
Total - covered | | 1,090 | | | 3,595 | | | 4,685 | | | 21,022 | | | 25,707 | | | - |
Total | $ | 37,314 | | $ | 41,989 | | $ | 79,303 | | $ | 1,299,432 | | $ | 1,378,735 | | $ | 3,290 |
Impaired Loans. The following table presents loans individually evaluated for impairment by class of loans at the end of the respective reporting period.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| With No Specific Allowance | | With A Specific Allowance |
| | | | Unpaid | | | | | Unpaid | | | |
| Recorded | | Principal | | Recorded | | Principal | | Related |
(Dollars in thousands) | Investment | | Balance | | Investment | | Balance | | Allowance |
At December 31, 2013 | | | | | | | | | | | | | | |
Noncovered: | | | | | | | | | | | | | | |
Commercial real estate | $ | 32,284 | | $ | 32,784 | | $ | 15,446 | | $ | 15,729 | | $ | 4,012 |
One-to-four family residential | | 456 | | | 576 | | | - | | | - | | | - |
Real estate construction | | 84 | | | 106 | | | 2,636 | | | 2,762 | | | 18 |
Commercial | | 1,120 | | | 1,254 | | | 9,177 | | | 14,608 | | | 3,863 |
Other | | 4 | | | 6 | | | 46 | | | 72 | | | 46 |
Total noncovered | $ | 33,948 | | $ | 34,726 | | $ | 27,305 | | $ | 33,171 | | $ | 7,939 |
| | | | | | | | | | | | | | |
Covered: | | | | | | | | | | | | | | |
Commercial real estate | $ | 5,793 | | $ | 6,760 | | $ | 457 | | $ | 457 | | $ | 3 |
One-to-four family residential | | 54 | | | 54 | | | 42 | | | 94 | | | 4 |
Total covered | $ | 5,847 | | $ | 6,814 | | $ | 499 | | $ | 551 | | $ | 7 |
| | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | |
Noncovered: | | | | | | | | | | | | | | |
Commercial real estate | $ | 29,425 | | $ | 30,340 | | $ | 24,630 | | $ | 27,397 | | $ | 5,094 |
One-to-four family residential | | 563 | | | 653 | | | 7 | | | 7 | | | 7 |
Real estate construction | | 3,970 | | | 7,841 | | | 232 | | | 256 | | | 50 |
Commercial | | 3,337 | | | 6,975 | | | 13,422 | | | 13,448 | | | 6,492 |
Other | | 7 | | | 8 | | | 81 | | | 100 | | | 81 |
Total noncovered | $ | 37,302 | | $ | 45,817 | | $ | 38,372 | | $ | 41,208 | | $ | 11,724 |
| | | | | | | | | | | | | | |
Covered: | | | | | | | | | | | | | | |
Commercial real estate | $ | 4,325 | | $ | 5,347 | | $ | 2,214 | | $ | 3,979 | | $ | 22 |
One-to-four family residential | | 20 | | | 25 | | | 52 | | | 98 | | | 2 |
Real estate construction | | 130 | | | 308 | | | - | | | - | | | - |
Commercial | | 322 | | | 1,884 | | | 2 | | | 3 | | | 1 |
Other | | 2 | | | 4 | | | - | | | - | | | - |
Total covered | $ | 4,799 | | $ | 7,568 | | $ | 2,268 | | $ | 4,080 | | $ | 25 |
The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2013, 2012, and 2011.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, | |
| 2013 | | 2012 | | 2011 | |
| Average | | | | | Average | | | | | Average | | | | |
| Recorded | | Interest | | Recorded | | Interest | | Recorded | | Interest | |
(Dollars in thousands) | Investment | | Income | | Investment | | Income | | Investment | | Income | |
Noncovered: | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 47,835 | | $ | 1,784 | | $ | 36,373 | | $ | 1,517 | | $ | 10,012 | | $ | 1,852 | |
One-to-four family residential | | 362 | | | - | | | 427 | | | 8 | | | 1,317 | | | 8 | |
Real estate construction | | 2,488 | | | - | | | 4,507 | | | 51 | | | 8,222 | | | 805 | |
Commercial | | 11,468 | | | 87 | | | 4,494 | | | 137 | | | 9,144 | | | 746 | |
Other | | 63 | | | - | | | 104 | | | - | | | 97 | | | - | |
Total noncovered | $ | 62,216 | | $ | 1,871 | | $ | 45,905 | | $ | 1,713 | | $ | 28,792 | | $ | 3,411 | |
| | | | | | | | | | | | | | | | | | |
Covered: | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 15,290 | | $ | 328 | | $ | 21,110 | | $ | 184 | | $ | 26,642 | | $ | - | |
One-to-four family residential | | 4,283 | | | 1 | | | 5,627 | | | 1 | | | 7,926 | | | - | |
Real estate construction | | 313 | | | - | | | 1,721 | | | - | | | 6,003 | | | - | |
Commercial | | 1,431 | | | - | | | 2,175 | | | - | | | 4,403 | | | - | |
Other | | 66 | | | - | | | 158 | | | - | | | 438 | | | - | |
Total covered | $ | 21,383 | | $ | 329 | | $ | 30,791 | | $ | 185 | | $ | 45,412 | | $ | - | |
Included in interest income recognized on impaired loans are $2.4 million and $1.9 million, and $3.3 million, for December 31, 2013, 2012, and 2011, respectively, in interest on accruing troubled debt restructurings.
Troubled Debt Restructurings. The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months.
When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.
Troubled debt restructured loans outstanding as of December 31, 2013 and 2012 are as follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| At December 31, 2013 | | At December 31, 2012 |
(Dollars in thousands) | Accruing | | Nonaccrual | | Accruing | | Nonaccrual |
Commercial real estate | $ | 44,442 | | $ | 4,456 | | $ | 39,170 | | $ | 2,953 |
One-to-four family residential | | 18 | | | 162 | | | 27 | | | 134 |
Real estate construction | | - | | | - | | | 847 | | | 130 |
Commercial | | 1,527 | | | 648 | | | 3,998 | | | 351 |
Consumer | | - | | | 46 | | | - | | | 81 |
Total | $ | 45,987 | | $ | 5,312 | | $ | 44,042 | | $ | 3,649 |
At December 31, 2013 and 2012, we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring.
Loans modified as troubled debt restructurings that occurred during the year ended December 31, 2013 and 2012 are shown in the following tables:
| | | | | | | | | | | |
| For the year ended December 31, |
| 2013 | | 2012 |
| Number of | | Recorded | | Number of | | Recorded |
(Dollars in thousands) | Modifications | | Investment | | Modifications | | Investment |
Commercial real estate | | 9 | | $ | 4,732 | | | 12 | | $ | 22,713 |
One-to-four family residential | | 1 | | | 68 | | | 3 | | | 110 |
Real estate construction | | - | | | - | | | 1 | | | 847 |
Commercial | | 5 | | | 784 | | | 7 | | | 3,328 |
Consumer | | - | | | - | | | 1 | | | 80 |
Total | | 15 | | $ | 5,584 | | | 24 | | $ | 27,078 |
The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.
The following tables present the recorded investment and the number of loans modified as a troubled debt restructuring which subsequently defaulted for the year ended December 31, 2013 and 2012. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.
| | | | | | | | | | | |
| For the year ended December 31, |
| 2013 | | 2012 |
| Number of | | Recorded | | Number of | | Recorded |
(Dollars in thousands) | Contracts | | Investment | | Contracts | | Investment |
Commercial real estate | | 1 | | $ | 166 | | | - | | $ | - |
Commercial | | - | | | - | | | 3 | | | 1,658 |
Real estate construction | | - | | | - | | | 1 | | | 130 |
Total | | 1 | | $ | 166 | | | 4 | | $ | 1,788 |
Credit Quality Indicators. To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings:
Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans are considered nonperforming.
Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of December 31, 2013 and 2012, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Commercial | | 1-4 Family | | Real Estate | | | | | | | | | |
(Dollars in thousands) | Real Estate | | Residential | | Construction | | Commercial | | Other | | Total |
At December 31, 2013 | | | | | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | | | | | |
Pass | $ | 610,929 | | $ | 81,534 | | $ | 101,715 | | $ | 233,132 | | $ | 30,893 | | $ | 1,058,203 |
Special Mention | | 62,932 | | | 1,452 | | | 22,576 | | | 6,130 | | | 141 | | | 93,231 |
Substandard | | 77,453 | | | 944 | | | 24,203 | | | 11,329 | | | 50 | | | 113,979 |
Doubtful | | 965 | | | 58 | | | - | | | 4,467 | | | - | | | 5,490 |
Total | $ | 752,279 | | $ | 83,988 | | $ | 148,494 | | $ | 255,058 | | $ | 31,084 | | $ | 1,270,903 |
| | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | | | | | |
Pass | $ | 718,054 | | $ | 71,975 | | $ | 83,350 | | $ | 208,019 | | $ | 35,897 | | $ | 1,117,295 |
Special Mention | | 88,167 | | | 1,901 | | | 25,964 | | | 7,047 | | | 181 | | | 123,260 |
Substandard | | 80,104 | | | 1,923 | | | 25,477 | | | 26,887 | | | 223 | | | 134,614 |
Doubtful | | 2,948 | | | 36 | | | - | | | 582 | | | - | | | 3,566 |
Total | $ | 889,273 | | $ | 75,835 | | $ | 134,791 | | $ | 242,535 | | $ | 36,301 | | $ | 1,378,735 |
Allowance for Loan Losses. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method as of December 31, 2013 and 2012.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Commercial | | 1-4 Family | | Real Estate | | | | | | | | | |
(Dollars in thousands) | Real Estate | | Residential | | Construction | | Commercial | | Other | | Total |
At December 31, 2013 | | | | | | | | | | | | | | | | | |
Balance at beginning of period | $ | 27,223 | | $ | 861 | | $ | 5,271 | | $ | 12,604 | | $ | 759 | | $ | 46,718 |
Loans charged-off | | (806) | | | (578) | | | 246 | | | (8,599) | | | (267) | | | (10,004) |
Recoveries | | 171 | | | 253 | | | 4,527 | | | 2,049 | | | 158 | | | 7,158 |
Provision for loan losses | | (7,734) | | | 314 | | | (4,521) | | | 4,931 | | | (199) | | | (7,209) |
Balance at end of period | $ | 18,854 | | $ | 850 | | $ | 5,523 | | $ | 10,985 | | $ | 451 | | $ | 36,663 |
| | | | | | | | | | | | | | | | | |
Allowance for loan losses ending balance: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,012 | | $ | - | | $ | 18 | | $ | 3,863 | | $ | 46 | | $ | 7,939 |
Collectively evaluated for impairment | | 14,839 | | | 797 | | | 5,505 | | | 7,122 | | | 405 | | | 28,668 |
Acquired with deteriorated credit quality | | 3 | | | 53 | | | - | | | - | | | - | | | 56 |
Total ending allowance balance | $ | 18,854 | | $ | 850 | | $ | 5,523 | | $ | 10,985 | | $ | 451 | | $ | 36,663 |
| | | | | | | | | | | | | | | | | |
Loans receivable ending balance: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 47,730 | | $ | 456 | | $ | 2,720 | | $ | 10,297 | | $ | 50 | | $ | 61,253 |
Collectively evaluated for impairment | | 693,267 | | | 79,602 | | | 145,576 | | | 243,790 | | | 30,988 | | | 1,193,223 |
Acquired with deteriorated credit quality | | 11,282 | | | 3,930 | | | 198 | | | 971 | | | 46 | | | 16,427 |
Total ending loans balance | $ | 752,279 | | $ | 83,988 | | $ | 148,494 | | $ | 255,058 | | $ | 31,084 | | $ | 1,270,903 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Commercial | | 1-4 Family | | Real Estate | | | | | | | | | |
| Real Estate | | Residential | | Construction | | Commercial | | Other | | Total |
At December 31, 2012 | | | | | | | | | | | | | | | | | |
Balance at beginning of period | $ | 21,749 | | $ | 1,016 | | $ | 11,177 | | $ | 9,827 | | $ | 915 | | $ | 44,684 |
Loans charged-off | | (2,167) | | | (269) | | | - | | | (4,455) | | | (649) | | | (7,540) |
Recoveries | | 58 | | | 271 | | | 1,972 | | | 3,671 | | | 495 | | | 6,467 |
Provision for loan losses | | 7,583 | | | (157) | | | (7,878) | | | 3,561 | | | (2) | | | 3,107 |
Balance at end of period | $ | 27,223 | | $ | 861 | | $ | 5,271 | | $ | 12,604 | | $ | 759 | | $ | 46,718 |
| | | | | | | | | | | | | | | | | |
Allowance for loan losses ending balances: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 5,094 | | $ | 7 | | $ | 50 | | $ | 6,492 | | $ | 81 | | $ | 11,724 |
Collectively evaluated for impairment | | 21,975 | | | 785 | | | 5,221 | | | 6,111 | | | 678 | | | 34,770 |
Acquired with deteriorated credit quality | | 154 | | | 69 | | | - | | | 1 | | | - | | | 224 |
Total ending allowance balance | $ | 27,223 | | $ | 861 | | $ | 5,271 | | $ | 12,604 | | $ | 759 | | $ | 46,718 |
| | | | | | | | | | | | | | | | | |
Loans receivable ending balance: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 54,055 | | $ | 570 | | $ | 4,202 | | $ | 16,759 | | $ | 88 | | $ | 75,674 |
Collectively evaluated for impairment | | 816,920 | | | 70,384 | | | 130,207 | | | 223,739 | | | 36,104 | | | 1,277,354 |
Acquired with deteriorated credit quality | | 18,298 | | | 4,881 | | | 382 | | | 2,037 | | | 109 | | | 25,707 |
Total ending loans balance | $ | 889,273 | | $ | 75,835 | | $ | 134,791 | | $ | 242,535 | | $ | 36,301 | | $ | 1,378,735 |
| | | | | | | | | | | | | | | | | |
| Commercial | | 1-4 Family | | Real Estate | | | | | | | | | |
| Real Estate | | Residential | | Construction | | Commercial | | Other | | Total |
At December 31, 2011 | | | | | | | | | | | | | | | | | |
Balance at beginning of period | $ | 32,508 | | $ | 1,597 | | $ | 19,605 | | $ | 10,605 | | $ | 914 | | $ | 65,229 |
Loans charged-off | | (71,066) | | | (346) | | | (62,070) | | | (22,103) | | | (1,040) | | | (156,625) |
Recoveries | | 411 | | | 67 | | | 1,521 | | | 1,864 | | | 116 | | | 3,979 |
Provision for loan losses | | 59,896 | | | (302) | | | 52,121 | | | 19,461 | | | 925 | | | 132,101 |
Balance at end of period | $ | 21,749 | | $ | 1,016 | | $ | 11,177 | | $ | 9,827 | | $ | 915 | | $ | 44,684 |
| | | | | | | | | | | | | | | | | |
Allowance for loan losses ending balances: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 411 | | $ | 21 | | $ | 73 | | $ | 349 | | $ | 112 | | $ | 966 |
Collectively evaluated for impairment | | 21,198 | | | 981 | | | 10,846 | | | 9,439 | | | 803 | | | 43,267 |
Acquired with deteriorated credit quality | | 140 | | | 14 | | | 258 | | | 39 | | | - | | | 451 |
Total ending allowance balance | $ | 21,749 | | $ | 1,016 | | $ | 11,177 | | $ | 9,827 | | $ | 915 | | $ | 44,684 |
| | | | | | | | | | | | | | | | | |
Loans receivable ending balance: | | | | | | | | | | | | | �� | | | | |
Individually evaluated for impairment | $ | 21,701 | | $ | 1,468 | | $ | 11,983 | | $ | 10,490 | | $ | 123 | | $ | 45,765 |
Collectively evaluated for impairment | | 1,006,860 | | | 78,907 | | | 220,102 | | | 335,776 | | | 38,463 | | | 1,680,108 |
Acquired with deteriorated credit quality | | 23,686 | | | 7,072 | | | 3,746 | | | 2,841 | | | 270 | | | 37,615 |
Total ending loans balance | $ | 1,052,247 | | $ | 87,447 | | $ | 235,831 | | $ | 349,107 | | $ | 38,856 | | $ | 1,763,488 |
Note 4: Premises and Equipment
Year-end premises and equipment were as follows:
| | | | | |
| | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 |
Land | $ | 6,057 | | $ | 6,059 |
Buildings and improvements | | 21,751 | | | 18,237 |
Furniture, fixtures, and equipment | | 27,268 | | | 30,911 |
Construction/remodeling in progress | | 1,159 | | | 129 |
| | 56,235 | | | 55,336 |
Accumulated depreciation and amortization | | (35,402) | | | (33,645) |
Total premises and equipment, net | $ | 20,833 | | $ | 21,691 |
| | | | | |
Depreciation of premises and equipment totaled $2.5 million in 2013 and 2012, and $2.6 million in 2011.
We lease certain equipment and premises for our operations. Future minimum annual rental payments required under operating leases, net of sublease agreements, that have initial or remaining lease terms in excess of one year as of December 31, 2013 were as follows:
| | | | | |
(Dollars in thousands) | | | | |
2014 | | | | $ | 2,407 |
2015 | | | | | 2,043 |
2016 | | | | | 1,204 |
2017 | | | | | 143 |
2018 | | | | | 72 |
Thereafter | | | | | - |
Total | | | | $ | 5,869 |
The total rental expense was $2.6 million, $2.5 million, and $2.6 million in 2013, 2012, and 2011, respectively.
Note 5: Goodwill and Other Intangible Assets
We have recorded goodwill and other identifiable intangible assets associated with purchase business combinations. Goodwill is not amortized, but is periodically evaluated for impairment. We perform an annual goodwill impairment test as of October 1 of each year and assess qualitative factors on a quarterly basis that would indicate events or circumstances that an impairment might have taken place.
Goodwill totaled $1.2 million at December 31, 2013 and 2012, of which, $0.2 million of goodwill is reported in the Oklahoma Banking segment and $1.0 million is reported in the Texas Banking segment. Further information regarding operating segments can be found in “Note 18 Operating Segments”.
Based on our annual goodwill impairment test as of October 1, 2013 and updated through December 31, 2013, management does not believe any of its goodwill is impaired as of December 31, 2013. We did not recognize an impairment during the years ended December 31, 2013, 2012 and 2011.
The following table presents the gross carrying amount of other intangible assets and accumulated amortization.
| | | | | | | | |
| | | | At December 31, |
(Dollars in thousands) | | | | 2013 | | 2012 |
Core deposit premiums | | | | $ | 5,400 | | $ | 5,400 |
Less accumulated amortization | | | | | (3,343) | | | (2,857) |
Core deposit premiums, net | | | | | 2,057 | | | 2,543 |
| | | | | | | | |
Loan servicing rights | | | | | 11,689 | | | 10,257 |
Less accumulated amortization | | | | | (8,766) | | | (7,936) |
Loan servicing rights, net | | | | | 2,923 | | | 2,321 |
| | | | | | | | |
Other intangible assets, net | | | | $ | 4,980 | | $ | 4,864 |
Core deposit intangibles are amortized using an economic life method based on deposit attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The weighted average amortization period for core deposit intangibles is approximately 10 years. Amortization expense related to core deposit intangibles totaled $0.5 million in 2013, 2012, and 2011.
During 2013 and 2012, we had recorded loan servicing right amortization expense of $0.8 million and $0.7 million, respectively.
The estimated aggregate future amortization expense for other intangible assets remaining as of December 31, 2013 is as follows:
| | | | | | | | | |
(Dollars in thousands) | | Core Deposit Premiums | | Loan Servicing Rights | | Total |
2014 | | $ | 514 | | $ | 512 | | $ | 1,026 |
2015 | | | 474 | | | 476 | | | 950 |
2016 | | | 425 | | | 400 | | | 825 |
2017 | | | 249 | | | 333 | | | 582 |
2018 | | | 182 | | | 274 | | | 456 |
Thereafter | | | 213 | | | 928 | | | 1,141 |
| | $ | 2,057 | | $ | 2,923 | | $ | 4,980 |
Note 6: Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.
ASC 820, Fair Value Measurements and Disclosure, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1Quoted prices in active markets for identical instruments.
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The estimated fair value amounts have been determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. There were no changes in valuation methods used to estimate fair value during the year ended December 31, 2013.
A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:
Loans held for sale – Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. The fair value of loans held for sale is based on existing investor commitments. Guaranteed student loans held for sale are carried at the lower of cost or market, which is determined on an aggregate basis.
Available for sale securities – The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices, when available. We obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. We review the prices supplied by the independent pricing service, as well as their
underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.
The fair value of a single private equity investment is estimated based on our proportionate share of the net asset value, $2.4 million and $1.7 million as of December 31, 2013 and December 31, 2012, respectively. The investee invests in small and mid-sized U.S. financial institutions and other financial-related companies. This investment has a quarterly redemption with sixty-five days’ notice.
Derivative instrument – We utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate (cash flow hedge). The fair value of the interest rate swap agreement is obtained from dealer quotes.
The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | Fair Value Measurement at Reporting Date Using |
| | | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
(Dollars in thousands) | | | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
At December 31, 2013 | | | | | | | | | | | | | | |
Loans held for sale: | | | | | | | | | | | | | | |
Student loans | | | | $ | - | | $ | - | | $ | - | | $ | - |
One-to-four family residential | | | | | 2,235 | | | - | | | 2,235 | | | - |
Government guaranteed commercial real estate | | | | | 769 | | | - | | | 769 | | | - |
Other loans held for sale | | | | | 56 | | | - | | | 56 | | | - |
| | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | |
Federal agency securities | | | | | 120,773 | | | - | | | 120,773 | | | - |
Obligations of state and political subdivisions | | | | | 32,636 | | | - | | | 32,636 | | | - |
Residential mortgage-backed securities | | | | | 183,170 | | | - | | | 183,170 | | | - |
Asset-backed securities | | | | | 9,482 | | | | | | 9,482 | | | |
Other securities | | | | | 36,418 | | | 151 | | | 36,267 | | | - |
| | | | | | | | | | | | | | |
Derivative instrument | | | | | (1,967) | | | - | | | (1,967) | | | - |
Total | | | | $ | 383,572 | | $ | 151 | | $ | 383,421 | | $ | - |
| | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | |
Loans held for sale: | | | | | | | | | | | | | | |
Student loans | | | | $ | 4,680 | | $ | - | | $ | 4,680 | | $ | - |
One-to-four family residential | | | | | 5,112 | | | - | | | 5,112 | | | - |
Government guaranteed commercial real estate | | | | | 21,794 | | | - | | | 21,794 | | | - |
Other loans held for sale | | | | | 96 | | | - | | | 96 | | | - |
| | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | |
Federal agency securities | | | | | 115,614 | | | - | | | 115,614 | | | - |
Obligations of state and political subdivisions | | | | | 35,558 | | | - | | | 35,558 | | | - |
Residential mortgage-backed securities | | | | | 203,675 | | | - | | | 203,675 | | | - |
Asset-backed securities | | | | | 7,671 | | | | | | 7,671 | | | |
Other securities | | | | | 1,797 | | | 111 | | | 1,686 | | | - |
| | | | | | | | | | | | | | |
Derivative instrument | | | | | (3,195) | | | - | | | (3,195) | | | - |
Total | | | | $ | 392,802 | | $ | 111 | | $ | 392,691 | | $ | - |
Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:
Impaired loans – Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on third-party appraisals. Certain other impaired loans are remeasured and reported through a specific valuation allowance allocation of the allowance for loan losses based upon the net present value of cash flows.
Other real estate – Other real estate fair value is based on third-party appraisals for properties less the estimated costs to sell the asset.
Goodwill – Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value. There has been no impairment during 2013 or 2012; therefore, no fair value adjustment was recorded through earnings.
Core deposit premiums – The fair value of core deposit premiums are based on third-party appraisals. There has been no impairment during 2013 or 2012; therefore, no fair value adjustment was recorded through earnings.
Mortgage loan servicing rights – There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.
Assets that are measured at fair value on a nonrecurring basis as of December 31, 2013 and 2012 are summarized below.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | | |
| | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total Gains |
(Dollars in thousands) | Total | | (Level 1) | | (Level 2) | | (Level 3) | | (Losses) |
At December 31, 2013 | | | | | | | | | | | | | | |
Noncovered impaired loans at fair value : | | | | | | | | | | | | | | |
Commercial real estate | $ | 20,423 | | $ | - | | $ | 20,423 | | $ | - | | $ | 3,075 |
One-to-four family residential | | - | | | - | | | - | | | - | | | - |
Real estate construction | | 2,636 | | | - | | | 2,636 | | | - | | | (18) |
Commercial | | 9,176 | | | - | | | 9,176 | | | - | | | (2,989) |
Other consumer | | 46 | | | - | | | 46 | | | - | | | 35 |
| | | | | | | | | | | | | | |
Noncovered other real estate | | 560 | | | - | | | 560 | | | - | | | (1,520) |
Covered other real estate | | 2,094 | | | - | | | 2,094 | | | - | | | (702) |
Mortgage loan servicing rights | | 3,492 | | | - | | | - | | | 3,492 | | | - |
Total | $ | 38,427 | | $ | - | | $ | 34,935 | | $ | 3,492 | | $ | (2,119) |
| | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | |
Noncovered impaired loans at fair value : | | | | | | | | | | | | | | |
Commercial real estate | $ | 33,137 | | $ | - | | $ | 33,137 | | $ | - | | $ | (6,674) |
One-to-four family residential | | 23 | | | - | | | 23 | | | - | | | (7) |
Real estate construction | | 232 | | | - | | | 232 | | | - | | | 3,532 |
Commercial | | 13,473 | | | - | | | 13,473 | | | - | | | (6,637) |
Other consumer | | 81 | | | - | | | 81 | | | - | | | 31 |
| | | | | | | | | | | | | | |
Noncovered other real estate | | 11,315 | | | - | | | 11,315 | | | - | | | (3,998) |
Covered other real estate | | 3,643 | | | - | | | 3,643 | | | - | | | (180) |
Mortgage loan servicing rights | | 2,321 | | | - | | | - | | | 2,321 | | | (465) |
Total | $ | 64,225 | | $ | - | | $ | 61,904 | | $ | 2,321 | | $ | (14,398) |
Noncovered impaired loans measured at fair value with a carrying amount of $45.5 million were written down to a fair value of $32.3 million, resulting in a life-to-date impairment of $27.3 million, of which $0.1 million was included in the provision for loan losses for the year ended December 31, 2013. As of December 31, 2012, noncovered impaired loans measured at fair value with a carrying amount of $61.0 million were written down to the fair value of $46.9 million at December 31, 2012, resulting in a life-to-date impairment charge of $14.1 million, of which $9.8 million was included in the provision for loan losses for the year ended December 31, 2012.
As of December 31, 2013, noncovered and covered other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $1.5 million and $0.7 million, respectively, which was included in noninterest expense for the year ended December 31, 2013. In the prior year, noncovered and covered other real estate assets were written down to their respective fair values, resulting in impairment charges of $4.0 million and $0.2 million, respectively, which were included in noninterest expense for the year ended December 31, 2012.
For the year ended December 31, 2013, no impairment of mortgage loan servicing rights was incurred. As of December 31, 2012, mortgage loan servicing rights were written down to their fair value, resulting in an impairment charge of $0.5 million, which were included in noninterest income for the period.
ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:
Cash and cash equivalents – For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities held to maturity – The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.
Loans, net of allowance – Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics. Our loans have been aggregated by categories consisting of commercial, real estate, student, and other consumer. The fair value of loans is estimated by discounting the cash flows using risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks.
Accrued interest receivable – The carrying amount is a reasonable estimate of fair value for accrued interest receivable.
Investment included in other assets – The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.
Deposits – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Other liabilities and accrued interest payable – The estimated fair value of other liabilities, which primarily includes trade accounts payable and accrued interest payable, approximates their carrying values.
Other borrowings – Included in other borrowings are FHLB advances, securities sold under agreements to repurchase, and treasury tax and loan demand notes. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.
Subordinated debentures – Two subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at December 31, 2013 and December 31, 2012. A third subordinated debenture with a fixed rate was redeemed on September 15, 2013. The fair value of the fixed rate subordinated debenture was based on market price.
The carrying values and estimated fair values of our financial instruments segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are as follows:
| | | | | | | | | | | |
| | | | | | | | | | | |
| At December 31, 2013 | | At December 31, 2012 |
| Carrying | | Fair | | Carrying | | Fair |
(Dollars in thousands) | Values | | Values | | Values | | Values |
Financial assets: | | | | | | | | | | | |
Level 2 inputs: | | | | | | | | | | | |
Cash and cash equivalents | $ | 279,839 | | $ | 279,839 | | $ | 288,079 | | $ | 288,079 |
Securities held to maturity | | 11,720 | | | 12,115 | | | 12,797 | | | 13,659 |
Accrued interest receivable | | 5,335 | | | 5,335 | | | 6,365 | | | 6,365 |
Investments included in other assets | | 8,140 | | | 8,140 | | | 8,531 | | | 8,531 |
Level 3 inputs: | | | | | | | | | | | |
Total loans, net of allowance | | 1,234,240 | | | 1,190,869 | | | 1,332,017 | | | 1,301,942 |
Financial liabilities: | | | | | | | | | | | |
Level 2 inputs: | | | | | | | | | | | |
Deposits | | 1,584,086 | | | 1,486,939 | | | 1,709,578 | | | 1,666,653 |
Accrued interest payable | | 832 | | | 832 | | | 1,116 | | | 1,116 |
Other liabilities | | 8,248 | | | 8,248 | | | 9,985 | | | 9,985 |
Derivative instrument | | 1,967 | | | 1,967 | | | 3,195 | | | 3,195 |
Other borrowings | | 80,632 | | | 83,593 | | | 70,362 | | | 74,057 |
Subordinated debentures | | 46,393 | | | 46,393 | | | 81,963 | | | 82,998 |
Note 7: Deposits
The following table summarizes deposits as of December 31, 2013 and 2012.
| | | | | |
(Dollars in thousands) | 2013 | | 2012 |
Noninterest-bearing demand | $ | 444,796 | | $ | 424,008 |
Interest-bearing demand | | 120,156 | | | 112,012 |
Money market accounts | | 439,981 | | | 423,417 |
Savings accounts | | 41,727 | | | 37,693 |
Time deposits of $100,000 or more | | 251,185 | | | 351,273 |
Other time deposits | | 286,241 | | | 361,175 |
Total deposits | $ | 1,584,086 | | $ | 1,709,578 |
The total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2013 and 2012 was $0.5 million and $0.4 million, respectively.
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 certificate of deposits as of December 31, 2013 and 2012. CDARS deposits totaled $1.3 million at December 31, 2013 and $9.9 million at December 31, 2012. There were no capital market certificate of deposits at December 31, 2013 and December 31, 2012.
Scheduled time deposit maturities as of December 31, 2013 are as follows:
| | | | | |
(Dollars in thousands) | | | | | |
2014 | | | | | $ 380,504 |
2015 | | | | | 96,028 |
2016 | | | | | 31,540 |
2017 | | | | | 20,738 |
2018 | | | | | 8,616 |
Thereafter | | | | | - |
Total time deposits | | | | | $ 537,426 |
Note 8: Borrowed Funds
We have available various forms of other borrowings for cash management and liquidity purposes. These forms of borrowings include short term federal funds purchased and securities sold under agreements to repurchase, and advances from the FHLB and the FRB. The following table summarizes borrowed funds for the periods indicated:
| | | | | | | | | | | | | | | | | |
| 2013 | | | 2012 | |
(Dollars in thousands) | Balance at December 31 | | Average Balance | | Weighted Average Rate | | | Balance at December 31 | | Average Balance | | Weighted Average Rate | |
Securities sold under repurchase | | | | | | | | | | | | | | | | | |
agreements | $ | 55,632 | | $ | 49,115 | | 0.05 | % | | $ | 45,362 | | $ | 36,823 | | 0.05 | % |
Federal Home Loan Bank advances | | 25,000 | | | 25,000 | | 3.47 | | | | 25,000 | | | 25,000 | | 3.48 | |
| $ | 80,632 | | | | | | | | $ | 70,362 | | | | | | |
We have approved federal funds purchase lines totaling $150.0 million with five financial entities. We sell securities under agreements to repurchase with us retaining custody of the collateral. Collateral consists of direct obligations of U.S. Government and Federal Agency issues, which are designated as pledged with our safekeeping agent. The type of collateral required, the retention of the collateral, and the security sold, minimize our risk of exposure to loss. These transactions are for one-to-four day periods. At December 31, 2013 and 2012, no repurchase agreement exceeded 10% of equity capital.
We have entered into an agreement with the FHLB to obtain advances from the FHLB from time to time. At December 31, 2013, the Bank SNB FHLB line of credit had an outstanding balance of $25.0 million. The terms of the agreement are set forth in the Advance, Pledge and Security Agreement (the “Agreement”). The FHLB requires that we pledge collateral on such advances. Under the terms of the Agreement, the discounted value of the collateral, as defined by the FHLB, should at all times be at least equal to the amount borrowed by us. Such advances outstanding are subject to a blanket collateral arrangement, which requires the pledging of eligible collateral to secure such advances. Such collateral principally includes certain loans and securities. At December 31, 2013 and 2012, loans pledged under the Agreement were $517.8 million and $532.9 million, and investment securities pledged (at carrying value) were $50.1 million and $12.2 million, respectively. There are no scheduled minimum future principal payments on the FHLB line of credit until after 2016.
We are qualified to borrow funds from the FRB through their Borrower-In-Custody (“BIC”) program. Collateral under this program consists of pledged selected commercial and industrial loans. Currently, the collateral will allow us to borrow up to $44.6 million. We also have substantial unused borrowing availability in the form of unsecured brokered certificate of deposits program from Bank of America Merrill Lynch, Morgan Stanley & Co., Citigroup Global Markets, Inc., Wells Fargo Bank, NA, UBS Securities LLC, and RBC Capital Markets Corp. In conjunction with these lines of credit, we had no retail certificates of deposit included in total deposits at December 31, 2013 and 2012.
Note 9: Trust Preferred Securities and Subordinated Debentures
At December 31, 2013 and 2012, we had the following issues of trust preferred securities outstanding and subordinated debentures owed to the Trusts.
| | | | | | | | | |
At December 31, 2013 | | | | | | | | | |
| | | | | | | | | |
(Dollars in thousands) | | Subordinated Debentures Owed to Trusts | | | Trust Preferred Securities of the Trusts | | Rates | | Final Maturity Date |
OKSB Statutory Trust I | $ | 20,619 | | $ | 20,000 | | 3.35% | | June 26, 2033 |
SBI Capital Trust II | | 25,774 | | | 25,000 | | 3.09% | | October 7, 2033 |
| $ | 46,393 | | $ | 45,000 | | | | |
| | | | | | | | | |
At December 31, 2012 | | | | | | | | | |
(Dollars in thousands) | | Subordinated Debentures Owed to Trusts | | | Trust Preferred Securities of the Trusts | | Rates | | Final Maturity Date |
OKSB Statutory Trust I | $ | 20,619 | | $ | 20,000 | | 3.41% | | June 26, 2033 |
SBI Capital Trust II | | 25,774 | | | 25,000 | | 3.19% | | October 7, 2033 |
Southwest Capital Trust II | | 35,570 | | | 34,500 | | 10.50% | | September 15, 2038 |
| $ | 81,963 | | $ | 79,500 | | | | |
On June 26, 2003, our subsidiary, OKSB Statutory Trust I, sold to investors in a private placement offering $20.0 million of adjustable rate trust preferred securities (the “OKSB Trust Preferred”). The OKSB Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus 3.10%. In addition to these adjustable rate securities, OKSB Statutory Trust I sold $0.6 million of trust common equity to Southwest. The aggregate proceeds of $20.6 million were used to purchase an equal principal amount of adjustable rate subordinated debentures that bear interest, adjustable quarterly, at 90-day LIBOR plus 3.10% (the “OKSB Subordinated Debentures”). After deducting underwriter’s compensation and noninterest expenses of the offering, the net proceeds were available to us to increase capital and for general corporate purposes. Interest payments on the OKSB Subordinated Debentures are deductible for federal income tax purposes.
On October 14, 2003, our subsidiary, SBI Capital Trust II, sold to investors in a private placement offering $25.0 million of adjustable rate trust preferred securities (the “SBI II Trust Preferred”). The SBI II Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus 2.85%. In addition to these adjustable rate securities, SBI Capital Trust II sold $0.8 million of trust common equity to us. The aggregate proceeds of $25.8 million were used to purchase an equal principal amount of our adjustable rate subordinated debentures that bear interest, adjustable quarterly 90-day LIBOR plus 2.85% (the “SBI II Subordinated Debentures”). The proceeds were available to us to increase capital and for general
corporate purposes. Interest payments on the SBI II Subordinated Debentures are deductible for federal income tax purposes.
In July 2008, our subsidiary, Southwest Capital Trust II, sold to investors in a public offering $34.5 million of 10.50% trust preferred securities (the “OKSBP Trust Preferred”). In addition to these trust preferred securities, Southwest Capital Trust II sold $1.1 million of trust common equity to us. The aggregated proceeds of $35.6 million were used to purchase an equal amount of our 10.50% subordinated debentures (the “OKSBP Subordinated Debentures”). On September 15, 2013, we redeemed all of the OKSBP Trust Preferred pursuant to the optional redemption provisions provided in the documents governing the OKSBP Trust Preferred. The OKSBP Trust Preferred were redeemed at the liquidation amount of $25 per trust preferred security plus accrued and unpaid distributions to the redemption date of September 15, 2013; settlement occurred on September 16, 2013. We also redeemed $1.07 million in common securities issued by Southwest Capital Trust II and related to the OKSBP Trust Preferred. Following the redemption, our capital levels remained well in excess of the regulatory minimum for well capitalized status. The redemption was funded with cash on hand.
At December 31, 2013, we had an aggregate of $46.4 million of subordinated debentures outstanding and had an asset of $1.4 million representing our total investment in the common equity issued by the Trusts. The sole assets of the Trusts are the subordinated debentures and the liabilities of the Trusts of the OKSB Trust Preferred and SBI II Trust Preferred. We have, through various contractual arrangements, unconditionally guaranteed payment of all obligations of our Trusts with respect to our OKSB Trust Preferred and our SBI II Trust Preferred.
The OKSB Trust Preferred, the OKSB Subordinated Debentures, the SBI II Trust Preferred, and the SBI II Subordinated Debentures, mature at or near the thirtieth anniversary date of their issuance. However, if certain conditions are met, the OKSB Trust Preferred and the OKSB Subordinated Debentures and the SBI II Trust Preferred and the SBI II Subordinated Debentures may be called at our discretion with thirty days’ notice.
We, OKSB Statutory Trust I, and SBI Capital Trust II believe that, taken together, our obligations under the Trust Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the Subordinated Debentures, the Indentures and the Agreements as to Expenses and Liabilities, entered into in connection with the offering of the Trust Preferred and the Subordinated Debentures, in the aggregate constitute a full and unconditional guarantee by us of the obligations of OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred.
OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated Debentures, which are its sole assets. We own all of the 619 outstanding common securities of OKSB Statutory Trust I; the liquidation value is $1,000 per share.
SBI Capital Trust II is a Delaware statutory trust created for the purpose of issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated Debentures, which are its sole assets. We own all of the 774 outstanding common securities of SBI Capital Trust II; the liquidation value is $1,000 per share.
Southwest Capital Trust II was a Delaware statutory trust created for the purpose of issuing the OKSBP Trust Preferred and purchasing the OKSBP Subordinated Debentures, which are its sole assets. All trust assets were redeemed on September 15, 2013.
Each of the Trust Preferred issuances meets the regulatory criteria for Tier I capital, subject to Federal Reserve guidelines that limit the amount of the Trust Preferred and cumulative perpetual preferred stock to an aggregate of 25% of Tier I capital. At December 31, 2013, $45.0 million of the Trust Preferred was included in Tier I capital.
We de-consolidate our investments in OKSB Statutory Trust I and SBI Capital Trust II (the “Trusts”) in this Annual Report and all future reports. Due to this required de-consolidation, the trust preferred securities are not presented on the consolidated statements of financial condition and the subordinated debentures are presented on the consolidated statements of financial condition as a separate liability category.
In July 2012, we paid all previously deferred dividends on our three issues of outstanding debentures and dividends on the related trust preferred securities. Payments of deferred and arrears interest and dividends were completed in July 2012, and all payments are now current. In July 2011, we suspended payments of interest on our three issues of outstanding debentures effective August 1, 2011 and dividends on the related trust preferred securities.
The terms of the debentures allow us to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. These terms also allow us to resume payments at the end of any deferral period, or to extend the deferral up to the maximum 20 quarters in total. No deferral can extend past the maturity date of the debenture.
Note 10: Derivative Instruments
We have an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap contract was designated as a cash flow hedging instrument with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month London Interbank Offered Rate (“LIBOR”). Under the swap, we will pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by us as of December 31, 2013 was 3.09%.
The estimated fair value of the interest rate derivative contract outstanding as of December 31, 2013 and 2012 resulted in a pre-tax loss of $2.0 million and $3.2 million, respectively, and was included in other liabilities in the Consolidated Statement of Financial Condition.
The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.7 million gain and a $0.2 million loss for the year ended December 31, 2013 and 2012, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.
Net cash flows as a result of the interest rate swap agreement were $0.8 million for year ended December 31, 2013 and $0.7 million for the year ended 2012, and were included in interest expense on subordinated debentures.
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management committee. Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with our derivative contract.
The fair value of cash and securities posted as collateral by us related to the derivative contract was $4.1 million and $4.2 million at December 31, 2013 and 2012, respectively.
Note 11: Taxes on Income
The components of taxes on income follow:
| | | | | | | | |
| For the Year Ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Current tax (benefit) expense: | | | | | | | | |
Federal | $ | 462 | | $ | 712 | | $ | (18,319) |
State | | 74 | | | 232 | | | (4,875) |
Deferred tax expense (benefit): | | | | | | | | |
Federal | | 9,362 | | | 8,145 | | | (18,375) |
State | | 858 | | | 794 | | | (2,088) |
Taxes on income | $ | 10,756 | | $ | 9,883 | | $ | (43,657) |
A reconciliation from the expected tax expense (benefit) using the U.S. Federal income tax rate of 35% to consolidated effective income tax expense (benefit) follows:
| | | | | | | | |
| For the Year Ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Computed tax (benefit) expense at statutory rates | $ | 9,867 | | $ | 9,124 | | $ | (39,183) |
Increase (decrease) in income taxes resulting from: | | | | | | | | |
Benefit of income not subject to U.S. Federal income tax | | (213) | | | (213) | | | (165) |
Expenses not deductible for U.S. Federal income tax | | 96 | | | 150 | | | 124 |
State income taxes, net of Federal income tax benefit | | 749 | | | 476 | | | (3,755) |
Reversal of FIN 48 reserve | | - | | | - | | | (953) |
State payment or refund from prior periods (federally tax affected) | | - | | | 50 | | | - |
Tax credit recapture | | 76 | | | - | | | - |
Other | | 181 | | | 296 | | | 275 |
Taxes on income | $ | 10,756 | | $ | 9,883 | | $ | (43,657) |
The calculated year-to-date effective tax rate is 38.2% for 2013, 37.9% for 2012, and (39.0%) for 2011.
At December 31, 2013, we had $10.7 million federal net operating loss carryforward expiring in 2031, $53.1 million of state net operating loss carryforward expiring in 2031, and $0.6 million of state net operating loss carryforward expiring in 2021. In addition, we had $2.5 million alternative minimum tax credit that can be carried forward indefinitely.
A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of certain income and expense items for financial statement reporting purposes. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
We conducted an analysis to assess the need for a valuation allowance at December 31, 2013. As part of this assessment, all available evidence, including both positive and negative, was considered to determine whether based on the weight of such evidence, a valuation allowance for deferred tax assets was needed. In accordance with ASC 740, Income Taxes, a valuation allowance is deemed to be needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of a deferred tax asset will not be realized. The future realization of the tax benefit depends on the existence of sufficient taxable income within the carryback and carryforward periods.
As part of our analysis, we considered the following positive evidence:
| · | | Taxes paid in prior carryback years; |
| · | | Ability to carryforward federal and Oklahoma tax losses for 20 years; |
| · | | Long history of earnings profitability; |
| · | | Projected future taxable income, exclusive of tax planning strategies, sufficient to utilize the deferred tax assets; |
| · | | Current year income exceeding forecasted income; |
| · | | Improvement in overall asset quality and related credit metrics; |
| · | | Redemption of Trust Preferred Securities; and |
| · | | Change in executive management. |
Due to the loss incurred in 2011, we remain in a three-year cumulative pretax loss position that is considered significant negative evidence in the determination of the need for a valuation allowance. Included in the three-year pretax loss position is $101.0 million related to the nonrecurring sale of nonperforming assets and potential problem loans during 2011. Management believes that the combination of a strong history of taxable income, the quick utilization of existing net operating loss carryforwards, and projected pre-tax income in future years represents positive evidence that the tax benefit will be realized. While realization of the deferred tax benefits is not assured, it is management’s judgment, after review of all available evidence and based on the weight of such evidence, that a valuation allowance is not necessary, as realization of these benefits meets the “more likely than not” standard.
Net deferred tax assets of $24.9 million and $32.2 million at December 31, 2013 and 2012, respectively, are reflected in the accompanying consolidated statements of financial condition in other assets.
Temporary differences that give rise to the deferred tax assets include the following:
| | | | | | | | | |
| | | | | At December 31, |
(Dollars in thousands) | | | | 2013 | | 2012 |
Deferred tax assets: | | | | | | | | |
| Provision for loan losses | | | | $ | 15,072 | | $ | 19,246 |
| Net operating loss carryforward | | | | | 5,065 | | | 12,674 |
| Tax credit carryforward | | | | | 3,443 | | | 3,070 |
| Write-downs on other real estate | | | | | - | | | 1,669 |
| Nonaccrual loan interest | | | | | 539 | | | 527 |
| Deferred compensation & profit sharing accrual | | | | | 173 | | | 551 |
| Investments | | | | | 468 | | | 457 |
| Section 597 gain - FDIC-assisted acquisition | | | | | 1,214 | | | (119) |
| Accrued Expenses | | | | | 812 | | | - |
| Other | | | | | 43 | | | (51) |
Total deferred tax assets | | | | | 26,829 | | | 38,024 |
| | | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
| Accumulated depreciation | | | | | (2,476) | | | (2,835) |
| Amortizable assets | | | | | (614) | | | (749) |
| Dividend - Equity vs. Cost Method | | | | | (316) | | | (492) |
| Prepaid expenses | | | | | (188) | | | (254) |
| FHLB stock dividends | | | | | (192) | | | (220) |
| Stock-based compensation | | | | | (6) | | | (216) |
Total deferred tax liabilities | | | | | (3,792) | | | (4,766) |
| Deferred taxes (payable) receivable on investment | | | | | | | | |
| securities available for sale | | | | | 1,900 | | | (1,075) |
Net deferred tax asset | | | | $ | 24,937 | | $ | 32,183 |
We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal or state tax examinations for years before 2010. On February 15, 2012, we were notified by the Internal Revenue Service that the 2009 income tax filing was under audit and on January 14, 2013, we received final notice that the examination was completed with no adjustments proposed. Additionally, as procedurally required, our company’s 2010 and 2011 federal returns were examined in connection with the 2011 net operating loss carryback and no adjustments were required.
Unrecognized Tax Benefits – ASC 740, Income Taxes, provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. As of December 31, 2013, we have no unrecognized tax benefits related to Federal or State income tax matters and do not anticipate any changes within the next twelve months. Additionally, no interest and penalties have been accrued related to uncertain tax positions.
Note 12: Shareholders’ Equity
On December 5, 2008, we issued to the United States Department of the Treasury (the “Treasury Department”) 70,000 shares of Fixed Rate Cumulative Preferred Stock, Series B, par value $1,000 per share (the “Series B Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total price of $70.0 million. The Series B Preferred Stock paid cumulative dividends at a rate of 5% per year for the first 5 years and thereafter at a rate of 9% per year. As part of its purchase of the Series B Preferred Stock, the Treasury Department received a warrant to purchase 703,753 shares of common stock at an initial per share exercise price of $14.92. The warrant expires ten years from the issuance date. Pursuant to the Securities Purchase Agreement, the Treasury Department agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.
We allocated $66.3 million to the Series B Preferred Stock and $3.7 million to the warrant based on their relative fair values at the issue date. The amount allocated to the warrant was accreted over the estimated life of the Series B Preferred Stock using five years. Such accretion for the year ended December 31, 2013 was $0 million and $1.5 million for the year ended December 31, 2012, and $0.7 million for December 31, 2011.
In August 2012, we repurchased from the Treasury Department all 70,000 outstanding shares of our Series B Preferred Stock. As a result of the repurchase, we took a one-time, non-cash equity charge of approximately $1.2 million to reflect accelerated accretion of the remaining discount on the Series B Preferred.
On May 29, 2013, we repurchased the warrant issued to the Treasury Department as part of the TARP Capital Purchase Program (CPP) for a purchase price of $2.3 million. The repurchase of the warrant completed our repurchase of all securities issued to the Treasury in connection with the CPP.
We have reserved for issuance 150,000 shares of common stock pursuant to the terms of the Employee Stock Purchase Plan. The Employee Stock Purchase Plan allows our employees to acquire additional common shares through payroll deductions. From July 1999 to August 2009, shares issued out of this plan came from treasury shares, subsequent shares issued came from the reserved shares. As of December 31, 2013, 56,136 new shares had been issued and 52,500 treasury shares had been reissued under this plan.
We have reserved 800,000 shares of common stock pursuant to the terms of the 2008 Stock Plan. The 2008 Stock Plan provides selected key employees with the opportunity to acquire common stock. As of December 31, 2013, 323,927 new shares had been issued and 25,725 treasury shares had been reissued by the 2008 Stock Plan.
Note 13: Earnings per Common Share
The following table shows the computation of basic and diluted earnings per common share:
| | | | | | | | |
| | | | | | | |
(Dollars in thousands, except earnings per share data) | 2013 | | 2012 | | 2011 |
Numerator: | | | | | | | | |
Net income (loss) | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
Preferred dividend | | - | | | (2,196) | | | (3,522) |
Warrant amortization | | - | | | (1,545) | | | (731) |
Net income (loss) available to common shareholders | | 17,435 | | | 12,446 | | | (72,548) |
Earnings allocated to participating securities | | (139) | | | - | | | - |
Numerator for basic earnings per common share | $ | 17,296 | | $ | 12,446 | | $ | (72,548) |
Effect of reallocating undistributed earnings | | | | | | | | |
of participating securities | | 139 | | | - | | | - |
Numerator for diluted earnings per common share | $ | 17,435 | | $ | 12,446 | | $ | (72,548) |
| | | | | | | | |
Denominator: | | | | | | | | |
Denominator for basic earnings per common share | | 19,516,776 | | | 19,374,098 | | | 19,414,231 |
Dilutive effect of stock compensation | | 87,469 | | | - | | | - |
Denominator for diluted earnings per common share | | 19,604,245 | | | 19,374,098 | | | 19,414,231 |
| | | | | | | | |
Earnings per common share: | | | | | | | | |
Basic | $ | 0.89 | | $ | 0.64 | | $ | (3.73) |
Diluted | $ | 0.89 | | $ | 0.64 | | $ | (3.73) |
Note 14: Capital Requirements and Regulatory Matters
We and Bank SNB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our and Bank SNB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and Bank SNB must meet specific capital guidelines that involve quantitative measures of our and Bank SNB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our and Bank SNB’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require us and Bank SNB to maintain minimum amounts of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined).
Management believes that, as of December 31, 2013, we and Bank SNB met all capital adequacy requirements and that as of December 31, 2012, we, Stillwater National, and Bank of Kansas met all capital adequacy requirements.
As of December 31, 2013, Bank SNB was categorized as well-capitalized under the regulatory framework for prompt corrective action. As of December 31, 2012, Stillwater National and Bank of Kansas were categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.
A summary of actual capital amounts and ratios as of December 31, 2013 are presented below.
| | | | | | | | | | | | | | | | | |
| | | | | | | To Be Well Capitalized | | | | | | | |
| | | | | | | Under Prompt Corrective | | | For Capital | |
| Actual | | | Action Provisions | | | Adequacy Purposes | |
(Dollars in thousands) | Amount | | Ratio | | | | Amount | | Ratio | | | | Amount | | Ratio | |
As of December 31, 2013: | | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | |
Southwest | $ | 310,867 | | 21.59 | % | | $ | N/A | | N/A | % | | $ | 115,194 | | 8.00 | % |
Bank SNB | | 284,388 | | 19.83 | | | | 143,413 | | 10.00 | | | | 114,730 | | 8.00 | |
Tier I Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | |
Southwest | | 292,051 | | 20.28 | | | | N/A | | N/A | | | | 57,597 | | 4.00 | |
Bank SNB | | 266,132 | | 18.56 | | | | 86,048 | | 6.00 | | | | 57,365 | | 4.00 | |
Tier I Leverage (to average assets) | | | | | | | | | | | | | | | | | |
Southwest | | 292,051 | | 14.86 | | | | N/A | | N/A | | | | 78,597 | | 4.00 | |
Bank SNB | | 266,132 | | 13.62 | | | | 97,719 | | 5.00 | | | | 78,175 | | 4.00 | |
A summary of actual capital amounts and ratios of Stillwater National and Bank of Kansas as of December 31, 2012 are presented below.
| | | | | | | | | | | | | | | | | |
| | | | | | | To Be Well Capitalized | | | | | | | |
| | | | | | | Under Prompt Corrective | | | For Capital | |
| Actual | | | Action Provisions | | | Adequacy Purposes | |
(Dollars in thousands) | Amount | | Ratio | | | | Amount | | Ratio | | | | Amount | | Ratio | |
As of December 31, 2012: | | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | |
Southwest | $ | 339,964 | | 21.56 | % | | $ | N/A | | N/A | % | | $ | 126,122 | | 8.00 | % |
Stillwater National | | 269,323 | | 19.55 | | | | 137,793 | | 10.00 | | | | 110,234 | | 8.00 | |
Bank of Kansas | | 33,356 | | 18.37 | | | | 18,161 | | 10.00 | | | | 14,529 | | 8.00 | |
Tier I Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | |
Southwest | | 319,665 | | 20.28 | | | | N/A | | N/A | | | | 63,061 | | 4.00 | |
Stillwater National | | 236,705 | | 17.18 | | | | 82,676 | | 6.00 | | | | 55,117 | | 4.00 | |
Bank of Kansas | | 31,064 | | 17.10 | | | | 10,896 | | 6.00 | | | | 7,264 | | 4.00 | |
Tier I Leverage (to average assets) | | | | | | | | | | | | | | | | | |
Southwest | | 319,665 | | 15.01 | | | | N/A | | N/A | | | | 85,201 | | 4.00 | |
Stillwater National | | 236,705 | | 13.14 | | | | 90,088 | | 5.00 | | | | 72,070 | | 4.00 | |
Bank of Kansas | | 31,064 | | 10.02 | | | | 15,506 | | 5.00 | | | | 12,405 | | 4.00 | |
The approval of the OCC is required if the total of all dividends declared by Bank SNB in any calendar year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, Bank SNB may not pay a dividend if, after paying the dividend, Bank SNB would be undercapitalized. For the year ended December 31, 2013, Bank SNB declared $19.5 million in dividends. For the year ended December 31, 2012, Bank SNB declared $65.0 million in dividends, and no dividends were declared by Bank SNB for the year ended December 31, 2011.
Note 15: Employee Benefits
We sponsor a 401(k) defined contribution savings plan. The plan covers all employees who have completed one year of service and have attained the age of 21. The plan is subject to the Employee Retirement Income Security Act of 1974, as amended. This plan permits participants to make before or after-tax contributions in an amount not exceeding 90% of eligible compensation and subject to dollar limits from Internal Revenue Service regulations. We will make an annual nonelective contribution of 3% of eligible compensation. We made contributions of $1.0 million and $0.7 million in 2013 and 2012, respectively.
Stock Options – We recorded no share-based compensation expense with respect to stock options for the years ended December 31, 2013 and 2012. The share-based compensation is calculated using the accrual method, which treats each vesting tranche as a separate award and amortizes expense evenly from grant date to vest date for each tranche. The amortization of stock-based compensation reflects actual forfeitures, and as of December 31, 2013, there was no unrecognized compensation expense. The deferred tax asset that was recorded related to this compensation expense was approximately $0 for tax years 2013 and 2012 and $92,000 for tax year 2011.
We have computed the estimated fair values of all share-based compensation using the Black-Scholes option pricing model. No options were granted in 2013, 2012, or in 2011.
A summary of option activity under the Stock Plans as of December 31, 2013 and changes during the three-year period then ended is presented below.
| | | | | | | | |
| | | | | | Weighted |
| | | Weighted | | Average Aggregate |
| | | Average | | Remaining | | Intrinsic |
| Number of | | Exercise | | Contractual | | Value (dollars |
| Options | | Price | | Life (Years) | | in thousands) |
Outstanding at December 31, 2010 | 202,215 | | $ | 24.00 | | | | |
Granted | - | | | - | | | | |
Exercised | - | | | - | | | | |
Canceled/expired | (128,401) | | | 23.59 | | | | |
Outstanding at December 31, 2011 | 73,814 | | $ | 24.72 | | | | |
Granted | - | | | - | | | | |
Exercised | - | | | - | | | | |
Canceled/expired | (68,814) | | | 25.28 | | | | |
Outstanding at December 31, 2012 | 5,000 | | $ | 16.93 | | | | |
Granted | - | | | - | | | | |
Exercised | - | | | - | | | | |
Canceled/expired | (5,000) | | | 16.93 | | | | |
Outstanding at December 31, 2013 | - | | $ | - | | - | | - |
| | | | | | | | |
Total exercisable at December 31, 2011 | 73,814 | | $ | 24.72 | | | | |
Total exercisable at December 31, 2012 | 5,000 | | $ | 16.93 | | | | |
Total exercisable at December 31, 2013 | - | | $ | - | | | | - |
No stock options were exercised in 2013, 2012 and 2011.
Restricted Stock - Restricted shares granted as of December 31, 2013, 2012 and 2011 was 401,844, 200,798, and 120,298, respectively. We recognized $0.7 million for the year ended December 31, 2013 and $0.1 million for the year ended December 31, 2012 and $0.2 million for the year ended December 31, 2011, in compensation expense, net of tax, related to all restricted shares outstanding. At December 31, 2013, there was $0.7 million of total unrecognized compensation expense related to restricted shares granted under the 2008 Stock Plan. Of the total unrecognized compensation expense at December 31, 2013, $0.4 million will be recognized in 2014, and the remainder will be recognized the following three years.
The 2013 and 2012 grants of restricted stock have a vesting period between six months to 3 years. The restrictions on the shares expire one year after the award date or upon a change in control of us (subject to the prohibition on parachute
payments imposed by the American Reinvestment and Recovery Act) or the permanent and total disability or death of the participant. We recognize compensation expense over the restricted period.
Note 16: Related Party Transactions
Directors and officers of us and Bank SNB were customers of, and had transactions with, us in the ordinary course of business, and similar transactions are expected in the future. All loans included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and in management’s opinion did not involve more than normal risk of loss or present other unfavorable features. Certain directors, and companies in which they have ownership interests, had indebtedness to us totaling $3.2 million and $3.7 million at December 31, 2013 and 2012, respectively. During 2013, $9.4 million of new loans and advances on existing loans were made to these persons and repayments totaled $9.9 million.
At December 31, 2013 and 2012, directors, officers and other related parties had demand, non-interest bearing deposits of $1.7 million and $2.4 million, respectively, savings and interest-bearing transaction accounts of $17.0 million and $12.3 million, respectively, and time certificates of deposit of $0.7 million and $0.8 million, respectively.
Note 17: Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies
Financial Instruments with Off-Balance-Sheet Risk – In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with U.S. generally accepted accounting principles, these transactions are not presented in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit.
The following table provides a summary of our off-balance sheet financial instruments:
| | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 |
Commitments to extend commercial and real estate mortgage credit | $ | 323,925 | | $ | 248,337 |
Standby and commercial letters of credit | | 5,800 | | | 6,744 |
Total | $ | 329,725 | | $ | 255,081 |
A loan commitment is a binding contract to lend up to a maximum amount for a specified period of time provided there is no violation of any financial, economic, or other terms of the contract. A standby letter of credit obligates us to honor a financial commitment to a third party should our customer fail to perform. Many loan commitments and most standby letters of credit expire unfunded, and, therefore, total commitments do not represent our future funding obligations. Loan commitments and letters of credit are made under normal credit terms, including interest rates and collateral prevailing at the time, and usually require the payment of a fee by the customer. Commercial letters of credit are commitments generally issued to finance the movement of goods between buyers and sellers. Our exposure to credit loss, assuming commitments are funded, in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. We do not anticipate any material losses as a result of the commitments.
Litigation – In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.
Severance Compensation Plan and Change in Control Agreements – We have adopted a Severance Compensation Plan and a Change of Control Agreement (the “Plans”) for the benefit of certain officers and key members of management. The Plan’s purpose is to protect and retain certain qualified employees in the event of a change in control and to reward those qualified employees for loyal service to us by providing severance compensation to them upon their involuntary termination of employment after a change in control of Southwest. At December 31, 2013, we have not recorded any
amounts in the Consolidated Financial Statements relating to the Plans. If a change of control were to occur, the maximum amount payable to certain officers and key members of management would approximate $4.8 million.
Note 18: Operating Segments
We operate five principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. The Oklahoma Banking segment, the Texas Banking segment, and the Kansas Banking segment provide deposit and lending services. The Mortgage Banking segment consists of residential mortgage lending services to customers. Prior to 2013, the Mortgage Banking segment included all loans available for sale in the secondary market. This adjustment had an immaterial impact on interest income for 2012 and 2011. Other Operations includes our funds management unit and corporate investments.
The primary purpose of the funds management unit is to manage our overall internal liquidity needs and interest rate risk. Each segment borrows funds from or provides funds to the funds management unit as needed to support its operations. The value of funds provided to and the cost of funds borrowed from the funds management unit by each segment are internally priced at rates that approximate market rates for funds with similar duration. The yield used in the funds transfer pricing curve is a blend of rates based on the volume usage of retail and brokered certificates of deposit and Federal Home Loan Bank advances.
Effective January 1, 2013, and as a result of new management, we began to identify reportable segments by geographic location of relationship manager. Operating results are adjusted for allocated service and management costs. In addition to this realignment, management decided to eliminate a capital credit allocation between the reportable segments. The prior year information has been realigned and reallocated for consistency with current identified reportable segments.
The accounting policies of each reportable segment are the same as ours. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting, and audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile to the consolidated financial statements.
Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk factors.
The following table summarizes financial results by operating segment:
| | | | | | | | | | | | | | | | | |
For the year ended December 31,2013 |
| Oklahoma | | Texas | | Kansas | | Mortgage | | Other | | Total |
(Dollars in thousands) | Banking | | Banking | | Banking | | Banking | | Operations* | | Company |
| | | | | | | | | | | | | | | | | |
Net interest income | $ | 34,725 | | $ | 18,949 | | $ | 10,527 | | $ | 670 | | $ | (2,221) | | $ | 62,650 |
Provision for loan losses | | (486) | | | (6,403) | | | (472) | | | 148 | | | 4 | | | (7,209) |
Noninterest income | | 6,943 | | | 1,305 | | | 1,944 | | | 2,701 | | | 750 | | | 13,643 |
Noninterest expenses | | 28,000 | | | 9,494 | | | 11,898 | | | 2,287 | | | 3,632 | | | 55,311 |
Income (loss) before taxes | | 14,154 | | | 17,163 | | | 1,045 | | | 936 | | | (5,107) | | | 28,191 |
Taxes on income | | 5,400 | | | 6,548 | | | 399 | | | 357 | | | (1,948) | | | 10,756 |
Net income (loss) | $ | 8,754 | | $ | 10,615 | | $ | 646 | | $ | 579 | | $ | (3,159) | | $ | 17,435 |
| | | | | | | | | | | | | | | | | |
* Includes externally generated loss of $1.6 million, primarily from investing services, and an internally generated revenue of $0.1 million from the funds management unit |
| | | | | | | | | | | | | | | | | |
Fixed asset expenditures | $ | 85 | | $ | $ 9 | | $ | $ 8 | | $ | - | | $ | $ 1,753 | | $ | 1,855 |
Total loans at period end | | 681,991 | | | 366,697 | | | 198,992 | | | 23,215 | | | 8 | | | 1,270,903 |
Total assets at period end | | 686,736 | | | 361,058 | | | 203,631 | | | 26,162 | | | 703,836 | | | 1,981,423 |
Total deposits at period end | | 1,113,715 | | | 207,227 | | | 247,884 | | | 1,895 | | | 13,365 | | | 1,584,086 |
| | | | | | | | | | | | | | | | | |
For the year ended December 31,2012 |
| Oklahoma | | Texas | | Kansas | | Mortgage | | Other | | Total |
(Dollars in thousands) | Banking | | Banking | | Banking | | Banking | | Operations* | | Company |
| | | | | | | | | | | | | | | | | |
Net interest income | $ | 37,954 | | $ | 25,190 | | $ | 9,685 | | $ | 1,370 | | $ | 2,364 | | $ | 76,563 |
Provision for loan losses | | 448 | | | 5,364 | | | (2,705) | | | - | | | - | | | 3,107 |
Noninterest income | | 7,697 | | | 1,854 | | | 2,440 | | | 2,771 | | | 1,174 | | | 15,936 |
Noninterest expenses | | 29,406 | | | 12,848 | | | 13,767 | | | 2,430 | | | 4,871 | | | 63,322 |
Income (loss) before taxes | | 15,797 | | | 8,832 | | | 1,063 | | | 1,711 | | | (1,333) | | | 26,070 |
Taxes on income | | 5,989 | | | 3,348 | | | 403 | | | 649 | | | (506) | | | 9,883 |
Net income (loss) | $ | 9,808 | | $ | 5,484 | | $ | 660 | | $ | 1,062 | | $ | (827) | | $ | 16,187 |
| | | | | | | | | | | | | | | | | |
* Includes externally generated revenue of $0.8 million, primarily from investing services, and an internally generated revenue of $2.8 million from the funds management unit |
| | | | | | | | | | | | | | | | | |
Fixed asset expenditures | $ | 178 | | $ | $ 71 | | $ | $ 8 | | $ | - | | $ | $ 1,362 | | $ | 1,619 |
Total loans at period end | | 652,121 | | | 520,481 | | | 174,451 | | | 31,682 | | | - | | | 1,378,735 |
Total assets at period end | | 664,607 | | | 515,675 | | | 178,291 | | | 34,304 | | | 729,378 | | | 2,122,255 |
Total deposits at period end | | 1,254,348 | | | 166,919 | | | 270,368 | | | 2,420 | | | 15,523 | | | 1,709,578 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
For the year ended December 31,2011 |
| Oklahoma | | Texas | | Kansas | | Mortgage | | Other | | Total |
(Dollars in thousands) | Banking | | Banking | | Banking | | Banking | | Operations* | | Company |
| | | | | | | | | | | | | | | | | |
Net interest income | $ | 43,005 | | $ | 29,820 | | $ | 12,414 | | $ | 1,438 | | $ | 9,655 | | $ | 96,332 |
Provision for loan losses | | 27,087 | | | 98,335 | | | 6,679 | | | - | | | - | | | 132,101 |
Noninterest income | | 7,781 | | | 1,856 | | | 2,065 | | | 1,297 | | | 1,019 | | | 14,018 |
Noninterest expenses | | 36,402 | | | 28,727 | | | 19,131 | | | 2,121 | | | 3,820 | | | 90,201 |
Income (loss) before taxes | | (12,703) | | | (95,386) | | | (11,331) | | | 614 | | | 6,854 | | | (111,952) |
Taxes on income | | (4,955) | | | (37,196) | | | (4,419) | | | 240 | | | 2,673 | | | (43,657) |
Net income (loss) | $ | (7,748) | | $ | (58,190) | | $ | (6,912) | | $ | 374 | | $ | 4,181 | | $ | (68,295) |
| | | | | | | | | | | | | | | | | |
* Includes externally generated revenue of $2.8 million, primarily from investing services, and an internally generated revenue of $7.9 million from the funds management unit |
| | | | | | | | | | | | | | | | | |
Fixed asset expenditures | $ | 366 | | $ | 3 | | $ | 193 | | $ | 5 | | $ | 1,119 | | $ | 1,686 |
Total loans at period end | | 858,212 | | | 653,199 | | | 213,382 | | | 38,695 | | | - | | | 1,763,488 |
Total assets at period end | | 888,839 | | | 653,146 | | | 219,481 | | | 40,876 | | | 574,934 | | | 2,377,276 |
Total deposits at period end | | 1,406,361 | | | 156,101 | | | 276,757 | | | 1,430 | | | 80,733 | | | 1,921,382 |
Note 19: Parent Company Condensed Financial Information
Following are the condensed financial statements of Southwest Bancorp, Inc. (“Parent Company only”) for the periods indicated:
| | | | | |
| At December 31, |
(Dollars in thousands) | 2013 | | 2012 |
Statements of Financial Condition | | | | | |
Assets: | | | | | |
Cash and cash equivalents | $ | 12,039 | | $ | 18,245 |
Investment in subsidiary banks | | 273,849 | | | 293,573 |
Investments in other subsidiaries | | 8,284 | | | 9,355 |
Investment securities, available for sale | | 3,161 | | | 2,462 |
Other assets | | 10,909 | | | 8,391 |
Total | $ | 308,242 | | $ | 332,026 |
| | | | | |
Liabilities: | | | | | |
Subordinated debentures | | 46,393 | | | 81,963 |
Other liabilities | | 2,660 | | | 4,007 |
Shareholders' Equity: | | | | | |
Common stock and related accounts | | 259,189 | | | 246,056 |
Total | $ | 308,242 | | $ | 332,026 |
| | | | | |
| | | | | | | | |
| For the Year Ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Statements of Operations | | | | | | | | |
Income: | | | | | | | | |
Cash dividends from subsidiaries | $ | 19,625 | | $ | 70,175 | | $ | 160 |
Noninterest income | | 333 | | | 595 | | | 774 |
Investment income | | 243 | | | 340 | | | 31 |
Other operating income | | - | | | - | | | 45 |
Total income | | 20,201 | | | 71,110 | | | 1,010 |
Expense: | | | | | | | | |
Interest on subordinated debentures | | 4,168 | | | 5,463 | | | 5,306 |
Noninterest expense | | 1,808 | | | 3,187 | | | 2,107 |
Total expense | | 5,976 | | | 8,650 | | | 7,413 |
Total income (loss) before taxes and equity in | | | | | | | | |
undistributed income of subsidiaries | | 14,225 | | | 62,460 | | | (6,403) |
Taxes on income | | (2,027) | | | (2,900) | | | (2,563) |
Income (loss) before equity in undistributed | | | | | | | | |
income of subsidiaries | | 16,252 | | | 65,360 | | | (3,840) |
Equity in undistributed income (loss) of subsidiaries | | 1,183 | | | (49,173) | | | (64,455) |
Net income (loss) | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
| | | | | | | | |
| For the Year Ended December 31, |
(Dollars in thousands) | 2013 | | 2012 | | 2011 |
Statements of Cash Flows | | | | | | | | |
Operating activities: | | | | | | | | |
Net income | $ | 17,435 | | $ | 16,187 | | $ | (68,295) |
Equity in undistributed income of subsidiaries | | (1,183) | | | 49,173 | | | 64,455 |
Other, net | | (2,341) | | | (5,437) | | | 499 |
Net cash provided by (used in) operating activities | | 13,911 | | | 59,923 | | | (3,341) |
Investing activities: | | | | | | | | |
Available for sale securities: | | | | | | | | |
Purchases | | - | | | (247) | | | (724) |
Sales / Maturities | | 32 | | | - | | | 46 |
Investment in/capital contribution to other subsidiaries | | 15,000 | | | - | | | - |
Net cash used in investing activities | | 15,032 | | | (247) | | | (678) |
Financing activities: | | | | | | | | |
Net proceeds from issuance of common stock | | 2,708 | | | 925 | | | 278 |
Proceeds from issuance of subordinated debentures | | (35,570) | | | - | | | - |
Preferred stock dividend | | - | | | (74,330) | | | (1,751) |
Other, net | | (2,287) | | | (76) | | | - |
Net cash provided by (used in) financing activities | | (35,149) | | | (73,481) | | | (1,473) |
Net increase (decrease) in cash and cash equivalents | | (6,206) | | | (13,805) | | | (5,492) |
Cash and cash equivalents, | | | | | | | | |
Beginning of year | | 18,245 | | | 32,050 | | | 37,542 |
End of year | $ | 12,039 | | $ | 18,245 | | $ | 32,050 |
Note 20: Subsequent Events
On January 16, 2014 we announced the execution of agreements to sell branch banks in Anthony, Harper and Overland Park, Kansas. Bank branches in Anthony and Harper, Kansas, with $123 million in combined total deposits, will be purchased by BancCentral, National Association, in Alva, Oklahoma. The Overland Park branch, with $11 million in deposits, will be purchased by Fidelity Bank, in Wichita, Kansas. The transactions are expected to be completed during the second quarter of 2014, subject to regulatory approvals and other customary terms and conditions. The banking offices will continue to be staffed by the current employees of each market.
Note 21: New Authoritative Accounting Guidance
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 201) – Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. In January 2013, FASB issued Accounting Standards Update No. 2013-01 Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”) which clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11, as amended by ASU 2013-01, became effective for us on January 1, 2013 and did not have a significant impact on the financial statements.
In October 2012, FASB issued Accounting Standards Update No. 2012-06, Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a financial Institution (“ASU 2012-06”). ASU 2012-06 requires that when a reporting entity
initially recognizes an indemnification asset (in accordance with Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity would be required to account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value of the indemnification asset would be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining term of the indemnified assets). The amendments resulting from ASU 2012-06 would be applied prospectively to any new indemnification assets acquired and to changes in expected cash flows of existing indemnification assets occurring on or after the date of adoption. The guidance became effective for us on January 1, 2013 and did not have a significant impact on the financial statements.
In February 2013, FASB issued Accounting Standard Update No. 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 became effective for us on January 1, 2013 and did not have a significant impact on the financial statements.
Item 9. Change in and disagreements with accountants on accounting and financial disclosures
None.
item 9A. Controls and Procedures
Management’s Assessment of the Effectiveness of Disclosure Controls and Procedures
As required by SEC rules, our management evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2013. Our Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As required by SEC rules, our management evaluated the effectiveness of our internal control over financial reporting as defined in SEC Rule 13a-15 as of December 31, 2013. Our Chief Executive Officer and Chief Financial Officer participated in the evaluation, which was based upon the criteria for effective internal control over financial reporting included in the “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
The report by our independent registered public accounting firm, Ernst & Young LLP, on our internal control over financial reporting is included on page 92.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited Southwest Bancorp, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Southwest Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Southwest Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Southwest Bancorp, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013, and our report dated March 7, 2014 expressed an unqualified opinion on those financial statements.
| | |
/s/ Ernst & Young LLP Tulsa, Oklahoma March 7, 2014 | | |
| | |
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2014 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2014 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2014 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2014 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
ITEM 14. pRINCIPAL aCCOUNTING fEES AND sERVICES
The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2014 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are filed as part of this report:
Independent Registered Public Accounting Firm’s Report for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Financial Condition at December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2013, 2012, and 2011
(2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10‑K.
| | | |
| Exhibit
Number | | Exhibit Description |
| 3.1 | | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 5.1 to Current Report on Form 8-K filed October 2, 2012) |
| 3.2 | | Amended and Restated Bylaws of Southwest Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed December 27, 2012) |
* | 10.1 | | Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-97850)) |
* | 10.2 | | Southwest Bancorp, Inc. and Affiliates Amended and Restated Severance Compensation Plan (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed January 2, 2008) |
* | 10.3 | | Stillwater National Bank and Trust Company 2002 and 2003 Deferred Compensation Plans (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002) |
| 10.4 | | Indemnification Agreements by and between Southwest Bancorp, Inc. and James E. Berry II, Thomas D. Berry, Russell W. Teubner, and John Cohlmia (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended December 31, 2005) |
| 10.5 10.6 10.7 | | Indemnification Agreements by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006) Indemnification Agreements by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006) Director’s Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10 to Current Report on Form 8-K filed January 3, 2007) |
| | | �� |
| Exhibit
Number | | Exhibit Description |
* | 10.8 | | Amendment to Director’s Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 2, 2008) |
| 10.9 | | Audit Committee Financial Expert Agreement by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 2006) |
* | 10.10 | | Southwest Bancorp, Inc. 2008 Stock Based Award Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) |
* | 10.11 | | Southwest Bancorp, Inc. Form of Restricted Stock Agreement Amendments (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) |
| 10.12 | | Loan and Real Estate Sale Agreement by and between Southwest Bancorp, Inc. and SW Loan Portfolio Holdings, L.P., dated December 1, 2011 (incorporated by reference to Exhibit 10.20 to Annual Report on Form 10-K for the fiscal year ended December 31, 2011) |
* | 10.13 | | Form of TARP Restricted Employee Agreement dated June 18, 2012 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 18, 2012) |
* | 10.14 | | Change of Control Agreement by and between Southwest Bancorp, Inc. and Priscilla Barnes dated August 3, 2012 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2012) |
| 10.15 | | Letter Agreement dated August 8, 2012, by and between the United Stated Department of the Treasury and Southwest Bancorp, Inc. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed August 8, 2012) |
* | 10.16 | | Employment Agreement dated August 30, 2012 by and among Southwest Bancorp, Inc., the Stillwater National Bank and Trust Company, Bank of Kansas, and Mark W. Funke (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed September 5, 2012) |
* | 10.17 | | Mandatory Retirement Age Policy—Chief Executive Officer (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed September 5, 2012) |
* | 10.18 | | Employment Agreement dated November 15, 2012 by and among Southwest Bancorp, Inc., Stillwater National Bank and Trust Company, Bank of Kansas, and Joe T. Shockley, Jr. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed November 16, 2012) |
* | 10.19 | | Description of Stillwater National Bank and Trust Company 2013 Elective Non-Qualified Deferred Compensation Plan (incorporated by reference to Current Report on Form 8-K filed December 27, 2012) |
* | 10.20 | | Description of Southwest Bancorp, Inc. 2013 Senior Management Incentive Plan (incorporated by reference to Current Report on Form 8-K filed December 27, 2012) |
* * * | 10.21 10.22 10.23 | | Change of Control Agreement by and between Southwest Bancorp, Inc. and Kimberly Sinclair dated March 6, 2013 (incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K for the fiscal year ended December 31, 2012) Change of Control Agreement by and between Southwest Bancorp, Inc. and Brent Bates dated July 27, 2012 (filed herewith) Change of Control Agreement by and between Southwest Bancorp, Inc. and Rusty LaForge dated July 27, 2012 (filed herewith) |
| 21 | | Subsidiaries of the Registrant |
| 23 | | Consent of Independent Registered Public Accounting Firm |
| 31(a), (b) | | Rule 13a-14(a)/15d-14(a) Certifications |
| 32(a), (b) | | 18 U.S.C. Section 1350 Certifications |
| | | |
| Exhibit
Number | | Exhibit Description |
| 101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements |
| | | |
| * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST BANCORP, INC.
March 7, 2014by: /s/ Mark W. Funke
Mark W. Funke
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Officers
| | |
/s/ Mark W. Funke | | March 7, 2014 |
Mark W. Funke | | |
Director and Chief Executive Officer | | |
(Principal Executive Officer) | | |
| | |
/s/ Joe T. Shockley, Jr. | | March 7, 2014 |
Joe T. Shockley, Jr. | | |
Executive Vice President and Chief Financial Officer | | |
(Principal Financial and Accounting Officer) | | |
Directors
| | | | | | |
/s/ James E. Berry, II | | March 7, 2014 | | /s/ David P. Lambert | | March 7, 2014 |
James E. Berry, II | | | | David P. Lambert | | |
| | | | | | |
/s/ Thomas D. Berry | | March 7, 2014 | | /s/ Larry J. Lanie | | March 7, 2014 |
Thomas D. Berry | | | | Larry J. Lanie | | |
| | | | | | |
/s/ John Cohlmia | | March 7, 2014 | | /s/ Marran Ogilvie | | March 7, 2014 |
John Cohlmia | | | | Marran Ogilvie | | |
| | | | | | |
/s/ David S. Crockett, Jr. | | March 7, 2014 | | | | March 7, 2014 |
David S. Crockett, Jr. | | | | James M. Morris, II | | |
| | | | | | |
/s/ J. Berry Harrison | | March 7, 2014 | | /s/ Russell W. Teubner | | March 7, 2014 |
J. Berry Harrison | | | | Russell W. Teubner | | |
| | | | | | |
/s/ James M. Johnson | | March 7, 2014 | | | | |
James M. Johnson | | | | | | |
