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EX-31.(B) - EX-31.(B) - SOUTHWEST BANCORP INCoksb-20140930xex31b.htm
EX-31.(A) - EX-31.(A) - SOUTHWEST BANCORP INCoksb-20140930xex31a.htm
EX-32.(A) - EX-32.(A) - SOUTHWEST BANCORP INCoksb-20140930xex32a.htm
EX-32.(B) - EX-32.(B) - SOUTHWEST BANCORP INCoksb-20140930xex32b.htm

 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

_________________ 

  

FORM 10-Q 

 __________________ 

 

[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2014

 

OR 

 

[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from __________ to __________

 

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

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer, accelerated filer, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

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 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of November 4, 2014, the issuer has 19,455,908  shares of its Common Stock, par value $1.00, outstanding.

 

1

 


 

SOUTHWEST BANCORP, INC. 

INDEX TO FORM 10-Q 

 

 

 

2

 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”) makes forward-looking statements in this Form 10-Q and documents incorporated by reference into it that are subject to risks and uncertainties.  Forward-looking statements often use words such as “anticipate”, “target”, “outlook”, “forecast”, “will”, “should”, “expect”, “estimate”, “intend”, “plan”, “goal”,
“believe”, or other words with similar meanings.  Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time, many of which are beyond our control.  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; 

·

Expectations regarding our stock repurchase program;

·

Expectations regarding dividends;

·

Expectations regarding acquisitions and divestitures;

·

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 effective tax rates or the expiration of favorable tax provisions; 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 uncertainties, the 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 our Annual Report on  Form 10-K for the year ended December 31, 2013

 

The cautionary statements in this Form 10-Q and any documents incorporated by reference herein also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements.  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 Form 10-Q, 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. 

 

Management’s discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes.   

 

3

 


 

 SOUTHWEST BANCORP, INC. 

Unaudited Consolidated Statements of Financial Condition 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Dollars in thousands)

2014

 

2013

Assets:

 

 

 

 

 

Cash and due from banks

$

18,498 

 

$

28,062 

Interest-bearing deposits

 

111,605 

 

 

251,777 

Cash and cash equivalents

 

130,103 

 

 

279,839 

Securities held to maturity (fair values of $11,265 and $12,115, respectively)

 

10,663 

 

 

11,720 

Securities available for sale (amortized cost of $359,042 and $385,423, respectively)

 

359,944 

 

 

382,479 

Loans held for sale

 

4,368 

 

 

3,060 

Loans receivable (includes loss share: $0 and $1,812, respectively)

 

1,363,020 

 

 

1,267,843 

Less:  Allowance for loan losses

 

(30,917)

 

 

(36,663)

Net loans receivable

 

1,332,103 

 

 

1,231,180 

Accrued interest receivable

 

4,952 

 

 

5,335 

Non-hedge derivative asset

 

166 

 

 

 -

Premises and equipment, net

 

18,986 

 

 

20,833 

Other real estate

 

3,448 

 

 

2,654 

Goodwill

 

1,214 

 

 

1,214 

Other intangible assets, net

 

3,866 

 

 

4,980 

Other assets

 

31,135 

 

 

38,129 

Total assets

$

1,900,948 

 

$

1,981,423 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing demand

$

445,148 

 

$

444,796 

Interest-bearing demand

 

104,807 

 

 

120,156 

Money market accounts

 

477,614 

 

 

439,981 

Savings accounts

 

33,398 

 

 

41,727 

Time deposits of $100,000 or more

 

203,090 

 

 

251,185 

Other time deposits

 

230,889 

 

 

286,241 

Total deposits

 

1,494,946 

 

 

1,584,086 

Accrued interest payable

 

771 

 

 

832 

Non-hedge derivative liability

 

166 

 

 

 -

Other liabilities

 

10,822 

 

 

10,293 

Other borrowings

 

75,884 

 

 

80,632 

Subordinated debentures

 

46,393 

 

 

46,393 

Total liabilities

 

1,628,982 

 

 

1,722,236 

Shareholders' equity:

 

 

 

 

 

Common stock - $1 par value; 40,000,000 shares authorized;

 

 

 

 

 

 19,793,623 shares issued and 19,732,926 shares issued and outstanding, respectively

 

19,794 

 

 

19,733 

Additional paid in capital

 

100,971 

 

 

99,937 

Retained earnings

 

155,290 

 

 

142,528 

Accumulated other comprehensive loss

 

(411)

 

 

(3,011)

Treasury stock, at cost; 223,005 and 0 shares, respectively

 

(3,678)

 

 

 -

Total shareholders' equity

 

271,966 

 

 

259,187 

Total liabilities & shareholders' equity

$

1,900,948 

 

$

1,981,423 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

SOUTHWEST BANCORP, INC. 

Unaudited Consolidated Statements of Operations 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

For the nine months

 

 

ended September 30,

 

ended September 30,

(Dollars in thousands, except earnings per share data)

 

2014

 

2013

 

2014

 

2013

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

15,683 

 

$

16,242 

 

$

47,801 

 

$

49,663 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

 

383 

 

 

438 

 

 

1,147 

 

 

1,336 

Mortgage-backed securities

 

 

824 

 

 

820 

 

 

2,650 

 

 

2,520 

State and political subdivisions

 

 

291 

 

 

300 

 

 

881 

 

 

906 

Other securities

 

 

36 

 

 

65 

 

 

134 

 

 

146 

Other interest-earning assets

 

 

274 

 

 

270 

 

 

963 

 

 

765 

Total interest income

 

 

17,491 

 

 

18,135 

 

 

53,576 

 

 

55,336 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

33 

 

 

35 

 

 

113 

 

 

117 

Money market accounts

 

 

157 

 

 

182 

 

 

439 

 

 

608 

Savings accounts

 

 

 

 

10 

 

 

30 

 

 

34 

Time deposits of $100,000 or more

 

 

338 

 

 

552 

 

 

1,125 

 

 

1,863 

Other time deposits

 

 

328 

 

 

538 

 

 

1,113 

 

 

1,789 

Other borrowings

 

 

227 

 

 

225 

 

 

675 

 

 

667 

Subordinated debentures

 

 

563 

 

 

1,320 

 

 

1,669 

 

 

4,245 

Total interest expense

 

 

1,654 

 

 

2,862 

 

 

5,164 

 

 

9,323 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

15,837 

 

 

15,273 

 

 

48,412 

 

 

46,013 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

(2,897)

 

 

(329)

 

 

(4,238)

 

 

(707)

Net interest income after provision for loan losses

 

 

18,734 

 

 

15,602 

 

 

52,650 

 

 

46,720 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fees

 

 

2,492 

 

 

2,589 

 

 

7,696 

 

 

7,856 

Gain on sale of bank branches, net

 

 

 -

 

 

 -

 

 

4,378 

 

 

 -

Gain on sales of  mortgage loans, net

 

 

382 

 

 

619 

 

 

1,069 

 

 

2,264 

Gain on sales/calls of investment securities, net

 

 

 -

 

 

 -

 

 

764 

 

 

 -

Other noninterest income

 

 

210 

 

 

339 

 

 

448 

 

 

455 

Total noninterest income

 

 

3,084 

 

 

3,547 

 

 

14,355 

 

 

10,575 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,804 

 

 

7,645 

 

 

24,402 

 

 

23,820 

Occupancy

 

 

2,612 

 

 

2,721 

 

 

8,164 

 

 

7,974 

FDIC and other insurance

 

 

299 

 

 

413 

 

 

1,010 

 

 

1,304 

Other real estate, net

 

 

(220)

 

 

(387)

 

 

359 

 

 

(1,428)

General and administrative

 

 

2,863 

 

 

2,627 

 

 

8,862 

 

 

8,576 

Total noninterest expense

 

 

13,358 

 

 

13,019 

 

 

42,797 

 

 

40,246 

Income before taxes

 

 

8,460 

 

 

6,130 

 

 

24,208 

 

 

17,049 

Taxes on income

 

 

3,172 

 

 

2,330 

 

 

9,077 

 

 

6,446 

Net income

 

$

5,288 

 

$

3,800 

 

$

15,131 

 

$

10,603 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.27 

 

$

0.19 

 

$

0.77 

 

$

0.53 

Diluted earnings per common share

 

 

0.27 

 

 

0.19 

 

 

0.77 

 

 

0.54 

Common dividends declared per share

 

 

0.04 

 

 

 -

 

 

0.12 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

5

 


 

 

 

 

SOUTHWEST BANCORP, INC. 

Unaudited Consolidated Statements of Comprehensive Income 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

For the nine months

 

ended September 30,

 

ended September 30,

(Dollars in thousands)

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

5,288 

 

$

3,800 

 

$

15,131 

 

$

10,603 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on available for sale securities

 

(680)

 

 

(419)

 

 

3,846 

 

 

(7,169)

Change in fair value of derivative used for cash flow hedge

 

324 

 

 

(524)

 

 

394 

 

 

993 

Other comprehensive income (loss), before tax

 

(356)

 

 

(943)

 

 

4,240 

 

 

(6,176)

Tax benefit (expense) related to items of other comprehensive

 

 

 

 

 

 

 

 

 

 

 

income (loss)

 

138 

 

 

369 

 

 

(1,640)

 

 

2,363 

Other comprehensive income (loss), net of tax

 

(218)

 

 

(574)

 

 

2,600 

 

 

(3,813)

Comprehensive income

$

5,070 

 

$

3,226 

 

$

17,731 

 

$

6,790 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

SOUTHWEST BANCORP, INC. 

Unaudited Consolidated Statements of Cash Flows 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months

 

ended September 30,

(Dollars in thousands)

2014

 

2013

Operating activities:

 

 

 

 

 

Net income

$

15,131 

 

$

10,603 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

(4,238)

 

 

(707)

Adjustment to other real estate

 

320 

 

 

1,970 

Deferred tax expense

 

8,100 

 

 

6,043 

Asset depreciation

 

1,930 

 

 

1,802 

Securities premium amortization, net of discount accretion

 

2,004 

 

 

2,793 

Amortization of intangibles

 

588 

 

 

1,037 

Restricted stock amortization expense

 

636 

 

 

647 

Net gain on sales/calls of investment securities

 

(764)

 

 

 -

Net gain on sales of mortgage loans

 

(1,069)

 

 

(2,264)

Net (gain) loss on sales of premises/equipment

 

36 

 

 

(7)

Net gain on sales of other real estate

 

(200)

 

 

(3,880)

Net gain from sale of bank branches

 

(4,378)

 

 

 -

Proceeds from sales of held for sale loans

 

59,088 

 

 

109,493 

Held for sale loans originated for resale

 

(55,137)

 

 

(106,148)

Net changes in assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

82 

 

 

640 

Other assets

 

(3,322)

 

 

28,501 

Accrued interest payable

 

(74)

 

 

(276)

Other liabilities

 

692 

 

 

(2,759)

Net cash provided by operating activities

 

19,425 

 

 

47,488 

Investing activities:

 

 

 

 

 

Proceeds from sales of available for sale securities

 

 -

 

 

2,744 

Proceeds from principal repayments, calls and maturities:

 

 

 

 

 

Held to maturity securities

 

1,750 

 

 

5,000 

Available for sale securities

 

58,517 

 

 

90,406 

Redemptions of other investments

 

883 

 

 

382 

Purchases of held to maturity securities

 

 -

 

 

(5,000)

Purchases of available for sale securities

 

(34,833)

 

 

(107,995)

Loans originated, net of principal repayments

 

(131,198)

 

 

64,609 

Cash outflows from sale of bank branches, net

 

(94,806)

 

 

 -

Purchases of premises and equipment

 

(1,581)

 

 

(1,455)

Proceeds from sales of premises and equipment

 

68 

 

 

68 

Proceeds from sales of other real estate

 

1,306 

 

 

16,107 

Net cash  provided by (used in) investing activities

 

(199,894)

 

 

64,866 

Financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

41,435 

 

 

(125,787)

Net increase (decrease) in other borrowings

 

(4,748)

 

 

8,301 

Net proceeds from issuance of common stock

 

83 

 

 

194 

Purchases of treasury stock

 

(3,678)

 

 

 -

Repurchase of common stock warrant

 

 -

 

 

(2,287)

Redemption of trust preferred securities

 

 -

 

 

(35,570)

Common stock dividends paid

 

(2,358)

 

 

 -

Preferred stock dividends paid

 

(1)

 

 

 -

Net cash provided by (used in) financing activities

 

30,733 

 

 

(155,149)

Net decrease in cash and cash equivalents

 

(149,736)

 

 

(42,795)

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

279,839 

 

 

288,079 

End of period

$

130,103 

 

$

245,284 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

7

 


 

 

 

SOUTHWEST BANCORP, INC. 

Unaudited Consolidated Statements of Shareholders’ Equity 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

Common Stock

 

Paid in

 

Retained

 

Comprehensive

 

 

Treasury

 

Shareholders'

(Dollars in thousands)

Shares

 

Amount

 

Capital

 

Earnings

 

Gain/(Loss)

 

 

Stock

 

Equity

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

171,846 

 

 

171 

 

 

2,049 

 

 

 -

 

 

 -

 

 

 -

 

 

2,220 

Net common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

employee plans and related tax expense

1,762 

 

 

 

 

21 

 

 

 -

 

 

 -

 

 

 -

 

 

23 

Other comprehensive loss, net of tax

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,813)

 

 

 -

 

 

(3,813)

Net income

 -

 

 

 -

 

 

 -

 

 

10,603 

 

 

 -

 

 

 -

 

 

10,603 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2013

19,703,313 

 

$

19,703 

 

$

99,488 

 

$

135,696 

 

$

(2,085)

 

$

 -

 

$

252,802 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

19,732,926 

 

$

19,733 

 

$

99,937 

 

$

142,528 

 

$

(3,011)

 

$

 -

 

$

259,187 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

 -

 

 

 -

 

 

 -

 

 

(1)

 

 

 -

 

 

 -

 

 

(1)

Common, $0.12 per share,

 -

 

 

 -

 

 

 -

 

 

(2,368)

 

 

 -

 

 

 -

 

 

(2,368)

Common stock issued

59,343 

 

 

60 

 

 

1,012 

 

 

 -

 

 

 -

 

 

 -

 

 

1,072 

Net common stock issued under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

employee plans and related tax expense

1,354 

 

 

 

 

22 

 

 

 -

 

 

 -

 

 

 -

 

 

23 

Other comprehensive income, net of tax

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,600 

 

 

 -

 

 

2,600 

Treasury shares purchased

(223,005)

 

 

 -

 

 

 

 

 

 

 

 

 -

 

 

(3,678)

 

 

(3,678)

Net income

 -

 

 

 -

 

 

 -

 

 

15,131 

 

 

 -

 

 

 -

 

 

15,131 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2014

19,570,618 

 

$

19,794 

 

$

100,971 

 

$

155,290 

 

$

(411)

 

$

(3,678)

 

$

271,966 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 


 

SOUTHWEST BANCORP, INC. 

Notes to Unaudited Consolidated Financial Statements 

 

NOTE 1:  SIGNIFICANT ACCOUNTING AND REPORTING POLICIES 

 

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, shareholders’ equity, cash flows, and comprehensive income in conformity with accounting principles generally accepted in the United States.  However, the unaudited consolidated financial statements include all adjustments which, in the opinion of management, are necessary for a fair presentation.  Those adjustments consist of normal recurring adjustments.  The results of operations for the three and nine months ended September 30, 2014, and the cash flows for the nine months ended September 30, 2014, should not be considered indicative of the results to be expected for the full year.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2013.  

 

The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (“we”, “our”, “us”, “Southwest”), Bank SNB, an Oklahoma state banking corporation (“Bank SNB”), our banking subsidiary,  SNB Capital Corporation, a lending and loan workout subsidiary, and the consolidated subsidiaries of Bank SNB, including SNB Real Estate Holdings, Inc.  All significant intercompany transactions and balances have been eliminated in consolidation.     

 

In accordance with Accounting Standards Codification (“ASC”) 855, Subsequent Events,  we have evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.  Please see Note 13: Subsequent Events for more detail.

 

 

NOTE 2:  DISPOSALS

 

On January 16, 2014, we announced the execution of agreements to sell branch banks in Overland Park, Anthony, and Harper, Kansas, which were all a part of our Kansas operating segmentAfter strategic evaluation, we decided to sell these branches in order to invest our capital and resources in Wichita, Hutchinson, and South Hutchinson to better fit our product lines in Kansas, along with our banking offices in Oklahoma and Texas. There are no further plans to divest of any other banking offices at this time, and we will focus on growing our presence in other markets in which we operate.    

 

During the second quarter of 2014, the Overland Park branch was sold to Fidelity Bank in Wichita, Kansas, and the Anthony and Harper, Kansas branches were sold to BancCentral, National Association, in Alva, Oklahoma. The sold branches had combined total deposits of $130.6 million and loans of $27.9 million.

 

These transactions resulted in a net gain of $4.4 million, which is included under noninterest income in the gain on sale of bank branches, net as a separate line item on the unaudited consolidated statements of operations.    

 

 

 

 

 

9

 


 

NOTE 3:  INVESTMENT SECURITIES

 

A summary of the amortized cost and fair values of investment securities at September 30, 2014 and December 31, 2013 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Gross Unrealized

 

Fair

(Dollars in thousands)

Cost

 

Gains

 

Losses

 

Value

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political subdivisions

$

10,663 

 

$

602 

 

$

 -

 

$

11,265 

Total

$

10,663 

 

$

602 

 

$

 -

 

$

11,265 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

Federal agency securities

$

110,620 

 

$

325 

 

$

(1,264)

 

$

109,681 

Obligations of state and political subdivisions

 

32,864 

 

 

439 

 

 

(262)

 

 

33,041 

Residential mortgage-backed securities

 

171,964 

 

 

1,792 

 

 

(1,562)

 

 

172,194 

Asset-backed securities

 

9,601 

 

 

 -

 

 

(46)

 

 

9,555 

Other securities

 

33,993 

 

 

1,511 

 

 

(31)

 

 

35,473 

Total

$

359,042 

 

$

4,067 

 

$

(3,165)

 

$

359,944 

 

 

 

 

 

 

 

 

 

 

 

 

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 

Other securities

 

35,316 

 

 

1,267 

 

 

(165)

 

 

36,418 

Total

$

385,423 

 

$

3,380 

 

$

(6,324)

 

$

382,479 

 

Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. Other securities consist of corporate stock.

 

Securities with limited marketability, such as Federal Reserve Bank stock, Federal Home Loan Bank (“FHLB”) stock, and certain other investments, are carried at cost and included in other assets on the unaudited consolidated statements of financial condition.  Total investments carried at cost were $7.3 million at September 30, 2014 and  $8.1 million at December 31, 2013.  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 September 30, 2014 follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

Held to Maturity

 

Amortized

 

Fair

 

Amortized

 

Fair

(Dollars in thousands)

Cost

 

Value

 

Cost

 

Value

One year or less

$

19,323 

 

$

19,581 

 

$

940 

 

$

946 

More than one year through five years

 

170,716 

 

 

172,418 

 

 

3,834 

 

 

3,976 

More than five years through ten years

 

118,044 

 

 

116,772 

 

 

2,515 

 

 

2,612 

More than ten years

 

50,959 

 

 

51,173 

 

 

3,374 

 

 

3,731 

Total

$

359,042 

 

$

359,944 

 

$

10,663 

 

$

11,265 

 

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. 

10

 


 

 

Gain or loss on sale of investments is based upon the specific identification method.  There was a $0.8 million gain on sales of securities for the nine months ended September 30, 2014, which was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession, and of the release of escrowed funds received in association with the sale of an investment that was carried at cost. There were no sales of securities for the nine months ended September 30, 2013.

 

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 September 30, 2014 and December 31, 2013.  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 September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agency securities

15 

 

$

66,999 

 

$

(798)

 

$

(466)

 

$

65,735 

Obligations of state and political subdivisions

10 

 

 

15,182 

 

 

(96)

 

 

(166)

 

 

14,920 

Residential mortgage-backed securities

39 

 

 

63,596 

 

 

(1,236)

 

 

(327)

 

 

62,033 

Asset-backed securities

 

 

9,601 

 

 

(46)

 

 

 -

 

 

9,555 

Other securities

 

 

2,000 

 

 

(30)

 

 

 -

 

 

1,970 

Total

68 

 

$

157,378 

 

$

(2,206)

 

$

(959)

 

$

154,213 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

9,578 

 

 

(96)

 

 

 -

 

 

9,482 

Other securities

 

 

27,728 

 

 

(165)

 

 

 -

 

 

27,563 

Total

108 

 

$

261,473 

 

$

(6,048)

 

$

(276)

 

$

255,149 

 

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 our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value. 

 

We have the ability and intent to hold the securities classified as held to maturity until they mature, at which time we expect to receive full value for the securities.  Furthermore, as of September 30, 2014, 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 likely that we will have to sell any such securities before a recovery of cost.  The declines in fair value were attributable to recent 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 September 30, 2014, 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 $240.1 million and $292.6 million were pledged to meet such requirements at September 30, 2014 and December 31, 2013, respectively.  Any amount over-pledged can be released at any time.

 

 

11

 


 

NOTE 4: 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, Tulsa, Dallas, Wichita, and other metropolitan markets in Oklahoma, Texas,  and Kansas.  As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and marketsPlease see Note 10: Operating Segments for more detail regarding loans by market.  At September 30, 2014 and December 31, 2013, 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: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

At September 30, 2014

 

At December 31, 2013

Real estate mortgage:

 

 

 

 

 

Commercial

$

757,878 

 

$

752,279 

One-to-four family residential

 

78,985 

 

 

83,988 

Real estate construction:

 

 

 

 

 

Commercial

 

166,379 

 

 

143,848 

One-to-four family residential

 

11,030 

 

 

4,646 

Commercial

 

330,738 

 

 

255,058 

Installment and consumer:

 

 

 

 

 

Guaranteed student loans

 

127 

 

 

4,394 

Other

 

22,251 

 

 

26,690 

 

 

1,367,388 

 

 

1,270,903 

Less: Allowance for loan losses

 

(30,917)

 

 

(36,663)

Total loans, net

$

1,336,471 

 

$

1,234,240 

 

Concentrations of CreditAt September 30, 2014, $474.3 million, or 35%, and  $403.8 million, or 30%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industry, respectivelyWe 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 SaleWe had loans which were held for sale of $4.4 million and $3.1 million at September 30, 2014 and December 31, 2013, respectively.  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 our one-to-four family residential loans and loan servicing rights are sold to one buyer.  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.  These loans are available for sale in the secondary market.  

 

Loan ServicingWe 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 $401.8 million and $390.7 million at September 30, 2014 and December 31, 2013, 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.  On June 19, 2009, Bank SNB entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire substantially all loans as well as certain other related assets of First National Bank of Anthony, Anthony, Kansas in an FDIC-assisted transaction.  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 transaction.  Under these agreements, for a period of ten years for 1-4 family real estate loans and for a period of five years for other loans, the FDIC will reimburse Bank SNB for 80% of net losses up to $35.0 million on covered assets, primarily acquired loans and other real estate, and for 95% of any net losses above $35.0 million.  Bank SNB services the covered assets.  The five-year period for other loans expired June 30, 2014.

 

Due to the immateriality of the remaining balance of loans covered under the loss sharing agreement with the FDIC, covered and noncovered loans have been combined for reporting purposes. Prior period numbers have also been adjusted to reflect this change. This adjustment has no financial statement impact.

 

Loans covered under the loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are reported in loans.  The acquired loans were initially recorded at fair value (as determined

12

 


 

by the present value of expected future cash flows) with no allowance for loan losses.  Subsequent decreases in expected cash flows are recognized as impairments.  Valuation allowances on these loans reflect only losses incurred after the acquisition.   

 

The expected payments from the FDIC under the loss sharing agreements are recorded as part of loans in the unaudited consolidated statements of financial condition. 

 

Changes in the carrying amounts and accretable yields for loans acquired under the loss sharing agreement with the FDIC were as follows for the three and nine months ended September 30, 2014 and September 30, 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

2014

 

 

2013

 

 

 

 

Carrying

 

 

 

 

Carrying

 

Accretable

 

amount

 

Accretable

 

amount

(Dollars in thousands)

Yield

 

of loans

 

Yield

 

of loans

Balance at beginning of period

$

860 

 

$

7,920 

 

$

1,580 

 

$

21,646 

Payments received

 

 -

 

 

(1,301)

 

 

 -

 

 

(2,697)

Net charge-offs

 

 -

 

 

 -

 

 

 -

 

 

 -

Accretion

 

(68)

 

 

 -

 

 

(137)

 

 

31 

Balance at end of period

$

792 

 

$

6,619 

 

$

1,443 

 

$

18,980 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

2014

 

2013

 

 

 

 

Carrying

 

 

 

 

Carrying

 

Accretable

 

amount

 

Accretable

 

amount

(Dollars in thousands)

Yield

 

of loans

 

Yield

 

of loans

Balance at beginning of period

$

1,597 

 

$

16,427 

 

$

1,904 

 

$

25,707 

Payments received

 

 -

 

 

(9,401)

 

 

 -

 

 

(6,527)

Transfers to other real estate / repossessed assets

 

 -

 

 

 -

 

 

(33)

 

 

(375)

Net charge-offs

 

(9)

 

 

(407)

 

 

(1)

 

 

(70)

Accretion

 

(796)

 

 

 -

 

 

(427)

 

 

245 

Balance at end of period

$

792 

 

$

6,619 

 

$

1,443 

 

$

18,980 

 

 

Nonperforming / Past Due LoansWe identify past due loans based on contractual terms on a loan by loan basis and generally place loans, except for consumer loans, on nonaccrual when any portion of the principal or interest is ninety  days past due and collateral is insufficient to discharge the debt in full.  Interest accrual may also be discontinued earlier if, in management’s opinion, collection is unlikely.  Generally, past due consumer installment loans are not placed on nonaccrual but are charged-off when they are four months past due.  Accrued interest is written off when a loan is placed on nonaccrual status.  Subsequent interest income is recorded when cash receipts are received from the borrower and collectability of the principal amount is reasonably assured.   

 

Under generally accepted accounting principles and instructions to reports of condition and income of federal banking regulators, a nonaccrual loan may be returned to accrual status:  (i) when none of its principal and interest is due and unpaid, repayment is expected, and there has been a sustained period (at least six months) of repayment performance; (ii) when the loan is well-secured, there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or (iii) when the loan otherwise becomes well-secured and in the process of collection. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance. 

 

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 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 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. 

 

 

 

13

 


 

The following table shows the recorded investment in loans on nonaccrual status. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

At September 30, 2014

 

At December 31, 2013

Real estate mortgage:

 

 

 

 

 

Commercial

$

7,504 

 

$

7,766 

One-to-four family residential

 

1,274 

 

 

513 

Real estate construction:

 

 

 

 

 

Commercial

 

77 

 

 

2,721 

Commercial

 

6,149 

 

 

8,769 

Other consumer

 

55 

 

 

50 

Total nonaccrual loans

$

15,059 

 

$

19,819 

 

During the first nine months of 2014,  an immaterial amount of interest income was received on nonaccruing loans.  If interest on all nonaccrual loans had been accrued for the nine months ended September 30, 2014, additional interest income of $0.7 million would have been recorded.

 

Net cumulative charge-offs against nonaccrual loans at September 30, 2014 and December 31, 2013 were $6.2 million and $8.2 million, respectively. 

The following table shows an age analysis of past due loans at September 30, 2014 and December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

3,758 

 

$

7,504 

 

$

11,262 

 

$

746,616 

 

$

757,878 

 

$

 -

One-to-four family residential

 

18 

 

 

1,274 

 

 

1,292 

 

 

77,693 

 

 

78,985 

 

 

 -

Real estate construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 -

 

 

77 

 

 

77 

 

 

166,302 

 

 

166,379 

 

 

 -

One-to-four family residential

 

 -

 

 

 -

 

 

 -

 

 

11,030 

 

 

11,030 

 

 

 -

Commercial

 

356 

 

 

6,149 

 

 

6,505 

 

 

324,233 

 

 

330,738 

 

 

 -

Other

 

109 

 

 

55 

 

 

164 

 

 

22,214 

 

 

22,378 

 

 

 -

Total

$

4,241 

 

$

15,059 

 

$

19,300 

 

$

1,348,088 

 

 

1,367,388 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

3,851 

 

$

7,766 

 

$

11,617 

 

$

740,662 

 

$

752,279 

 

$

 -

One-to-four family residential

 

302 

 

 

513 

 

 

815 

 

 

83,173 

 

 

83,988 

 

 

 -

Real estate construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

569 

 

 

2,721 

 

 

3,290 

 

 

140,558 

 

 

143,848 

 

 

 -

One-to-four family residential

 

 -

 

 

 -

 

 

 -

 

 

4,646 

 

 

4,646 

 

 

 -

Commercial

 

1,998 

 

 

8,819 

 

 

10,817 

 

 

244,241 

 

 

255,058 

 

 

50 

Other

 

128 

 

 

53 

 

 

181 

 

 

30,903 

 

 

31,084 

 

 

Total

$

6,848 

 

$

19,872 

 

$

26,720 

 

$

1,244,183 

 

 

1,270,903 

 

$

53 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans.  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.  Each loan deemed to be impaired (loans on nonaccrual status and greater than one-hundred thousand, and all troubled debt restructurings) is evaluated on an individual basis using the discounted present value of expected cash flows based on the loan’s initial effective interest rate, the fair value of collateral, or the market value of the loan.  Smaller balance, homogeneous loans, including mortgage, student, and consumer loans, are collectively evaluated for impairment.     

 

Interest payments on impaired loans are applied to principal until collectability of the principal amount is reasonably assured, and at that time interest is recognized on a cash basis.  Impaired loans, or portions thereof, are charged-off when deemed uncollectible. 

 

14

 


 

Impaired loans are shown in the following table: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With No Specific Allowance

 

With A Specific Allowance

 

 

 

 

Unpaid

 

 

 

 

Unpaid

 

 

 

 

Recorded

 

Principal

 

Recorded

 

Principal

 

Related

(Dollars in thousands)

Investment

 

Balance

 

Investment

 

Balance

 

Allowance

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

13,970 

 

$

17,510 

 

$

13,782 

 

$

13,910 

 

$

3,234 

One-to-four family residential

 

1,289 

 

 

1,987 

 

 

 -

 

 

 -

 

 

 -

Real estate construction

 

77 

 

 

106 

 

 

 -

 

 

 -

 

 

 -

Commercial

 

2,844 

 

 

3,548 

 

 

4,494 

 

 

10,607 

 

 

2,063 

Other

 

54 

 

 

56 

 

 

 -

 

 

 -

 

 

 -

Total

$

18,234 

 

$

23,207 

 

$

18,276 

 

$

24,517 

 

$

5,297 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

38,077 

 

$

39,544 

 

$

15,903 

 

$

16,186 

 

$

4,015 

One-to-four family residential

 

510 

 

 

630 

 

 

42 

 

 

94 

 

 

Real estate construction

 

84 

 

 

106 

 

 

2,636 

 

 

2,762 

 

 

18 

Commercial

 

1,120 

 

 

1,254 

 

 

9,177 

 

 

14,608 

 

 

3,863 

Other

 

 

 

 

 

46 

 

 

72 

 

 

46 

Total

$

39,795 

 

$

41,540 

 

$

27,804 

 

 

33,722 

 

$

7,946 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The average recorded investment and interest income recognized on impaired loans as of the nine months ended September 30, 2014 and September 30, 2013 are shown in the following table:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the nine months ended September 30,

 

 

2014

 

2013

 

 

Average

 

 

 

 

Average

 

 

 

 

 

Recorded

 

Interest

 

Recorded

 

Interest

 

(Dollars in thousands)

Investment

 

Income

 

Investment

 

Income

 

Commercial real estate

$

33,304 

 

$

724 

 

$

62,407 

 

$

1,528 

 

One-to-four family residential

 

3,106 

 

 

 

 

4,757 

 

 

 

Real estate construction

 

234 

 

 

 -

 

 

5,706 

 

 

 -

 

Commercial

 

8,760 

 

 

58 

 

 

13,939 

 

 

74 

 

Other

 

39 

 

 

 -

 

 

142 

 

 

 -

 

Total

$

45,442 

 

$

783 

 

$

86,951 

 

$

1,603 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings.  Our 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. 

 

15

 


 

Troubled debt restructured loans outstanding as of September 30, 2014 and December 31, 2013 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2014

 

At December 31, 2013

(Dollars in thousands)

Accruing

 

Nonaccrual

 

Accruing

 

Nonaccrual

Commercial real estate

$

20,248 

 

$

3,747 

 

$

44,442 

 

$

4,456 

One-to-four family residential

 

15 

 

 

70 

 

 

18 

 

 

162 

Commercial

 

1,190 

 

 

603 

 

 

1,527 

 

 

648 

Consumer

 

 -

 

 

 -

 

 

 -

 

 

46 

Total

$

21,453 

 

$

4,420 

 

$

45,987 

 

$

5,312 

 

At September 30, 2014 and December 31, 2013,  we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in a  troubled debt restructuring. 

 

Loans modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2014   and September 30, 2013 are shown in the following table:     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

2014

 

2013

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in thousands)

Modifications

 

Investment

 

Modifications

 

Investment

Commercial real estate

 

 

$

26 

 

 

 -

 

$

 -

Commercial

 

 

 

434 

 

 

 -

 

 

 -

Total

 

 

$

460 

 

 

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

2014

 

2013

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in thousands)

Modifications

 

Investment

 

Modifications

 

Investment

Commercial real estate

 

 

$

26 

 

 

 

$

2,881 

Commercial

 

 

 

448 

 

 

 

 

1,820 

Total

 

 

$

474 

 

 

12 

 

$

4,701 

 

 

The modifications of loans identified as troubled debt restructurings primarily related to payment reductions, payment extensions, and/or reductions in the interest rate.  The financial impact of troubled debt restructurings is not significant.   

 

The following table presents the recorded investment and the number of loans modified as a troubled debt restructuring that subsequently defaulted during the three and nine months ended September 30, 2014 and September 30, 2013.  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 three months ended September 30,

 

2014

 

2013

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in thousands)

Contracts

 

Investment

 

Contracts

 

Investment

Commercial

 

 

$

18 

 

 

 -

 

$

 -

Total

 

 

$

18 

 

 

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

2014

 

2013

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in thousands)

Contracts

 

Investment

 

Contracts

 

Investment

Commercial real estate

 

 -

 

$

 -

 

 

 

$

535 

Commercial

 

 

 

18 

 

 

 

 

1,033 

Total

 

 

$

18 

 

 

 

$

1,568 

 

 

16

 


 

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 September 30, 2014 and December 31, 2013, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1-4 Family

 

Real Estate

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Real Estate

 

Residential

 

Construction

 

Commercial

 

Other

 

Total

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

672,510 

 

$

77,058 

 

$

157,838 

 

$

317,458 

 

$

22,194 

 

$

1,247,058 

Special Mention

 

37,653 

 

 

93 

 

 

233 

 

 

3,115 

 

 

130 

 

 

41,224 

Substandard

 

47,390 

 

 

1,800 

 

 

19,338 

 

 

4,998 

 

 

54 

 

 

73,580 

Doubtful

 

325 

 

 

34 

 

 

 -

 

 

5,167 

 

 

 -

 

 

5,526 

Total

$

757,878 

 

$

78,985 

 

$

177,409 

 

$

330,738 

 

$

22,378 

 

$

1,367,388 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

Allowance for Loan LossesThe allowance for loan losses is a reserve established through the 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 periodic review and evaluation of the loan portfolio and quarterly assessments of the probable losses inherent 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. 

Management believes the level of the allowance is appropriate to absorb 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.  There is no one factor, or group of factors, that produces the amount of an appropriate allowance for loan losses, as the methodology for assessing the allowance for loan losses makes use of evaluations of individual impaired loans along with other factors and analysis of loan categories.  This assessment is highly qualitative and relies upon judgments and estimates by management.

The specific allowance is recorded based on the result of an evaluation consistent with ASC 310.10.35, Receivables: Subsequent Measurement, for each impaired loan.  Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral.  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 collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated

17

 


 

value of the collateral.  Charge-offs against the allowance for impaired loans are made when and to the extent loans are deemed uncollectible.  Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.  

 

The 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 loanThe 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 loans 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 usThe 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 following discovery of factors that may significantly affect the value of the collateral.  Appraisals typically are received within 30 days of request.  Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt 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. 

 

The following tables show the balance in the allowance for loan losses and the recorded investment in loans for the dates indicated by portfolio classification disaggregated on the basis of impairment evaluation method.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1-4 Family

 

Real Estate

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Real Estate

 

Residential

 

Construction

 

Commercial

 

Other

 

Total

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

18,854 

 

$

850 

 

$

5,523 

 

$

10,985 

 

$

451 

 

$

36,663 

Loans charged-off

 

(1,400)

 

 

(187)

 

 

(655)

 

 

(3,857)

 

 

(441)

 

 

(6,540)

Recoveries

 

3,700 

 

 

195 

 

 

 -

 

 

917 

 

 

220 

 

 

5,032 

Provision for loan losses

 

(5,519)

 

 

(174)

 

 

(697)

 

 

2,102 

 

 

50 

 

 

(4,238)

Balance at end of period

$

15,635 

 

$

684 

 

$

4,171 

 

$

10,147 

 

$

280 

 

$

30,917 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

3,234 

 

$

 -

 

$

 -

 

$

2,063 

 

$

 -

 

$

5,297 

Collectively evaluated for impairment

 

12,401 

 

 

684 

 

 

4,171 

 

 

8,084 

 

 

280 

 

 

25,620 

Acquired with deteriorated credit quality

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total ending allowance balance

$

15,635 

 

$

684 

 

$

4,171 

 

$

10,147 

 

$

280 

 

$

30,917 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

25,932 

 

$

598 

 

$

77 

 

$

7,338 

 

$

54 

 

$

33,999 

Collectively evaluated for impairment

 

726,991 

 

 

76,877 

 

 

177,217 

 

 

323,362 

 

 

22,323 

 

 

1,326,770 

Acquired with deteriorated credit quality

 

4,955 

 

 

1,510 

 

 

115 

 

 

38 

 

 

 

 

6,619 

Total ending loans balance

$

757,878 

 

$

78,985 

 

$

177,409 

 

$

330,738 

 

$

22,378 

 

$

1,367,388 

 

18

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1-4 Family

 

Real Estate

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Real Estate

 

Residential

 

Construction

 

Commercial

 

Other

 

Total

At September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

27,223 

 

$

861 

 

$

5,271 

 

$

12,604 

 

$

759 

 

$

46,718 

Loans charged-off

 

(806)

 

 

(577)

 

 

(131)

 

 

(5,583)

 

 

(226)

 

 

(7,323)

Recoveries

 

109 

 

 

212 

 

 

59 

 

 

916 

 

 

97 

 

 

1,393 

Provision for loan losses

 

(6,770)

 

 

411 

 

 

2,236 

 

 

3,536 

 

 

(120)

 

 

(707)

Balance at end of period

$

19,756 

 

$

907 

 

$

7,435 

 

$

11,473 

 

$

510 

 

$

40,081 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

4,343 

 

 

 -

 

 

 -

 

 

4,295 

 

 

49 

 

 

8,687 

Collectively evaluated for impairment

 

15,403 

 

 

849 

 

 

7,435 

 

 

7,178 

 

 

461 

 

 

31,326 

Acquired with deteriorated credit quality

 

10 

 

 

58 

 

 

 -

 

 

 -

 

 

 -

 

 

68 

Total ending allowance balance

$

19,756 

 

$

907 

 

$

7,435 

 

$

11,473 

 

$

510 

 

$

40,081 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

45,920 

 

 

396 

 

 

5,659 

 

 

12,663 

 

 

54 

 

 

64,692 

Collectively evaluated for impairment

 

697,938 

 

 

80,165 

 

 

161,800 

 

 

250,935 

 

 

32,115 

 

 

1,222,953 

Acquired with deteriorated credit quality

 

13,578 

 

 

4,084 

 

 

311 

 

 

967 

 

 

40 

 

 

18,980 

Total ending loans balance

$

757,436 

 

$

84,645 

 

$

167,770 

 

$

264,565 

 

$

32,209 

 

$

1,306,625 

 

 

 

 

 

 

 

 

 

 

NOTE 5:  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 our estimated fair value amounts.  There were no significant changes in valuation methods used to estimate fair value during the nine months ended September 30, 2014. 

 

A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows: 

  

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.  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 

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review the prices supplied by our 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, $2.5 million and $2.4 million as of September 30, 2014 and December 31, 2013, 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 instrumentsWe utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate.  This has been designated as a cash flow hedge. We also offer an interest rate swap program that permits qualified customers to manage interest rate risk on variable rate loans with Bank SNB. Derivative contracts are executed between our customers and Bank SNB. Offsetting contracts are executed by Bank SNB and approved counterparties. The counterparty contracts are identical to customer contracts, except for  a fixed pricing spread or fee paid to us. The fair value of the interest rate swap agreements are obtained from dealer quotes.

 

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agency securities

 

 

 

$

109,681 

 

$

 -

 

$

109,681 

 

$

 -

Obligations of state and political subdivisions

 

 

 

 

33,041 

 

 

 -

 

 

33,041 

 

 

 -

Residential mortgage-backed securities

 

 

 

 

172,194 

 

 

 -

 

 

172,194 

 

 

 -

Asset-backed securities

 

 

 

 

9,555 

 

 

 -

 

 

9,555 

 

 

 -

Other securities

 

 

 

 

35,473 

 

 

143 

 

 

35,330 

 

 

 -

 

 

 

 

 

 -

 

 

 

 

 

 

 

 

 

Derivative instruments, net

 

 

 

 

(1,573)

 

 

 -

 

 

(1,573)

 

 

 -

Total

 

 

 

$

358,371 

 

$

143 

 

$

358,228 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, net

 

 

 

 

(1,967)

 

 

 -

 

 

(1,967)

 

 

 -

Total

 

 

 

$

380,512 

 

$

151 

 

$

380,361 

 

$

 -

 

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 analyzed and reported through a specific valuation allowance based upon the net present value of cash flows.   

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 based on loan commitments.  The fair value of loans held for sale is based on existing investor commitments. 

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Other real estate – Other real estate fair value is based on third-party appraisals for significant 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 2014 or 2013; 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.

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. As of September 30, 2014 and December 31, 2013, there was no impairment; therefore, no fair value adjustments were recorded through earnings. 

 

Assets that were measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013 are summarized below.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements 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 September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Impaired loans at fair value :

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

14,076 

 

$

 -

 

$

14,076 

 

$

 -

Commercial

 

6,031 

 

 

 -

 

 

6,031 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

3,617 

 

 

 -

 

 

3,617 

 

 

 -

Government guaranteed commercial real estate

 

721 

 

 

 -

 

 

721 

 

 

 -

Other loans held for sale

 

30 

 

 

 -

 

 

30 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate

 

3,448 

 

 

 -

 

 

3,448 

 

 

 -

Core deposit premium

 

597 

 

 

 -

 

 

597 

 

 

 -

Mortgage loan servicing rights

 

3,269 

 

 

 -

 

 

 -

 

 

3,269 

Total

$

31,789 

 

$

 -

 

$

28,520 

 

$

3,269 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Impaired loans at fair value :

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

20,764 

 

$

 -

 

$

20,764 

 

$

 -

One-to-four family residential

 

1,045 

 

 

 -

 

 

1,045 

 

 

 -

Real estate construction

 

2,636 

 

 

 -

 

 

2,636 

 

 

 

Commercial

 

9,176 

 

 

 -

 

 

9,176 

 

 

 -

Other consumer

 

75 

 

 

 -

 

 

75 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

2,235 

 

 

 -

 

 

2,235 

 

 

 -

Government guaranteed commercial real estate

 

769 

 

 

 -

 

 

769 

 

 

 -

Other loans held for sale

 

56 

 

 

 -

 

 

56 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate

 

2,654 

 

 

 -

 

 

2,654 

 

 

 -

Core deposit premium

 

2,058 

 

 

 -

 

 

2,058 

 

 

 -

Mortgage loan servicing rights

 

3,492 

 

 

 -

 

 

 -

 

 

3,492 

Total

$

44,960 

 

$

 -

 

$

41,468 

 

$

3,492 

 

Impaired loans measured at fair value with a carrying amount of $26.1 million were written down to a fair value of $20.1 million, resulting in a life-to-date impairment of $6.0 million, of which $4.6 million was included in the provision for loan losses for the nine months ended September 30, 2014.  As of December 31, 2013, impaired loans measured at fair value with

21

 


 

a carrying amount of $47.0 million were written down to the fair value of $33.7 million at December 31, 2013, resulting in a life-to-date impairment charge of $13.3 million, of which $0.05 million was included in the provision for loan losses for the year ended December 31, 2013. 

 

As of September 31, 2014 and December 31, 2013, other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $0.3 million and  $2.2 million, respectively, which was included in noninterest expense.

 

For the nine months ended September 30, 2014, $1.1 million of the core deposit premium was written off as a result of the bank branch sales. As of December 31, 2013, there was no impairment; therefore, no fair value adjustments were recorded through earnings. 

 

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. 

Investments 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. 

Accrued interest payable and other liabilities – The estimated fair value of accrued interest payable and other liabilities, which primarily includes trade accounts 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 – Our two subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at September 30, 2014 

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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 were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2014

 

At December 31, 2013

 

Carrying

 

Fair

 

Carrying

 

Fair

(Dollars in thousands)

Values

 

Values

 

Values

 

Values

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

130,103 

 

$

130,103 

 

$

279,839 

 

$

279,839 

Securities held to maturity

 

10,663 

 

 

11,265 

 

 

11,720 

 

 

12,115 

Accrued interest receivable

 

4,952 

 

 

4,952 

 

 

5,335 

 

 

5,335 

Derivative asset

 

166 

 

 

166 

 

 

 -

 

 

 -

Investments included in other assets

 

7,257 

 

 

7,257 

 

 

8,140 

 

 

8,140 

Level 3 inputs:

 

 

 

 

 

 

 

 

 

 

 

Total loans, net of allowance

 

1,367,388 

 

 

1,272,485 

 

 

1,234,240 

 

 

1,190,869 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Level 2 inputs:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,494,946 

 

 

1,408,990 

 

 

1,584,086 

 

 

1,486,939 

Accrued interest payable

 

771 

 

 

771 

 

 

832 

 

 

832 

Other liabilities

 

9,249 

 

 

9,249 

 

 

8,248 

 

 

8,248 

Derivative liabilities

 

1,739 

 

 

1,739 

 

 

1,967 

 

 

1,967 

Other borrowings

 

75,884 

 

 

78,274 

 

 

80,632 

 

 

83,593 

Subordinated debentures

 

46,393 

 

 

46,393 

 

 

46,393 

 

 

46,393 

 

 

 

 

 

 

 

 

 

NOTE 6: DERIVATIVE INSTRUMENTS 

 

We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within policy guidelines. All derivative instruments are carried at fair value, in which credit risk is considered in determining fair value.

 

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.  Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.

 

Customer Risk Management Interest Rate Swaps 

 

Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us.  If we enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates.  The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us by the dealer counterparty.  These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks.  The fair value of derivative instruments are recognized as either assets or liabilities in the unaudited consolidated statements of financial condition. 

 

We have entered into two customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer.  As of September 30, 2014, these loans had an outstanding balance of $19.7 million.  We have entered into offsetting agreements with a dealer counterparty.  The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the unaudited consolidated statements of financial condition.

 

 

 

 

 

 

23

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

(Dollars in thousands)

Notional

 

Fair Value

 

Cash Collateral

 

Fair Value Net of Cash Collateral

Non-hedge derivative assets

$

19,723 

 

$

166 

 

$

 -

 

$

166 

Non-hedge derivative liabilities

 

19,723 

 

 

166 

 

 

 -

 

 

166 

 

The floating rates to us in connection with these instruments are 2.97% and 2.87% over the one-month LIBOR as of September 30, 2014.  There was no collateral required to be posted by us.  These interest rate swaps are not designated as  hedging instruments.

Interest Rate Swap

 

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 hedging instrument in cash flow hedges 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 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 September 30, 2014 was 3.08%. 

 

The estimated fair value of the interest rate derivative contract outstanding as of September 30, 2014 and December 31, 2013 resulted in a pre-tax loss of $1.6 million and $2.0 million, respectively, and was included in other liabilities in the unaudited consolidated statements of financial condition.  We obtained the counterparty valuation to validate the interest rate derivative contract as of September 30, 2014 and December 31, 2013.   

 

The effective portion of our gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.2 million gain and a $0.6 million gain for the nine months ended September 30, 2014 and September 30, 2013, 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 outflows as a result of the interest rate swap agreement were $0.6 million for both the nine months ended September 30, 2014 and September 30, 2013 and were included in interest expense on subordinated debentures.   

 

The fair value of cash and securities posted as collateral by us related to the interest rate swap derivative contract was $4.1 million at September 30, 2014 and December 31, 2013.

 

There are no credit-risk-related contingent features associated with our derivative contract. 

 

 

NOTE 7: TAXES ON INCOME 

 

Net deferred tax assets totaled $15.2 million at September 30, 2014 and $24.9 million at December 31, 2013.  Net deferred tax assets are included in other assets and no valuation allowance is recorded. 

 

As of December 31, 2013, we were in a cumulative pretax loss position as a result of the loss incurred in 2011, resulting in a $10.7 million federal net operating loss carryforward expiring in 2031.  As of September 30, 2014,  none of the pretax loss remains to be offset by pretax income generated in future periods.  We fully utilized the remaining federal net operating loss carryforward during the second quarter of 2014.

 

We monitor our deferred tax assets for realizability and conducted an interim analysis to assess the need for a valuation allowance at September 30, 2014.  As part of this analysis management considered evidence associated with the taxable income generated in the first nine months of 2014,  a  long history of taxable income, and projected pretax income in future years.  While realization of the deferred tax benefit 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 required as realization of these benefits meets the “more likely than not” standard under generally accepted accounting principles 

 

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We or one of our subsidiaries file 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

 

 

NOTE 8: SHAREHOLDERS’ EQUITY

 

Stock Repurchase Program

On August 14, 2014, our Board of Directors (the “Board”) authorized the repurchase of up to 5.0% or 990,000 shares, of our common stock.  The share repurchases are expected to be made primarily on the open market from time to time until August  14, 2015.  Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors. During the third quarter of 2014, we repurchased 223,005 shares for a total of $3.7 million. 

 

 

NOTE 9: EARNINGS PER SHARE 

 

Earnings per common share is computed using the two-class method prescribed by ASC 260, Earnings Per Share.  Using the two-class method, basic earnings per common share is computed based upon net income divided by the weighted average number of common shares outstanding during each period, which excludes 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 compensation using the treasury stock method. 

 

The following table shows the computation of basic and diluted earnings per common share: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

For the nine months

 

ended September 30,

 

ended September 30,

(Dollars in thousands, except earnings per share data)

2014

 

2013

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

5,288 

 

$

3,800 

 

$

15,131 

 

$

10,603 

Earnings allocated to participating securities

 

(68)

 

 

(40)

 

 

(186)

 

 

(88)

Numerator for basic earnings per common share

$

5,220 

 

$

3,760 

 

$

14,945 

 

$

10,515 

Effect of reallocating undistributed earnings

 

 

 

 

 

 

 

 

 

 

 

of participating securities

 

68 

 

 

40 

 

 

186 

 

 

88 

Numerator for diluted earnings per common share

$

5,288 

 

$

3,800 

 

$

15,131 

 

$

10,603 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per common share

 

19,477,161 

 

 

19,697,267 

 

 

19,508,785 

 

 

19,660,698 

Dilutive effect of stock compensation

 

157,529 

 

 

111,691 

 

 

146,221 

 

 

42,797 

Denominator for diluted earnings per common share

 

19,634,690 

 

 

19,808,958 

 

 

19,655,006 

 

 

19,703,495 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.27 

 

$

0.19 

 

$

0.77 

 

$

0.53 

Diluted

$

0.27 

 

$

0.19 

 

$

0.77 

 

$

0.54 

 

 

 

 

 

 

 

 

 

 

 

25

 


 

NOTE 10: 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 the fourth quarter of 2013, the Mortgage Banking segment only included loans available for sale in the secondary market.  During the fourth quarter of 2013, 1-4 family mortgages were combined with the available for sale loans for inclusion in the Mortgage Banking segment. This adjustment would have had an immaterial impact on interest income for the first nine months of 2013.  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 FHLB advances.    

 

The accounting policies of each reportable segment are the same as Southwest’s.  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.    The following table summarizes financial results by operating segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2014

 

Oklahoma

 

Texas

 

Kansas

 

Mortgage

 

Other

 

Total

(Dollars in thousands)

Banking

 

Banking

 

Banking

 

Banking

 

Operations

 

Company

Net interest income (loss)

$

9,902 

 

$

5,141 

 

$

1,543 

 

$

204 

 

$

(953)

 

$

15,837 

Provision for loan losses

 

(1,142)

 

 

(867)

 

 

(897)

 

 

 

 

 

 

(2,897)

Noninterest income

 

1,717 

 

 

409 

 

 

341 

 

 

506 

 

 

111 

 

 

3,084 

Noninterest expenses

 

7,169 

 

 

3,423 

 

 

1,424 

 

 

579 

 

 

763 

 

 

13,358 

Income (loss) before taxes

 

5,592 

 

 

2,994 

 

 

1,357 

 

 

123 

 

 

(1,606)

 

 

8,460 

Taxes on income

 

2,097 

 

 

1,123 

 

 

509 

 

 

45 

 

 

(602)

 

 

3,172 

Net income (loss)

$

3,495 

 

$

1,871 

 

$

848 

 

$

78 

 

$

(1,004)

 

$

5,288 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2013

 

Oklahoma

 

Texas

 

Kansas

 

Mortgage

 

Other

 

Total

(Dollars in thousands)

Banking

 

Banking

 

Banking

 

Banking

 

Operations

 

Company

Net interest income (loss)

$

9,008 

 

$

4,489 

 

$

2,736 

 

$

166 

 

$

(1,126)

 

$

15,273 

Provision for loan losses

 

1,012 

 

 

(1,387)

 

 

39 

 

 

 

 

 -

 

 

(329)

Noninterest income

 

1,731 

 

 

310 

 

 

470 

 

 

662 

 

 

374 

 

 

3,547 

Noninterest expenses

 

6,570 

 

 

2,524 

 

 

2,579 

 

 

575 

 

 

771 

 

 

13,019 

Income (loss) before taxes

 

3,157 

 

 

3,662 

 

 

588 

 

 

246 

 

 

(1,523)

 

 

6,130 

Taxes on income

 

1,200 

 

 

1,395 

 

 

222 

 

 

94 

 

 

(581)

 

 

2,330 

Net income (loss)

$

1,957 

 

$

2,267 

 

$

366 

 

$

152 

 

$

(942)

 

$

3,800 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2014

 

Oklahoma

 

Texas

 

Kansas

 

Mortgage

 

Other

 

Total

(Dollars in thousands)

Banking

 

Banking

 

Banking

 

Banking

 

Operations*

 

Company

Net interest income (loss)

$

28,026 

 

$

14,230 

 

$

6,998 

 

$

552 

 

$

(1,394)

 

$

48,412 

Provision for loan losses

 

(626)

 

 

(3,350)

 

 

(238)

 

 

(25)

 

 

 

 

(4,238)

Noninterest income

 

5,139 

 

 

948 

 

 

1,242 

 

 

1,533 

 

 

5,493 

 

 

14,355 

Noninterest expenses

 

21,530 

 

 

9,883 

 

 

6,710 

 

 

1,670 

 

 

3,004 

 

 

42,797 

Income before taxes

 

12,261 

 

 

8,645 

 

 

1,768 

 

 

440 

 

 

1,094 

 

 

24,208 

Taxes on income

 

4,598 

 

 

3,242 

 

 

663 

 

 

164 

 

 

410 

 

 

9,077 

Net income

$

7,663 

 

$

5,403 

 

$

1,105 

 

$

276 

 

$

684 

 

$

15,131 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Includes externally generated revenue of $6.0 million, primarily from investing services, and an internally generated loss of $1.9 million from the funds management unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans at period end

 

777,033 

 

 

424,640 

 

 

142,547 

 

 

23,164 

 

 

 

 

1,367,388 

Total assets at period end

 

784,343 

 

 

422,209 

 

 

144,786 

 

 

26,517 

 

 

523,093 

 

 

1,900,948 

Total deposits at period end

 

1,069,278 

 

 

206,268 

 

 

114,432 

 

 

7,907 

 

 

97,061 

 

 

1,494,946 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2013

 

Oklahoma

 

Texas

 

Kansas

 

Mortgage

 

Other

 

Total

(Dollars in thousands)

Banking

 

Banking

 

Banking

 

Banking

 

Operations*

 

Company

Net interest income (loss)

$

25,699 

 

$

14,097 

 

$

7,782 

 

$

467 

 

$

(2,032)

 

$

46,013 

Provision for loan losses

 

1,168 

 

 

(2,950)

 

 

69 

 

 

(6)

 

 

1,012 

 

 

(707)

Noninterest income

 

5,285 

 

 

1,004 

 

 

1,420 

 

 

2,223 

 

 

643 

 

 

10,575 

Noninterest expenses

 

20,817 

 

 

6,211 

 

 

8,653 

 

 

1,749 

 

 

2,816 

 

 

40,246 

Income (loss) before taxes

 

8,999 

 

 

11,840 

 

 

480 

 

 

947 

 

 

(5,217)

 

 

17,049 

Taxes on income

 

3,403 

 

 

4,477 

 

 

182 

 

 

358 

 

 

(1,974)

 

 

6,446 

Net income (loss)

$

5,596 

 

$

7,363 

 

$

298 

 

$

589 

 

$

(3,243)

 

$

10,603 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Includes externally generated loss of $1.4 million, primarily from investing services, and an internally generated loss of $36,000 from the funds management unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans at period end

 

681,745 

 

 

414,433 

 

 

206,802 

 

 

3,641 

 

 

 

 

1,306,625 

Total assets at period end

 

684,529 

 

 

407,532 

 

 

211,237 

 

 

6,591 

 

 

662,478 

 

 

1,972,367 

Total deposits at period end

 

1,128,753 

 

 

188,391 

 

 

250,597 

 

 

5,666 

 

 

10,384 

 

 

1,583,791 

 

 

 

 

 

 

 

 

 

NOTE 11COMMITMENTS AND CONTINGENCIES

 

Customer Risk Management Interest Rate Swap

 

On September  9, 2014, we entered into an agreement to provide one of our commercial borrowers a customer interest rate swap that effectively converts the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of September 30, 2014, the floating rate loan had an outstanding balance of $17.0 million.  The option to execute the swap is conditional on compliance with the loan and swap agreements, and will be subject to the terms of the International Swaps and Derivatives Association Master Agreement.  The fixed pay amount will be based on the market rates at the time of execution, and it is our intention to simultaneously execute an offsetting trade with an approved swap dealer counterparty with identical terms. 

 

Legal Action

 

On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae.   The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae.  Plaintiff claims that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the

27

 


 

lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code.  Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action.  On March 26, 2014, the Court denied the plaintiff’s request to certify the class; however, the Court permitted the plaintiff to amend its filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014. A hearing on Plaintiffs’ renewed motion for class certification was held on October 14, 2014, at which the court requested additional briefing to be completed by October 28, 2014.  No ruling has been issued to date.

 

Bank SNB is not named in the action.  In the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”).  Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB.  Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.

 

Due to the uncertainty regarding (i) the size and scope of the class, (ii) whether a class will ultimately be certified, (iii) the particular class members, (iv) the interest rate on loans made by Bank SNB charged to particular class members, (v) the late fees charged to particular class members, (vi) the time period that will ultimately be at issue if a class is certified in the Ubaldi Case, (vii) the theories, if any, under which the plaintiffs might prevail, (viii) whether Sallie Mae will make a claim against us for indemnification or repurchase, and (ix) the likelihood that Sallie Mae would prevail if it makes such a claim, we cannot estimate the amount or the range of losses that may arise as a result of the Ubaldi Case.

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 currently does not expect that the outcome of such actions will 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.

 

 

NOTE 12:  NEW AUTHORITATIVE ACCOUNTING GUIDANCE

 

In August 2014, FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern; (“ASU 2014-15”). The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2017, and it is not expected to have a material impact on the financial statements.

 

In August 2014, FASB issued Accounting Standard Update No. 2014-14, Troubled Debt Restructurings by Creditors: Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure; (“ASU 2014-14”). The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2015, and it is not expected to have a material impact on the financial statements.

 

In August 2014, FASB issued Accounting Standard Update No. 2014-13, Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2016, and it is not expected to have a material impact on the financial statements. 

 

In May 2014, FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customer, (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede existing revenue guidance under United States  GAAP and International Financial Reporting Standards. The standard core principal is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU does require new recurring disclosures. The guidance becomes effective for us on January 1, 2017. The impact as a result of this standard on our operations and financial statements is still being assessed.

 

In April 2014, FASB issued Accounting Standard Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment, reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 raises the threshold for disposals to qualify as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2015, and it is not expected to have a material impact on the financial statements.

28

 


 

 

In January 2014, FASB issued Accounting Standard Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, (“ASU 2014-04”). ASU 2014-04 clarifies when an entity is considered to have obtained physical possession (from an in-substance possession or foreclosure) of a residential real estate property collateralizing a mortgage loan. Upon physical possession of such real property, an entity is required to reclassify the nonperforming mortgage loan to other real estate owned. The ASU does not require new recurring disclosures. The guidance becomes effective for us on January 1, 2015, and is not expected to have a material impact on the financial statements.

 

In July 2013, FASB issued Accounting Standard Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”).  ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose.  The ASU does not require new recurring disclosures.  The guidance became effective for us on January 1, 2014 and did not have a material impact on the financial statements.

 

 

NOTE 13:  SUBSEQUENT EVENT

 

On July 28, 2014, we announced that Bank SNB, our wholly owned banking subsidiary, intended to file an application with the Oklahoma State Banking Department seeking to convert from a national association to an Oklahoma state-chartered bank (the “Charter Conversion”). The application was filed in July 2014 and the Charter Conversion was approved on September 24, 2014, with an effective date of October 1, 2014.  As a result, we are no longer regulated by the Office of the Comptroller of the Currency, but are now regulated by the Oklahoma State Banking Department and the Federal Reserve Bank. This move will provide efficiencies and cost savings from lower annual assessment fees of an estimated $0.1 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 


 

SOUTHWEST BANCORP, INC. 

 

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

 

 

EXECUTIVE SUMMARY

 

Southwest Bancorp, Inc. (“we”, “our”, “us”, or “Southwest”) is a financial holding company for Bank SNB, which has been providing banking services since 1894. Through Bank SNB, we have twenty-one full-service banking offices primarily located primarily along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas.  We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and consumer banking services, including commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services and products.  At September 30, 2014 we had total assets of $1.9 billion, deposits of $1.5 billion, and shareholders’ equity of $272.0 million.

 

On July 28, 2014, we announced that Bank SNB,  our wholly owned banking subsidiary, intended to file an application with the Oklahoma State Banking Department seeking to convert from a national association to an Oklahoma state-chartered bank (the “Charter Conversion”). The application was filed in July 2014 and the Charter Conversion was approved on September 24, 2014, with an effective date of October 1, 2014.

On August 14, 2014,  our Board of Directors (the “Board”) authorized the repurchase of up to 5.0%, or 990,000 shares, of our common stock.  The share repurchases are expected to be made primarily on the open market from time to time until August  14, 2015, or earlier termination of the repurchase program by the Board.  Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors.  During the third quarter of 2014, we repurchased 223,005 shares for a total of $3.7 million.

Our business operations are conducted through five operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, Mortgage Banking, and Other Operations. At September 30, 2014, the  Oklahoma Banking segment accounted for $777.0 million in loans, the Texas Banking segment accounted for $424.6 million in loans, the Kansas Banking segment accounted for $142.5 million in loans, and the Mortgage Banking segment accounted for $23.2 million in loans.  Please see “Financial Condition:  Loans” below for additional information.   For additional information on our operating segments, please see “Note 10: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements. 

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol OKSB.  We focus on converting our strategic vision into long-term shareholder value. 

 

INDUSTRY FOCUS

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

 

As of September 30, 2014, approximately $474.3 million, or 35%, of our loans were real estate industry loans.   We expect that the real estate recovery should continue to improve in the last quarter of 2014 as the market has progressed further through the economic and real estate cycles. Job growth, solid corporate profits, and recovery in the housing market are all positives for the real estate industry. Conversely, the high unemployment rate, uncertainty over government regulation and fiscal/monetary policy, and a concern about the rising cost of debt capital are all industry risk factors.    

 

Our tactical focus on healthcare lending was established in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of September 30, 2014, approximately $403.8 million, or 30%, of our loans were loans to individuals and businesses in the healthcare industry. 

 

30

 


 

FINANCIAL CONDITION 

 

Investment Securities 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Federal agency securities

$

109,681 

 

$

120,773 

 

$

(11,092)

 

(9.18)

%

Obligations of state and political subdivisions

 

43,704 

 

 

44,356 

 

 

(652)

 

(1.47)

 

Residential mortgage-backed securities

 

172,194 

 

 

183,170 

 

 

(10,976)

 

(5.99)

 

Asset-backed securities

 

9,555 

 

 

9,482 

 

 

73 

 

0.77 

 

Other securities

 

35,473 

 

 

36,418 

 

 

(945)

 

(2.59)

 

Total

$

370,607 

 

$

394,199 

 

$

(23,592)

 

(5.98)

%

 

Loans 

 

Total loans, including loans held for sale, were $1.4 billion at September 30, 2014.  The following table shows the composition of the loan portfolio at the dates indicated: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Total

(Dollars in thousands)

September 30, 2014

 

December 31, 2013

 

$ Change

 

% Change

Real estate mortgage

 

 

 

 

 

 

 

 

 

 

 

Commercial

$

757,878 

 

$

752,279 

 

$

5,599 

 

0.74 

%

One-to-four family residential

 

78,985 

 

 

83,988 

 

 

(5,003)

 

(5.96)

 

Real estate construction

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

166,379 

 

 

143,848 

 

 

22,531 

 

15.66 

 

One-to-four family residential

 

11,030 

 

 

4,646 

 

 

6,384 

 

137.41 

 

Commercial

 

330,738 

 

 

255,058 

 

 

75,680 

 

29.67 

 

Installment and consumer

 

 

 

 

 

 

 

 

 

 

 

Guaranteed student loans

 

127 

 

 

4,394 

 

 

(4,267)

 

(97.11)

 

Other

 

22,251 

 

 

26,690 

 

 

(4,439)

 

(16.63)

 

Total loans

$

1,367,388 

 

$

1,270,903 

 

$

96,485 

 

7.59 

%

 

As further discussed in “Note 2: Disposals” in the Notes to Unaudited Consolidated Financial Statements, approximately $27.9 million of loans were included in disposal of the community bank branches during the second quarter of 2014. During the third quarter of 2014, the $4.2 million portfolio of student loans was sold to reduce the expense of regulatory reporting and administration of a small portfolio.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

$

3,617 

 

$

2,235 

 

$

1,382 

 

61.83 

%

Government guaranteed commercial real estate

 

721 

 

 

769 

 

 

(48)

 

(6.24)

 

Other loans held for sale

 

30 

 

 

56 

 

 

(26)

 

(46.43)

 

Total loans held for sale

 

4,368 

 

 

3,060 

 

 

1,308 

 

42.75 

 

Portfolio loans

 

1,363,020 

 

 

1,267,843 

 

 

95,177 

 

7.51 

 

Total  loans

$

1,367,388 

 

$

1,270,903 

 

$

96,485 

 

7.59 

%

 

 

Allowance for Loan Losses 

 

Management determines the appropriate level of the allowance for loan losses using an established methodology.  (See “Note 4:  Loans and Allowance for Loan Losses in the Notes to Unaudited Consolidated Financial Statements.)  Management believes the amount of the allowance is appropriate, based on our analysis.      

 

The allowance for loan losses on loans is comprised of two components.  Loans deemed to be impaired (loans on nonaccrual

31

 


 

status and greater than $100,000, and all troubled debt restructurings) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded based upon the result.  Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral.  Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off. 

 

The allowance on all other (including impaired loans under $100,000) loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors, segmented into loan pools by type of loan and market area. 

 

The composition of the allowance for loan losses, at the dates indicated, is shown in the following table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

As of December 31, 2013

(Dollars in thousands)

Loan Balance

 

Allowance

 

Allowance
%

 

Loan Balance

 

Allowance

 

Allowance %

Nonaccrual

$

13,176 

 

$

3,326 

 

25.2 

%

 

$

18,560 

 

$

4,313 

 

23.2 

%

Performing TDR

 

20,824 

 

 

1,971 

 

9.5 

 

 

 

42,692 

 

 

3,627 

 

8.5 

 

All other

 

1,329,020 

 

 

25,620 

 

1.9 

 

 

 

1,206,591 

 

 

28,723 

 

2.4 

 

Total

$

1,363,020 

 

$

30,917 

 

2.3 

%

 

$

1,267,843 

 

$

36,663 

 

2.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The amount of the loan loss provision, or negative provision, for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period.  Net charge-offs for the first nine months of 2014 were $1.5 million, a decrease of $4.4 million from the $5.9 million recorded for the first nine months of 2013.  The provision for loan losses for the first nine months of 2014 was a negative (or credit) of $4.2 million, representing an increase of $3.5 million from the negative provision of $0.7 million recorded for the first nine months of 2013.  The increase in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs. 

 

32

 


 

Nonperforming Loans / Nonperforming Assets 

 

At September 30, 2014, the allowance for loan losses was 205.29% of nonperforming loans, compared to 184.50% of nonperforming loans, at December 31, 2013.  Nonaccrual loans, which comprise the majority of nonperforming loans, were $15.1 million as of September 30, 2014,  a decrease of $4.8 million, or 24%, from December 31, 2013.  We have taken cumulative net charge-offs related to these nonaccrual loans of $6.2 million as of September 30, 2014Nonaccrual loans at September 30, 2014 were comprised of 47 relationships and were primarily concentrated in commercial real estate (50%) and commercial and industrial (41%).  All nonaccrual loans are considered impaired and are carried at their estimated collectible amounts.  These loans are believed to have sufficient collateral and are in the process of being collected. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2014

 

December 31, 2013

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial real estate

$

7,504 

 

 

$

7,766 

 

One-to-four family residential

 

1,274 

 

 

 

513 

 

Real estate construction

 

77 

 

 

 

2,721 

 

Commercial

 

6,149 

 

 

 

8,769 

 

Other consumer

 

55 

 

 

 

50 

 

Total nonaccrual loans

 

15,059 

 

 

 

19,819 

 

 

 

 

 

 

 

 

 

Past due 90 days or more:

 

 

 

 

 

 

 

Commercial

 

 -

 

 

 

50 

 

Other consumer

 

 -

 

 

 

 

Total past due 90 days or more

 

 -

 

 

 

53 

 

Total nonperforming loans

 

15,059 

 

 

 

19,872 

 

Other real estate

 

3,448 

 

 

 

2,654 

 

Total nonperforming assets

$

18,507 

 

 

$

22,526 

 

 

 

 

 

 

 

 

 

Nonperforming assets to portfolio loans receivable and

 

 

 

 

 

 

 

other real estate

 

1.36 

%

 

 

1.77 

%

Nonperforming loans to portfolio loans receivable

 

1.10 

 

 

 

1.57 

 

Allowance for loan losses to nonperforming loans

 

205.29 

 

 

 

184.50 

 

Government-guaranteed portion of nonperforming loans

$

1,506 

 

 

$

875 

 

 

 

At September 30, 2014,  nine credit relationships represented 80% of nonperforming loans.  These were all commercial, commercial real estate lending, or one-to-four family residential relationships and had an aggregate principal balance of $12.1 million and related impairment reserves of $3.2 million.  Cumulative net charge-offs for these nine relationships were $5.3 million as of September 30, 2014

 

Performing loans considered potential problem loans (loans which are not included in the past due or nonaccrual categories but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms) amounted to approximately $64.4 million at September 30, 2014, compared to $99.8 million at December 31, 2013.  Substantially all of these loans were performing in accordance with their present terms at September 30, 2014.  Loans may be monitored by management and reported as potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. 

 

At September 30, 2014, other real estate was $3.4 million, up from $2.7  million at December 31, 2013 due to the addition of other properties.   During the first nine months of 2014, there were six sales of other real estate property, which had a principal value  of  $1.1 million,  and resulted in a net gain of $0.2 million.  In order to adjust the fair value of property values, there were total other real estate write-downs of $0.3 million during the first nine months of 2014 compared to the total other real estate write-downs of $1.5 million for the year ended December 31, 2013.

 

At September 30, 2014, the reserve for unfunded loan commitments was $2.6 million, a $0.2 million, or 7%, decrease from the amount at December 31, 2013.  Management believes the amount of the reserve is appropriate and is included in other liabilities on the unaudited consolidated statements of financial condition.  The decrease related primarily to continued improvement in asset quality and a corresponding decline in historical loss ratios used to calculate the reserve.       

 

 

33

 


 

Deposits and Other Borrowings 

 

Our deposits were $1.5 billion at September 30, 2014 and $1.6 billion at December 31, 2013.  The following table shows the composition of deposits at the dates indicated: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Noninterest-bearing demand

$

445,148 

 

$

444,796 

 

$

352 

 

0.08 

%

Interest-bearing demand

 

104,807 

 

 

120,156 

 

 

(15,349)

 

(12.77)

 

Money market accounts

 

477,614 

 

 

439,981 

 

 

37,633 

 

8.55 

 

Savings accounts

 

33,398 

 

 

41,727 

 

 

(8,329)

 

(19.96)

 

Time deposits of $100,000 or more

 

203,090 

 

 

251,185 

 

 

(48,095)

 

(19.15)

 

Other time deposits

 

230,889 

 

 

286,241 

 

 

(55,352)

 

(19.34)

 

Total deposits

$

1,494,946 

 

$

1,584,086 

 

$

(89,140)

 

(5.63)

%

 

We participate in the Certificate of Deposit Account Registry Service (“CDARS”) and CDARS deposits totaled $3.0 million at September 30, 2014 and December 31, 2013.

 

Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements, increased $4.7 million, or 6%, to $75.9 million during the first nine months of 2014.  The increase primarily reflects the timing of repurchase agreements for the period.   

  

As further discussed in “Note 2: Disposals” in the Notes to the Unaudited Consolidated Financial Statements, approximately $130.6 million of deposits were included in the sale of the community bank branches. The sale of community bank branches, when coupled with an increase in brokered deposits, changed the core funding mix as of September 30, 2014. Wholesale funding, including FHLB borrowings, federal funds purchased, and brokered deposits, accounted for 8% of total funding at September 30, 2014. See further discussion under the “Liquidity” section below.

 

Shareholders’ Equity 

 

Shareholders’ equity increased  $12.8 million, or 5%, primarily due to net income of $15.1 million, for the first nine months of 2014. At September 30, 2014, the accumulated other comprehensive loss on available for sale investment securities and derivative instruments (net of tax) was $0.4 million, a decrease from $3.0 million at December 31, 2013. 

 

At September 30, 2014, we and Bank SNB continued to exceed all applicable regulatory capital requirements.  See “Capital Requirements” on page 43. 

 

 

34

 


 

RESULTS OF OPERATIONS 

FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2014 and 2013 

 

Net income for the third quarter of 2014 of $5.3 million represented an increase of $1.5 million from the $3.8 million net income recorded for the third quarter of 2013.  Diluted earnings per share were $0.27 for the third quarter of 2014, compared to $0.19 for the third quarter of 2013.  The increase in quarterly net income was primarily the result of a $0.6 million, or 4%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013, and a $2.6 million increase in the negative provision for loan losses, offset in part by a $0.5 million decrease in noninterest income and a $0.3 million increase in noninterest expense. 

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period.  (See “Note 4:  Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 42.)  

 

Net Interest Income 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Loans

$

15,683 

 

$

16,242 

 

$

(559)

 

(3.44)

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

383 

 

 

438 

 

 

(55)

 

(12.56)

 

Mortgage-backed securities

 

824 

 

 

820 

 

 

 

0.49 

 

State and political subdivisions

 

291 

 

 

300 

 

 

(9)

 

(3.00)

 

Other securities

 

36 

 

 

65 

 

 

(29)

 

44.62 

 

Other interest-earning assets

 

274 

 

 

270 

 

 

 

1.48 

 

Total interest income

 

17,491 

 

 

18,135 

 

 

(644)

 

(3.55)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

33 

 

 

35 

 

 

(2)

 

(5.71)

 

Money market accounts

 

157 

 

 

182 

 

 

(25)

 

(13.74)

 

Savings accounts

 

 

 

10 

 

 

(2)

 

(20.00)

 

Time deposits of $100,000 or more

 

338 

 

 

552 

 

 

(214)

 

(38.77)

 

Other time deposits

 

328 

 

 

538 

 

 

(210)

 

(39.03)

 

Other borrowings

 

227 

 

 

225 

 

 

 

0.89 

 

Subordinated debentures

 

563 

 

 

1,320 

 

 

(757)

 

(57.35)

 

Total interest expense

 

1,654 

 

 

2,862 

 

 

(1,208)

 

(42.21)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

15,837 

 

$

15,273 

 

$

564 

 

3.69 

%

 

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

 

35

 


 

 AVERAGE BALANCES, YIELDS AND RATES 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

2014

 

2013

 

Average

 

 

 

 

Average

 

Average

 

 

 

 

Average

(Dollars in thousands)

Balance

 

Interest

 

Yield/Rate

 

Balance

 

Interest

 

Yield/Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1) (2)

$

1,356,729 

 

$

15,683 

 

4.59 

%

 

$

1,298,018 

 

$

16,242 

 

4.96 

%

Investment securities (2)

 

378,924 

 

 

1,534 

 

1.61 

 

 

 

364,746 

 

 

1,623 

 

1.76 

 

Other interest-earning assets

 

88,653 

 

 

274 

 

1.23 

 

 

 

287,968 

 

 

270 

 

0.37 

 

Total interest-earning assets

 

1,824,306 

 

 

17,491 

 

3.80 

 

 

 

1,950,732 

 

 

18,135 

 

3.69 

 

Other assets

 

43,339 

 

 

 

 

 

 

 

 

57,622 

 

 

 

 

 

 

Total assets

$

1,867,645 

 

 

 

 

 

 

 

$

2,008,354 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

109,245 

 

$

33 

 

0.12 

%

 

$

117,124 

 

$

35 

 

0.12 

%

Money market accounts

 

437,632 

 

 

157 

 

0.14 

 

 

 

416,839 

 

 

182 

 

0.17 

 

Savings accounts

 

32,076 

 

 

 

0.10 

 

 

 

38,992 

 

 

10 

 

0.10 

 

Time deposits

 

440,317 

 

 

666 

 

0.60 

 

 

 

600,321 

 

 

1,090 

 

0.72 

 

Total interest-bearing deposits

 

1,019,270 

 

 

864 

 

0.34 

 

 

 

1,173,276 

 

 

1,317 

 

0.45 

 

Other borrowings

 

85,423 

 

 

227 

 

1.05 

 

 

 

75,822 

 

 

225 

 

1.18 

 

Subordinated debentures

 

46,393 

 

 

563 

 

4.85 

 

 

 

75,004 

 

 

1,320 

 

7.04 

 

Total interest-bearing liabilities

 

1,151,086 

 

 

1,654 

 

0.57 

 

 

 

1,324,102 

 

 

2,862 

 

0.86 

 

Noninterest-bearing demand deposits

 

432,255 

 

 

 

 

 

 

 

 

422,203 

 

 

 

 

 

 

Other liabilities

 

11,442 

 

 

 

 

 

 

 

 

10,319 

 

 

 

 

 

 

Shareholders' equity

 

272,862 

 

 

 

 

 

 

 

 

251,730 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,867,645 

 

 

 

 

 

 

 

$

2,008,354 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

$

15,837 

 

3.23 

%

 

 

 

 

$

15,273 

 

2.83 

%

Net interest margin (3)

 

 

 

 

 

 

3.44 

%

 

 

 

 

 

 

 

3.11 

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

158.49% 

 

 

 

 

 

 

 

 

147.32% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average balances include nonaccrual loans.  Fees included in interest income on loans receivable are not considered material. 

 

(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.

 

(3) Net interest margin = annualized net interest income / average interest-earning assets

 

 

Compared to the third quarter of 2013, the third quarter 2014 yields on our interest-earning assets increased 11  basis points, while the rates paid on our interest-bearing liabilities decreased 29 basis points, resulting in an increase in the interest rate spread to 3.23%.  Other contributing factors were the reduction in the level of overnight fed funds sold balances, resulting primarily from the branch sale that occurred in the second quarter of 2014 and loan growth when comparing balances to prior year.  During the quarterly periods ended September 30, 2014 and September 30, 2013, annualized net interest margin was 3.44% and 3.11%, respectively, and for the same periods, the ratio of average interest-earning assets to average interest-bearing liabilities increased to 158.49% from  147.32%.

36

 


 

RATE VOLUME TABLE 

 

The following table analyzes changes in our interest income and interest expense for the periods indicated.  For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to:  (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume).  Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. 

 

With the rate environment remaining low in the short to mid-term, earning assets and interest bearing liabilities are repricing at lower rates.  The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

2014 vs. 2013

 

Increase

 

Due to Change

 

Or

 

In Average:

(Dollars in thousands)

(Decrease)

 

Volume

 

Rate

Interest earned on:

 

 

 

 

 

 

 

 

Loans receivable (1)

$

(559)

 

$

439 

 

$

(998)

Investment securities (1)

 

(89)

 

 

61 

 

 

(150)

Other interest-earning assets

 

 

 

(286)

 

 

290 

Total interest income

 

(644)

 

 

214 

 

 

(858)

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

 

 

 

 

 

Interest-bearing demand

 

(2)

 

 

(2)

 

 

 -

Money market accounts

 

(25)

 

 

 

 

(34)

Savings accounts

 

(2)

 

 

(2)

 

 

 -

Time deposits

 

(424)

 

 

(262)

 

 

(162)

Other borrowings

 

 

 

27 

 

 

(25)

Subordinated debentures

 

(757)

 

 

(418)

 

 

(339)

Total interest expense

 

(1,208)

 

 

(648)

 

 

(560)

 

 

 

 

 

 

 

 

 

Net interest income

$

564 

 

$

862 

 

$

(298)

 

 

 

 

 

 

 

 

 

(1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.

Noninterest Income 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

Other service charges

$

2,255 

 

$

2,376 

 

$

(121)

 

(5.09)

%

Other fees

 

237 

 

 

213 

 

 

24 

 

11.27 

 

Other noninterest income

 

210 

 

 

339 

 

 

(129)

 

(38.05)

 

Gain on sales of mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

382 

 

 

619 

 

 

(237)

 

(38.29)

 

Total noninterest income

$

3,084 

 

$

3,547 

 

$

(463)

 

(13.05)

%

 

Other service charges decreased primarily due to a decrease in direct checking and overdraft charges.

 

Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

 

Other noninterest income decreased primarily as a result of a legal settlement received in the third quarter or 2013, offset in part by interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014.

 

Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year.

 

 

37

 


 

Noninterest Expense 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

7,804 

 

$

7,645 

 

$

159 

 

2.08 

%

Occupancy

 

2,612 

 

 

2,721 

 

 

(109)

 

(4.01)

 

FDIC and other insurance

 

299 

 

 

413 

 

 

(114)

 

(27.60)

 

Other real estate (net)

 

(220)

 

 

(387)

 

 

167 

 

(43.15)

 

Unfunded loan commitment reserve

 

(327)

 

 

71 

 

 

(398)

 

(560.56)

 

Other general and administrative

 

3,190 

 

 

2,556 

 

 

634 

 

24.80 

 

Total noninterest expense

$

13,358 

 

$

13,019 

 

$

339 

 

2.60 

%

 

The number of full-time equivalent employees decreased from 364 at the beginning of the quarter to 351 as of September 30, 2014As of September 30, 2013, the number of full-time equivalent employees was 407. The increase in personnel expense from the prior year is primarily the result of restructuring costs and increased employee benefit expense.

  

Our financial institution subsidiary pays deposit insurance premiums to the FDIC based on assessment rates.  The decrease 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, which is due to improvements in asset quality and other factors.   

 

The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year. 

 

The unfunded loan commitment reserve expense decreased primarily as a result of continued improvement in asset quality and the corresponding decline in historical loss ratios used to calculate the reserve.  

 

The increase in other general and administrative is primarily the result of higher legal, marketing, and consulting fees.  

 

38

 


 

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2014 and 2013

 

Net income for the nine months ended September 30, 2014 of $15.1 million represented an increase of $4.5 million from the $10.6 million net income for the nine months ended September 30,  2013.  Diluted earnings per share were $0.77 for the nine months ended September 30, 2014, compared to $0.54 for the nine months ended September 30, 2013.  The increase in net income was the result of a $2.4 million, or 5%, increase in net interest income, primarily driven by lower interest expense on deposits and a reduction in interest expense due to the redemption of the 10.5% Trust Preferred Securities in third quarter of 2013, a $3.5 million increase in the negative provision for loan losses, resulting from improved asset quality, a $3.8 million increase in noninterest income, primarily the pre-tax net gain on sale of community bank branches, offset in part by a $2.6 million increase in noninterest expense due to decreased gains recognized on sale of other real estate properties and increased employee benefit expenses.

Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period.  (See “Note 4: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page 42.)

 

Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Loans

$

47,801 

 

$

49,663 

 

$

(1,862)

 

(3.75)

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

1,147 

 

 

1,336 

 

 

(189)

 

(14.15)

 

Mortgage-backed securities

 

2,650 

 

 

2,520 

 

 

130 

 

5.16 

 

State and political subdivisions

 

881 

 

 

906 

 

 

(25)

 

(2.76)

 

Other securities

 

134 

 

 

146 

 

 

(12)

 

8.22 

 

Other interest-earning assets

 

963 

 

 

765 

 

 

198 

 

25.88 

 

Total interest income

 

53,576 

 

 

55,336 

 

 

(1,760)

 

(3.18)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

113 

 

 

117 

 

 

(4)

 

(3.42)

 

Money market accounts

 

439 

 

 

608 

 

 

(169)

 

(27.80)

 

Savings accounts

 

30 

 

 

34 

 

 

(4)

 

(11.76)

 

Time deposits of $100,000 or more

 

1,125 

 

 

1,863 

 

 

(738)

 

(39.61)

 

Other time deposits

 

1,113 

 

 

1,789 

 

 

(676)

 

(37.79)

 

Other borrowings

 

675 

 

 

667 

 

 

 

1.20 

 

Subordinated debentures

 

1,669 

 

 

4,245 

 

 

(2,576)

 

(60.68)

 

Total interest expense

 

5,164 

 

 

9,323 

 

 

(4,159)

 

(44.61)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

48,412 

 

$

46,013 

 

$

2,399 

 

5.21 

%

 

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

 

 

 

 

 

 

 

 

39

 


 

AVERAGE BALANCES, YIELDS AND RATES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

(Dollars in thousands)

2014

 

2013

 

Average

 

 

 

 

Average

 

Average

 

 

 

 

Average

 

Balance

 

Interest

 

Yield/Rate

 

Balance

 

Interest

 

Yield/Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1) (2)

$

1,322,351 

 

$

47,801 

 

4.83 

%

 

$

1,323,938 

 

$

49,663 

 

5.02 

%

Investment securities (2)

 

383,950 

 

 

4,812 

 

1.68 

 

 

 

373,150 

 

 

4,908 

 

1.76 

 

Other interest-earning assets

 

183,416 

 

 

963 

 

0.70 

 

 

 

279,549 

 

 

765 

 

0.37 

 

Total interest-earning assets

 

1,889,717 

 

 

53,576 

 

3.79 

 

 

 

1,976,637 

 

 

55,336 

 

3.74 

 

Other assets

 

47,780 

 

 

 

 

 

 

 

 

69,423 

 

 

 

 

 

 

Total assets

$

1,937,497 

 

 

 

 

 

 

 

$

2,046,060 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

124,652 

 

$

113 

 

0.12 

%

 

$

125,598 

 

$

117 

 

0.12 

%

Money market accounts

 

431,802 

 

 

439 

 

0.14 

 

 

 

418,973 

 

 

608 

 

0.19 

 

Savings accounts

 

39,941 

 

 

30 

 

0.10 

 

 

 

38,850 

 

 

34 

 

0.12 

 

Time deposits

 

488,066 

 

 

2,238 

 

0.61 

 

 

 

638,739 

 

 

3,652 

 

0.76 

 

Total interest-bearing deposits

 

1,084,461 

 

 

2,820 

 

0.35 

 

 

 

1,222,160 

 

 

4,411 

 

0.48 

 

Other borrowings

 

83,987 

 

 

675 

 

1.07 

 

 

 

72,491 

 

 

667 

 

1.23 

 

Subordinated debentures

 

46,393 

 

 

1,669 

 

4.80 

 

 

 

79,618 

 

 

4,245 

 

7.11 

 

Total interest-bearing liabilities

 

1,214,841 

 

 

5,164 

 

0.57 

 

 

 

1,374,269 

 

 

9,323 

 

0.91 

 

Noninterest-bearing demand deposits

 

443,520 

 

 

 

 

 

 

 

 

409,393 

 

 

 

 

 

 

Other liabilities

 

10,898 

 

 

 

 

 

 

 

 

11,047 

 

 

 

 

 

 

Shareholders' equity

 

268,238 

 

 

 

 

 

 

 

 

251,351 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

1,937,497 

 

 

 

 

 

 

 

$

2,046,060 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

$

48,412 

 

3.22 

%

 

 

 

 

$

46,013 

 

2.83 

%

Net interest margin (3)

 

 

 

 

 

 

3.43 

%

 

 

 

 

 

 

 

3.11 

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

155.55% 

 

 

 

 

 

 

 

 

143.83% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average balances include nonaccrual loans.  Fees included in interest income on loans receivable are not considered material. 

 

(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.

 

(3) Net interest margin = annualized net interest income / average interest-earning assets

 

 

Compared to the nine months ended September 30, 2013, the nine months ended September 30, 2014 yields on our interest-earning assets increased 5 basis points, while the rates paid on our interest-bearing liabilities decreased 34 basis points, resulting in an increase in the interest rate spread to 3.22%.  During the same periods, annualized net interest margin was 3.43% and 3.11%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities increased to 155.55% from 143.83%.    

 

40

 


 

RATE VOLUME TABLE 

 

The following table analyzes changes in our interest income and interest expense for the periods indicated.  For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to:  (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume).  Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. 

 

With the rate environment remaining low, earning assets and interest bearing liabilites are repricing at lower rates.  The increase in net interest income is primarily the result of lower interest expense on deposits and a reduction in interest costs due to the redemption of the 10.5% Trust Preferred Securities in the third quarter of 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

2014 vs. 2013

 

Increase

 

Due to Change

 

Or

 

In Average:

(Dollars in thousands)

(Decrease)

 

Volume

 

Rate

Interest earned on:

 

 

 

 

 

 

 

 

Loans receivable (1)

$

(1,862)

 

$

(525)

 

$

(1,337)

Investment securities (1)

 

(96)

 

 

139 

 

 

(235)

Other interest-earning assets

 

198 

 

 

(329)

 

 

527 

Total interest income

 

(1,760)

 

 

(715)

 

 

(1,045)

 

 

 

 

 

 

 

 

 

Interest paid on:

 

 

 

 

 

 

 

 

Interest-bearing demand

 

(4)

 

 

(1)

 

 

(3)

Money market accounts

 

(169)

 

 

18 

 

 

(187)

Savings accounts

 

(4)

 

 

 

 

(5)

Time deposits

 

(1,414)

 

 

(772)

 

 

(642)

Other borrowings

 

 

 

98 

 

 

(90)

Subordinated debentures

 

(2,576)

 

 

(1,448)

 

 

(1,128)

Total interest expense

 

(4,159)

 

 

(2,104)

 

 

(2,055)

 

 

 

 

 

 

 

 

 

Net interest income

$

2,399 

 

$

1,389 

 

$

1,010 

 

 

 

 

 

 

 

 

 

(1) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis, because it is not considered material.

Noninterest Income 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

Other service charges

$

6,821 

 

$

7,123 

 

$

(302)

 

(4.24)

%

Other fees

 

875 

 

 

733 

 

 

142 

 

19.37 

 

Other noninterest income

 

448 

 

 

455 

 

 

(7)

 

(1.54)

 

Gain on sale of branches, net

 

4,378 

 

 

 -

 

 

4,378 

 

100.00 

 

Gain on sale/call of investment securities

 

764 

 

 

 -

 

 

764 

 

100.00 

 

Gain on sales of mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

1,069 

 

 

2,231 

 

 

(1,162)

 

(52.08)

 

All other loan sales

 

 -

 

 

33 

 

 

(33)

 

(100.00)

 

Total noninterest income

$

14,355 

 

$

10,575 

 

$

3,780 

 

35.74 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other service charges decreased primarily due to a decrease in commercial and overdraft charges.

 

Other fees increased due to an increase in loan servicing fees and a decrease in the amortization of mortgage servicing rights.

 

41

 


 

Other noninterest income decreased primarily as a result of a legal settlement received in the third quarter or 2013, offset in part by interest rate swap fee revenue from the customer risk management swaps, which began in the second quarter of 2014.

 

Gain on sale of branches consisted of $4.4 million recognized as the pre-tax net gain on sales of the community bank branches in the second quarter of 2014. See “Note 2: Disposals” for more details.

 

The gain on sale/call of investment securities was the result of the gain on the sale of a stock investment that was acquired in a prior year repossession, and the result of the release of escrowed funds received in association with the sale of an investment that was carried at cost.

 

Gain on sales of mortgage loans is primarily a reflection of the activity in residential mortgage lending. The decrease relates to a decrease in mortgage lending activity during the year.

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months

 

 

 

 

 

 

 

ended September 30,

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

$ Change

 

% Change

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

24,402 

 

$

23,820 

 

$

582 

 

2.44 

%

Occupancy

 

8,164 

 

 

7,974 

 

 

190 

 

2.38 

 

FDIC and other insurance

 

1,010 

 

 

1,304 

 

 

(294)

 

(22.55)

 

Other real estate (net)

 

359 

 

 

(1,428)

 

 

1,787 

 

(125.14)

 

Unfunded loan commitment reserve

 

(230)

 

 

442 

 

 

(672)

 

(152.04)

 

Other general and administrative

 

9,092 

 

 

8,134 

 

 

958 

 

11.78 

 

Total noninterest expense

$

42,797 

 

$

40,246 

 

$

2,551 

 

6.34 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The number of full-time equivalent employees decreased from 402 at the beginning of the year to 351 as of September 30, 2014, which includes the impact from the branch sales in Kansas. As of September 30, 2013, the number of full-time equivalent employees was 407. The increase in personnel expense from prior year is primarily the result of restructuring costs and increased employee benefit expense.

  

Our financial institution subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates.  The decrease 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, which is due to improvements in asset quality and other factors.   

 

The increase in other real estate net expenses is primarily the result of net gains on sales of other real estate properties recognized in the prior year.

 

The unfunded loan commitment reserve expense decreased primarily as a result of continued improvement in asset quality and the corresponding decline in historical loss ratios used to calculate the reserve.   

 

The increase in other general and administrative is primarily the result of higher consulting fees, legal fees, and marketing costs, which is partially offset with lower accounting fees.    

 

Provisions for Loan Losses  

 

The provision for loan losses is the amount of expense (or credit) that is required to maintain the allowance for losses at an appropriate level based upon the inherent risks in the loan portfolio after the effects of net charge-offs (or recoveries) for the period.  The decline in the negative provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs.  (See “Note 4:  Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Loans”) 

 

 Taxes on Income 

 

Our income tax expense was $9.1 million for the first nine months of 2014 compared to $6.4 million for the first nine months of 2013, an increase  $2.7 million, or 42%.  The increase in the income tax expense is the result of increased pretax income and fluctuations in permanent book/tax differences.  The effective tax rate for the first nine months of 2014 was 37.50%.     

42

 


 

 

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.  Additional sources of liquidity, including cash flow from the repayment of loans and the sale of participations in outstanding loans, are also considered in determining whether liquidity is satisfactory.  Liquidity is also achieved through growth of deposits, reductions in liquid assets, and accessibility to capital and money markets.  These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization. 

  

Southwest and Bank SNB have available various forms of short-term borrowings for cash management and liquidity purposes.  These forms of borrowings include federal funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Topeka (“FHLB”). 

 

Bank SNB also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program.  There was no outstanding balance of those notes at September 30, 2014.  Bank SNB has approved federal funds purchase lines totaling $140.0 million with four banks.  There was no outstanding balance on these lines at September 30, 2014.  Bank SNB is 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 allows Bank SNB to borrow up to $64 million.  As of September 30, 2014, no borrowings were made through the BIC program.  In addition, Bank SNB has available a $327 million line of credit from the FHLB.  Borrowings under the FHLB lines are secured by investment securities and loans.  At September 30, 2014, Bank SNB’s FHLB line of credit had an outstanding balance of $25.0 million.   

 

(See also “Deposits and Other Borrowings” on page 34 for funds available and “Note 10: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for a discussion of our funds management unit.) 

 

Bank SNB sells securities under agreements to repurchase with Bank SNB retaining custody of the collateral.  Collateral consists of U.S. government agency obligations, which are designated as pledged with Bank SNB’s safekeeping agent.  These transactions are for one to four day periods.  Outstanding balances under this program were $50.9 million and $55.6 million as of September 30, 2014 and December 31, 2013, respectively. 

 

At September 30, 2014, $240.1 million of the total carrying value of investment securities of $359.0 million were pledged as collateral to secure public and trust deposits, sweep agreements, and borrowings from the FHLB.  Any amount over pledged can be released at any time. 

 

During the first nine months of 2014, no category of short-term borrowings had an average balance that exceeded 30% of ending shareholders’ equity. 

 

During the first nine months of 2014, cash and cash equivalents decreased by $149.7 million, or 54%, to $130.1 million.  This decrease was the net result of cash used in investing activities of $199.9 million (primarily from an increase in net loans originated, net cash outflows from the sale of bank branches, and purchases of available for sale securities offset by repayments of securities), cash provided by financing activities of $30.7 million (primarily from net increases in deposits offset in part by a decrease in other borrowings and purchases of treasury stock),  and offset in part by cash provided by operating activities of $19.4 million.  

 

CAPITAL REQUIREMENTS 

 

Financial holding companies are required to maintain capital ratios set by the FRB in its Risk-Based Capital Guidelines.  At September 30, 2014, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 21.34%, a Tier I risk-based capital ratio of 20.05%, and a Tier 1 leverage ratio of 16.86%.  As of September 30, 2014, Bank SNB met the criteria for classification as “well-capitalized” institutions under the prompt corrective action rules of the Federal Deposit Insurance Act.  Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest or Bank SNB by bank regulators.   

 

EFFECTS OF INFLATION 

 

The unaudited consolidated financial statements and related unaudited consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which 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

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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 do the effects of general levels of inflation. 

 

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES 

 

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

 

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

 

There have been no significant changes in our application of critical accounting policies since December 31, 2013

 

*   *   *   *   *   *   *

 

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ITEM 3. 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 its 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.

 

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 Changes in Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Interest Rates:

+  300 bp

 

+200 bp

 

+100 bp

 

 

 

 

 

 

September 30, 2014

8.99% 

 

4.80% 

 

0.69% 

December 31, 2013

6.25% 

 

2.99% 

 

(0.03)%

 

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. When compared to December 31, 2013, net interest income improved in each of the three rising interest rate scenarios. Our greatest exposure to changes in interest rate is in the +300 bp scenario with an increase in net interest income of 8.99% on September 30, 2014, a 2.74%  increase from the December 31, 2013 level of 6.25%.   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 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 net assets. 

 

 

 

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Estimated Changes in Economic Value of Equity (EVE)

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Interest Rates:

+300 bp

 

+200 bp

 

+100 bp

 

 

 

 

 

 

September 30, 2014

(0.32)%

 

(0.88)%

 

(2.99)%

December 31, 2013

(6.69)%

 

(4.63)%

 

(2.91)%

 

As of September 30, 2014 the economic value of equity measure improved  in two of the three rising interest rate scenarios when compared to the December 31, 2013 percentages.  Our largest economic value of equity exposure is the +300 bp scenario.  The +300 bp scenario was (0.32%) on September 30, 2014, a 6.37%  improvement over the December 31, 2013 value of (6.69%).   Bank SNB is in compliance with all policy limits established for the economic value of equity. 

 

 

*   *   *   *   *   *   *

 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Disclosure Controls and Procedures 

 

As required by SEC rules, our management evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014Our 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 September 30, 2014. 

 

Changes in Internal Control over Financial Reporting 

 

No changes occurred during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

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PART II:  OTHER INFORMATION 

 

 

Item 1:  Legal proceedings 

 

On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae.   The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae.  Plaintiff claims that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code.  Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action.  On March 26, 2014, the Court denied the plaintiff’s request to certify the class; however, the Court permitted the plaintiff to amend its filing to redefine the class.  Plaintiffs filed a renewed motion on June 23, 2014. A hearing on Plaintiffs’ renewed motion for class certification was held on October 14, 2014, at which the court requested additional briefing to be completed by October 28, 2014.  No ruling has been issued to date.

 

Bank SNB is not named in the action.  In the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”).  Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB.  Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.

 

We and our subsidiaries are regularly subject to various claims and legal actions arising in the normal course of business that are not disclosed in this report.  Management currently does not expect that ultimate disposition of any of these matters will have a material adverse effect on our financial statements.  We are not currently aware of any additional, or material changes to, pending or threatened litigation against us or our subsidiaries that involves any of our property or the property of our subsidiaries that could have a material adverse effect on our financial statements. 

 

Item 1A:  Risk Factors 

 

There were no material changes in risk factors during the first nine months of 2014 from those disclosed in our Form 10-K for the year ended December 31, 2013.

 

Item 2:  Unregistered sales of equity securities and use of proceeds 

 

On August 14, 2014, our Board authorized the repurchase of up to 5.0% or 990,000 shares, of our common stock. The share repurchases are expected to be made primarily on the open market from time to time until August 14, 2015.  Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors.

 

The table below sets forth information regarding the Company's repurchases of its common stock during the three months ended September 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares Purchased

 

Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs

August 14, 2014 to August 31, 2014

 

35,300 

 

$

16.35 

 

 

35,300 

 

 

954,700 

September 1, 2014 to September 30, 2014

 

187,705 

 

 

16.52 

 

 

187,705 

 

 

766,995 

Total

 

223,005 

 

$

16.49 

 

 

223,005 

 

 

 

 

 

Item 3:  Defaults upon senior securities 

 

None 

 

Item 4:  Mine Safety Disclosures 

 

Not Applicable 

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Item 5:  Other information 

 

None  

 

Item 6:  Exhibits 

 

Exhibit 31(a), (b)   Rule 13a-14(a)/15d-14(a) Certifications 

Exhibit 32(a), (b)   18 U.S.C. Section 1350 Certifications 

Exhibit 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 

 

 

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SIGNATURES 

 

 

Pursuant to the requirements 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. 

(Registrant) 

 

 

 

 

 

By:  /s/ Mark W. Funke  

November 4, 2014

Mark W. Funke

President and Chief Executive Officer 

(Principal Executive Officer)

 

Date

 

 

 

By:  /s/ Joe T. Shockley, Jr.

 

November 4, 2014

Joe T. Shockley, Jr.

Executive Vice President and Chief  

Financial Officer  

(Principal Financial Officer) 

 

Date

 

 

 

49