Notes to Unaudited Consolidated Financial Statements
N
OTE
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 six months ended
June 30, 2013
, and the cash flows for the
six months ended June 30, 2013
,
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, 2012
.
The accompanying unaudited consolidated financial statements include the accounts of Southwest Bancorp, Inc. (
“we”, “our”, “us”,
“Southwest”),
our
wholly owned financial institution subsidiaries, Stillwater National Bank and Trust Company (“Stillwater National”)
and
Bank of Kansas,
SNB Capital Corporation, a lending and loan workout subsidiary
, and consolidated subsidiaries of Stillwater National, 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.
NOTE 2: INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities at
June 30, 2013
and
December 31, 2012
follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
(Dollars in thousands)
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
$
|
11,758
|
|
$
|
430
|
|
$
|
-
|
|
$
|
12,188
|
Total
|
$
|
11,758
|
|
$
|
430
|
|
$
|
-
|
|
$
|
12,188
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
$
|
121,338
|
|
$
|
510
|
|
$
|
(2,255)
|
|
$
|
119,593
|
Obligations of state and political subdivisions
|
|
34,523
|
|
|
73
|
|
|
(520)
|
|
|
34,076
|
Residential mortgage-backed securities
|
|
194,664
|
|
|
2,015
|
|
|
(1,154)
|
|
|
195,525
|
Asset-backed securities
|
|
9,564
|
|
|
-
|
|
|
(303)
|
|
|
9,261
|
Equity securities
|
|
1,308
|
|
|
882
|
|
|
-
|
|
|
2,190
|
Total
|
$
|
361,397
|
|
$
|
3,480
|
|
$
|
(4,232)
|
|
$
|
360,645
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
$
|
12,797
|
|
$
|
862
|
|
$
|
-
|
|
$
|
13,659
|
Total
|
$
|
12,797
|
|
$
|
862
|
|
$
|
-
|
|
$
|
13,659
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
$
|
114,159
|
|
$
|
1,474
|
|
$
|
(19)
|
|
$
|
115,614
|
Obligations of state and political subdivisions
|
|
34,754
|
|
|
887
|
|
|
(83)
|
|
|
35,558
|
Residential mortgage-backed securities
|
|
200,310
|
|
|
3,668
|
|
|
(303)
|
|
|
203,675
|
Asset-backed securities
|
|
7,794
|
|
|
-
|
|
|
(123)
|
|
|
7,671
|
Equity securities
|
|
1,300
|
|
|
497
|
|
|
-
|
|
|
1,797
|
Total
|
$
|
358,317
|
|
$
|
6,526
|
|
$
|
(528)
|
|
$
|
364,315
|
Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.
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 statement of financial condition. Total investments carried at cost were $
8.5
million at
June 30, 2013
and
December 31, 2012
. 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
June 30, 2013
follows:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
Held to Maturity
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
(Dollars in thousands)
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
One year or less
|
$
|
38,338
|
|
$
|
38,886
|
|
$
|
1,003
|
|
$
|
1,009
|
More than one year through five years
|
|
189,006
|
|
|
190,308
|
|
|
940
|
|
|
957
|
More than five years through ten years
|
|
115,096
|
|
|
112,514
|
|
|
6,397
|
|
|
6,552
|
More than ten years
|
|
18,957
|
|
|
18,937
|
|
|
3,418
|
|
|
3,670
|
Total
|
$
|
361,397
|
|
$
|
360,645
|
|
$
|
11,758
|
|
$
|
12,188
|
The foregoing analysis assumes that
our
residential mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to
our
investment securities for this analysis.
Gain or loss on sale of investments is based upon the specific identification method.
Sales of securities available for sale were as follows:
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|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
For the six months
|
|
|
ended June 30,
|
|
|
ended June 30,
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
Proceeds from sales
|
$
|
-
|
|
$
|
6,588
|
|
$
|
-
|
|
$
|
6,588
|
Gross realized gains
|
|
-
|
|
|
45
|
|
|
-
|
|
|
45
|
Gross realized losses
|
|
-
|
|
|
(10)
|
|
|
-
|
|
|
(10)
|
The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at
June 30, 2013
and
December 31, 2012
. Securities whose market values exceed cost are excluded from this table.
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|
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|
|
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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
36
|
|
$
|
86,704
|
|
$
|
(2,255)
|
|
$
|
-
|
|
$
|
84,449
|
Obligations of state and political subdivisions
|
20
|
|
|
25,903
|
|
|
(448)
|
|
|
(72)
|
|
|
25,383
|
Residential mortgage-backed securities
|
51
|
|
|
92,996
|
|
|
(1,120)
|
|
|
(34)
|
|
|
91,842
|
Asset-backed securities
|
5
|
|
|
9,564
|
|
|
(303)
|
|
|
-
|
|
|
9,261
|
Total
|
112
|
|
$
|
215,167
|
|
$
|
(4,126)
|
|
$
|
(106)
|
|
$
|
210,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
5
|
|
$
|
9,887
|
|
$
|
(19)
|
|
$
|
-
|
|
$
|
9,868
|
Obligations of state and political subdivisions
|
9
|
|
|
10,457
|
|
|
(83)
|
|
|
-
|
|
|
10,374
|
Residential mortgage-backed securities
|
23
|
|
|
46,787
|
|
|
(288)
|
|
|
(15)
|
|
|
46,484
|
Asset-backed securities
|
4
|
|
|
7,794
|
|
|
(123)
|
|
|
-
|
|
|
7,671
|
Total
|
41
|
|
$
|
74,925
|
|
$
|
(513)
|
|
$
|
(15)
|
|
$
|
74,397
|
We evaluate
all securities on an individual basis for other-than-temporary impairment on at least a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of
us
to retain
our
investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.
We have
the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time
we
expect to receive full value for the securities. Furthermore, as of
June 30, 2013
, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is not 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
June 30, 2013
, management believes the impairment of these investments is not deemed to be other-than-temporary.
As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of $
286.2
million and $
2
84.2
million were pledged to meet such requirements at
June 30, 2013
and
December 31, 2012
, respectively. Any amount over-pledged can be released at any time.
NOTE
3
: LOANS AND
ALLOWANCE FOR LOAN LOSSES
We
extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas. Its commercial lending operations are concentrated in
Oklahoma City,
Tulsa,
Dallas,
Wichita
,
and other metropolitan markets in
Oklahoma,
Texas
,
and
Kansas
. As a result, the collect
a
bility of
our
loan portfolio can be affected by changes in the economic conditions in
those states and markets
.
Please see Note 8: Operating Segments for more detail regarding loans by market.
At
June 30, 2013
and
December 31, 2012
, substantially all of
our
l
oans 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
At December 31, 2012
|
(Dollars in thousands)
|
Noncovered
|
|
Covered
|
|
Noncovered
|
|
Covered
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
786,686
|
|
$
|
15,452
|
|
$
|
870,975
|
|
$
|
18,298
|
One-to-four family residential
|
|
77,445
|
|
|
4,253
|
|
|
70,954
|
|
|
4,881
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
158,907
|
|
|
320
|
|
|
130,753
|
|
|
382
|
One-to-four family residential
|
|
5,241
|
|
|
-
|
|
|
3,656
|
|
|
-
|
Commercial
|
|
235,667
|
|
|
1,554
|
|
|
240,498
|
|
|
2,037
|
Installment and consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed student loans
|
|
4,520
|
|
|
-
|
|
|
4,680
|
|
|
-
|
Other
|
|
27,977
|
|
|
67
|
|
|
31,512
|
|
|
109
|
|
|
1,296,443
|
|
|
21,646
|
|
|
1,353,028
|
|
|
25,707
|
Less: Allowance for loan losses
|
|
(40,270)
|
|
|
(82)
|
|
|
(46,494)
|
|
|
(224)
|
Total loans, net
|
$
|
1,256,173
|
|
$
|
21,564
|
|
$
|
1,306,534
|
|
$
|
25,483
|
Concentrations of Credit
.
A
t
June 30, 2013
, $
429.4
million, or
33
%, of
our
noncovered
loan
s
consisted of loans to individuals and businesses in the healthcare industry.
We do
not have any other concentrations of loans to individuals or businesses involved in a single industry totaling
10
% or more of total loans.
Loans Held for Sale
.
We
had loans which were held for sale of $
7.2
million and $
31.7
million at
June 30, 2013
and
December 31, 2012
, respectively.
The decline from
year-end is due to
the first quarter reclassification of t
he guaranteed student loans and the United States Department of Agriculture government guaranteed commercial real estate loans back into the loan portfolio
in
and not actively looking to sell these loans. These loans were reclassified at their respective book value which approximated fair value.
The
loans currently classified as held for sale
, primarily residential mortgage loans,
are carried at the lower of cost or market value. A substantial portion of the one-to-four family residential loans and loan servicing rights are primarily 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 Servicing
.
We earn
fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $
368.8
million and $
305.5
million at
June 30, 2013
and
2012
, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.
Acquired Loans
.
On June 19, 2009, Bank of Kansas 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 (“FNBA”) in an FDIC-assisted transaction. Bank of Kansas and the FDIC entered into loss sharing agreements that provide Bank of Kansas with significant protection against credit losses from loans and related assets acquired in the transaction. Under these agreements, the FDIC will reimburse Bank of Kansas 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 of Kansas services the covered assets.
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 and are referred to as “covered” loans. Covered loans were initially recorded at fair value (as determined 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 covered loans reflect only losses incurred after the acquisition.
The expected payments from the FDIC under the l
oss sharing agreements are recorded as part of the covered loans in the Unaudited Consolidated Statement of Financial Condition
.
Changes in the carrying amounts and accretable yields for ASC 310.30
,
Receivables: Loans and Debt Securities Acquired with Deteriorated Credit Quality
,
loans were as follows for the
three and six months ended
June 30, 2013
and
June 30, 2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
2013
|
|
|
2012
|
|
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
Accretable
|
|
amount
|
|
Accretable
|
|
amount
|
(Dollars in thousands)
|
Yield
|
|
of loans
|
|
Yield
|
|
of loans
|
Balance at beginning of period
|
$
|
1,707
|
|
$
|
23,601
|
|
$
|
1,918
|
|
$
|
33,315
|
Payments received
|
|
-
|
|
|
(1,941)
|
|
|
-
|
|
|
(2,568)
|
Transfers to other real estate / repossessed assets
|
|
-
|
|
|
-
|
|
|
(3)
|
|
|
(173)
|
Net charge-offs
|
|
-
|
|
|
(70)
|
|
|
(1)
|
|
|
(40)
|
Accretion
|
|
(127)
|
|
|
56
|
|
|
(156)
|
|
|
178
|
Balance at end of period
|
$
|
1,580
|
|
$
|
21,646
|
|
$
|
1,758
|
|
$
|
30,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2013
|
|
2012
|
|
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
Accretable
|
|
amount
|
|
Accretable
|
|
amount
|
(Dollars in thousands)
|
Yield
|
|
of loans
|
|
Yield
|
|
of loans
|
Balance at beginning of period
|
$
|
1,904
|
|
$
|
25,707
|
|
$
|
2,402
|
|
$
|
37,615
|
Payments received
|
|
-
|
|
|
(3,830)
|
|
|
-
|
|
|
(5,860)
|
Transfers to other real estate / repossessed assets
|
|
(33)
|
|
|
(375)
|
|
|
6
|
|
|
(1,163)
|
Net charge-offs
|
|
(1)
|
|
|
(70)
|
|
|
(5)
|
|
|
(112)
|
Net reclassifications to / from nonaccretable amount
|
|
-
|
|
|
-
|
|
|
(271)
|
|
|
-
|
Accretion
|
|
(290)
|
|
|
214
|
|
|
(374)
|
|
|
232
|
Balance at end of period
|
$
|
1,580
|
|
$
|
21,646
|
|
$
|
1,758
|
|
$
|
30,712
|
Nonperforming / Past Due Loans
.
We 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 intere
st is
nine
ty
d
ays
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, 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 not brought current, but 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. Purchased nonperforming loans also may be returned to accrual status without becoming fully current. 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
t
hat 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.
The following table shows the recorded investment in loans on nonaccrual status.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
At December 31, 2012
|
(Dollars in thousands)
|
Noncovered
|
|
Covered
|
|
Noncovered
|
|
Covered
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
12,325
|
|
$
|
2,787
|
|
$
|
18,337
|
|
$
|
3,087
|
One-to-four family residential
|
|
418
|
|
|
74
|
|
|
563
|
|
|
52
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
5,989
|
|
|
130
|
|
|
3,355
|
|
|
130
|
Commercial
|
|
10,718
|
|
|
71
|
|
|
12,761
|
|
|
324
|
Other consumer
|
|
63
|
|
|
-
|
|
|
88
|
|
|
2
|
Total nonaccrual loans
|
$
|
29,513
|
|
$
|
3,062
|
|
$
|
35,104
|
|
$
|
3,595
|
During the first
six months
of
20
13
,
an immaterial amount
of interest income was received on nonaccruing loans. If interest on all nonaccrual loans had been accrued for the
six months
ended
June 30, 2013
, additional interest income of $
1.0
million would have been recorded.
Net c
umulative charge-offs against noncovered nonaccrual loans at
June 30, 2013
and
December 31, 2012
were $
12.6
million and $
8.3
million, respectively.
I
ncluded in noncovered nonaccrual loans are
five
and
six
collateral dependent lending relationships with aggregate principal balances of approximately $
25.7
million and $
31.2
million
a
s of
June 30, 2013
and
December 31, 2012
,
respectively
. R
elated impairment reserves
a
s of
June 30, 2013
and
December 31, 2012
were
$
3.2
million and $
6.8
million, respectively
. These impairment reserves wer
e established either based on recent
appraisal values obtained for the respective properties or the discounted present value of expected cash flows using the loan’s initial effective interest rate.
At
June 30, 2013
,
three
of
the five
lending relationships
were
secured by commercial real estate
.
The following table shows an age analysis of past due loans at
June 30, 2013
and
December 31, 2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
4,808
|
|
$
|
12,325
|
|
$
|
17,133
|
|
$
|
769,553
|
|
$
|
786,686
|
|
$
|
-
|
One-to-four family residential
|
|
115
|
|
|
418
|
|
|
533
|
|
|
76,912
|
|
|
77,445
|
|
|
-
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
-
|
|
|
5,989
|
|
|
5,989
|
|
|
152,918
|
|
|
158,907
|
|
|
-
|
One-to-four family residential
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,241
|
|
|
5,241
|
|
|
-
|
Commercial
|
|
1,912
|
|
|
10,719
|
|
|
12,631
|
|
|
223,036
|
|
|
235,667
|
|
|
1
|
Other
|
|
125
|
|
|
64
|
|
|
189
|
|
|
32,308
|
|
|
32,497
|
|
|
1
|
Total - noncovered
|
|
6,960
|
|
|
29,515
|
|
|
36,475
|
|
|
1,259,968
|
|
|
1,296,443
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
323
|
|
|
2,787
|
|
|
3,110
|
|
|
12,342
|
|
|
15,452
|
|
|
-
|
One-to-four family residential
|
|
-
|
|
|
74
|
|
|
74
|
|
|
4,179
|
|
|
4,253
|
|
|
-
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
-
|
|
|
130
|
|
|
130
|
|
|
190
|
|
|
320
|
|
|
-
|
Commercial
|
|
-
|
|
|
71
|
|
|
71
|
|
|
1,483
|
|
|
1,554
|
|
|
-
|
Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67
|
|
|
67
|
|
|
-
|
Total - covered
|
|
323
|
|
|
3,062
|
|
|
3,385
|
|
|
18,261
|
|
|
21,646
|
|
|
-
|
Total
|
$
|
7,283
|
|
$
|
32,577
|
|
$
|
39,860
|
|
$
|
1,278,229
|
|
$
|
1,318,089
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
23,348
|
|
$
|
18,337
|
|
$
|
41,685
|
|
$
|
829,290
|
|
$
|
870,975
|
|
$
|
-
|
One-to-four family residential
|
|
1,479
|
|
|
1,310
|
|
|
2,789
|
|
|
68,165
|
|
|
70,954
|
|
|
747
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
3,501
|
|
|
3,355
|
|
|
6,856
|
|
|
123,897
|
|
|
130,753
|
|
|
-
|
One-to-four family residential
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,656
|
|
|
3,656
|
|
|
-
|
Commercial
|
|
7,358
|
|
|
15,232
|
|
|
22,590
|
|
|
217,908
|
|
|
240,498
|
|
|
2,471
|
Other
|
|
538
|
|
|
160
|
|
|
698
|
|
|
35,494
|
|
|
36,192
|
|
|
72
|
Total - noncovered
|
|
36,224
|
|
|
38,394
|
|
|
74,618
|
|
|
1,278,410
|
|
|
1,353,028
|
|
|
3,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
1,090
|
|
|
3,087
|
|
|
4,177
|
|
|
14,121
|
|
|
18,298
|
|
|
-
|
One-to-four family residential
|
|
-
|
|
|
52
|
|
|
52
|
|
|
4,829
|
|
|
4,881
|
|
|
-
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
-
|
|
|
130
|
|
|
130
|
|
|
252
|
|
|
382
|
|
|
-
|
Commercial
|
|
-
|
|
|
324
|
|
|
324
|
|
|
1,713
|
|
|
2,037
|
|
|
-
|
Other
|
|
-
|
|
|
2
|
|
|
2
|
|
|
107
|
|
|
109
|
|
|
-
|
Total - covered
|
|
1,090
|
|
|
3,595
|
|
|
4,685
|
|
|
21,022
|
|
|
25,707
|
|
|
-
|
Total
|
$
|
37,314
|
|
$
|
41,989
|
|
$
|
79,303
|
|
$
|
1,299,432
|
|
$
|
1,378,735
|
|
$
|
3,290
|
Impaired Loans
. 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, are collectively evaluated for impairment.
Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.
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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
31,096
|
|
$
|
31,401
|
|
$
|
15,225
|
|
$
|
16,334
|
|
$
|
4,076
|
One-to-four family residential
|
|
418
|
|
|
519
|
|
|
-
|
|
|
-
|
|
|
-
|
Real estate construction
|
|
5,989
|
|
|
10,107
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
4,840
|
|
|
7,784
|
|
|
7,734
|
|
|
9,215
|
|
|
3,840
|
Other
|
|
4
|
|
|
7
|
|
|
59
|
|
|
82
|
|
|
59
|
Total noncovered
|
$
|
42,347
|
|
$
|
49,818
|
|
$
|
23,018
|
|
$
|
25,631
|
|
$
|
7,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
5,992
|
|
$
|
8,548
|
|
$
|
659
|
|
$
|
832
|
|
$
|
19
|
One-to-four family residential
|
|
45
|
|
|
55
|
|
|
47
|
|
|
96
|
|
|
4
|
Real estate construction
|
|
130
|
|
|
308
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
71
|
|
|
177
|
|
|
-
|
|
|
-
|
|
|
-
|
Total covered
|
$
|
6,238
|
|
$
|
9,088
|
|
$
|
706
|
|
$
|
928
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
29,425
|
|
$
|
30,340
|
|
$
|
24,630
|
|
|
27,397
|
|
$
|
5,094
|
One-to-four family residential
|
|
563
|
|
|
653
|
|
|
7
|
|
|
7
|
|
|
7
|
Real estate construction
|
|
3,970
|
|
|
7,841
|
|
|
232
|
|
|
256
|
|
|
50
|
Commercial
|
|
3,337
|
|
|
6,975
|
|
|
13,422
|
|
|
13,448
|
|
|
6,492
|
Other
|
|
7
|
|
|
8
|
|
|
81
|
|
|
100
|
|
|
81
|
Total noncovered
|
$
|
37,302
|
|
$
|
45,817
|
|
$
|
38,372
|
|
|
41,208
|
|
$
|
11,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
4,325
|
|
$
|
5,347
|
|
$
|
2,214
|
|
|
3,979
|
|
$
|
22
|
One-to-four family residential
|
|
20
|
|
|
25
|
|
|
52
|
|
|
98
|
|
|
2
|
Real estate construction
|
|
130
|
|
|
308
|
|
|
-
|
|
|
-
|
|
|
-
|
Commercial
|
|
322
|
|
|
1,884
|
|
|
2
|
|
|
3
|
|
|
1
|
Other
|
|
2
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
Total covered
|
$
|
4,799
|
|
$
|
7,568
|
|
$
|
2,268
|
|
$
|
4,080
|
|
$
|
25
|
The average recorded investment and interest income recognized on impaired loans as of
the six months ended June 30, 2013 and June 30, 2012
is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30,
|
|
|
2013
|
|
2012
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
|
Recorded
|
|
Interest
|
|
Recorded
|
|
Interest
|
|
(Dollars in thousands)
|
Investment
|
|
Income
|
|
Investment
|
|
Income
|
|
Noncovered:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
47,601
|
|
$
|
846
|
|
$
|
28,174
|
|
$
|
-
|
|
One-to-four family residential
|
|
305
|
|
|
-
|
|
|
859
|
|
|
25
|
|
Real estate construction
|
|
5,155
|
|
|
-
|
|
|
4,667
|
|
|
9
|
|
Commercial
|
|
12,159
|
|
|
46
|
|
|
9,312
|
|
|
5
|
|
Other
|
|
72
|
|
|
-
|
|
|
148
|
|
|
-
|
|
Total noncovered
|
$
|
65,292
|
|
$
|
892
|
|
$
|
43,160
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
16,889
|
|
$
|
122
|
|
$
|
22,464
|
|
$
|
20
|
|
One-to-four family residential
|
|
4,539
|
|
|
1
|
|
|
6,168
|
|
|
-
|
|
Real estate construction
|
|
359
|
|
|
-
|
|
|
2,718
|
|
|
38
|
|
Commercial
|
|
1,721
|
|
|
-
|
|
|
2,376
|
|
|
-
|
|
Other
|
|
89
|
|
|
-
|
|
|
194
|
|
|
1
|
|
Total covered
|
$
|
23,597
|
|
$
|
123
|
|
$
|
33,920
|
|
$
|
59
|
|
Troubled Debt Restructurings.
Ou
r
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
modif
y
loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.
Troubled debt restructured loans outstanding as of
June 30, 2013
and
December 31, 2012
were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
At December 31, 2012
|
(Dollars in thousands)
|
Accruing
|
|
Nonaccrual
|
|
Accruing
|
|
Nonaccrual
|
Commercial real estate
|
$
|
37,860
|
|
$
|
11,517
|
|
$
|
39,170
|
|
$
|
2,953
|
One-to-four family residential
|
|
18
|
|
|
118
|
|
|
27
|
|
|
134
|
Real estate construction
|
|
-
|
|
|
130
|
|
|
847
|
|
|
130
|
Commercial
|
|
1,856
|
|
|
1,644
|
|
|
3,998
|
|
|
351
|
Consumer
|
|
-
|
|
|
59
|
|
|
-
|
|
|
81
|
Total
|
$
|
39,734
|
|
$
|
13,468
|
|
$
|
44,042
|
|
$
|
3,649
|
At
June 30, 2013
and
December 31, 2012
,
we
had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring.
Loans modified as troubled debt restructurings that occurred during the
three and six months ended
June 30, 2013
an
d
June 30, 2012
are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
2013
|
|
2012
|
|
Number of
|
|
Recorded
|
|
Number of
|
|
Recorded
|
(Dollars in thousands)
|
Modifications
|
|
Investment
|
|
Modifications
|
|
Investment
|
Commercial real estate
|
|
2
|
|
$
|
1,722
|
|
|
2
|
|
$
|
232
|
Commercial
|
|
2
|
|
|
1,307
|
|
|
-
|
|
|
-
|
Total
|
|
4
|
|
$
|
3,029
|
|
|
2
|
|
$
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2013
|
|
2012
|
|
Number of
|
|
Recorded
|
|
Number of
|
|
Recorded
|
(Dollars in thousands)
|
Modifications
|
|
Investment
|
|
Modifications
|
|
Investment
|
Commercial real estate
|
|
7
|
|
$
|
2,948
|
|
|
4
|
|
$
|
12,454
|
One-to-four family residential
|
|
-
|
|
|
-
|
|
|
1
|
|
|
95
|
Real estate construction
|
|
-
|
|
|
-
|
|
|
1
|
|
|
881
|
Commercial
|
|
5
|
|
|
1,863
|
|
|
2
|
|
|
341
|
Total
|
|
12
|
|
$
|
4,811
|
|
|
8
|
|
$
|
13,771
|
The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.
The following table present
s
the recorded investment and the number of loans modified as a troubled debt restructuring
that
subsequently defaulted during the
three and six months ended
June 30, 2013
and
June 30, 2012
.
Default
, for this purpose, is deemed to occur
when a loan is 90 days or more past due or transferred to nonaccrual and is within
twelve
months of restructuring
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
2013
|
|
2012
|
|
Number of
|
|
Recorded
|
|
Number of
|
|
Recorded
|
(Dollars in thousands)
|
Contracts
|
|
Investment
|
|
Contracts
|
|
Investment
|
Commercial
|
|
1
|
|
$
|
1,048
|
|
|
2
|
|
$
|
115
|
Total
|
|
1
|
|
$
|
1,048
|
|
|
2
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2013
|
|
2012
|
|
Number of
|
|
Recorded
|
|
Number of
|
|
Recorded
|
(Dollars in thousands)
|
Contracts
|
|
Investment
|
|
Contracts
|
|
Investment
|
Commercial real estate
|
|
1
|
|
$
|
550
|
|
|
-
|
|
$
|
-
|
Commercial
|
|
1
|
|
|
1,048
|
|
|
2
|
|
|
115
|
Total
|
|
2
|
|
$
|
1,598
|
|
|
2
|
|
$
|
115
|
Credit Quality Indicators
. To assess the credit quality of loans,
we
categoriz
e
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
June 30, 2013
and
December 31, 2012
, 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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
634,950
|
|
$
|
77,856
|
|
$
|
101,814
|
|
$
|
212,470
|
|
$
|
32,319
|
|
$
|
1,059,409
|
Special Mention
|
|
86,588
|
|
|
2,275
|
|
|
35,850
|
|
|
3,912
|
|
|
181
|
|
|
128,806
|
Substandard
|
|
79,118
|
|
|
1,534
|
|
|
26,804
|
|
|
14,896
|
|
|
64
|
|
|
122,416
|
Doubtful
|
|
1,482
|
|
|
33
|
|
|
-
|
|
|
5,943
|
|
|
-
|
|
|
7,458
|
Total
|
$
|
802,138
|
|
$
|
81,698
|
|
$
|
164,468
|
|
$
|
237,221
|
|
$
|
32,564
|
|
$
|
1,318,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
$
|
718,054
|
|
$
|
71,975
|
|
$
|
83,350
|
|
$
|
208,019
|
|
$
|
35,897
|
|
$
|
1,117,295
|
Special Mention
|
|
88,167
|
|
|
1,901
|
|
|
25,964
|
|
|
7,047
|
|
|
181
|
|
|
123,260
|
Substandard
|
|
80,104
|
|
|
1,923
|
|
|
25,477
|
|
|
26,887
|
|
|
223
|
|
|
134,614
|
Doubtful
|
|
2,948
|
|
|
36
|
|
|
-
|
|
|
582
|
|
|
-
|
|
|
3,566
|
Total
|
$
|
889,273
|
|
$
|
75,835
|
|
$
|
134,791
|
|
$
|
242,535
|
|
$
|
36,301
|
|
$
|
1,378,735
|
Allowance for Loan Losses
.
The 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 o
f 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
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 loan
.
The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is located. Our primary markets are Oklahoma, Texas, and Kansas
,
and
loans secured by real estate in those states
are
included
in the “in-market” pool, with the remaining
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
us
.
The historical loss trend is determined by loan pool
and segmentation
and is based on the actual loss history experienced by
us
over the most recent
three
years.
The
qualitative
risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending
policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.
Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and 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 table shows the balance in the allowance for loan losses and the recorded investment in covered and noncovered loans 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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
27,223
|
|
$
|
861
|
|
$
|
5,271
|
|
$
|
12,604
|
|
$
|
759
|
|
$
|
46,718
|
Loans charged-off
|
|
(509)
|
|
|
(577)
|
|
|
(131)
|
|
|
(5,335)
|
|
|
(171)
|
|
|
(6,723)
|
Recoveries
|
|
86
|
|
|
47
|
|
|
39
|
|
|
499
|
|
|
64
|
|
|
735
|
Provision for loan losses
|
|
(5,685)
|
|
|
731
|
|
|
1,650
|
|
|
2,989
|
|
|
(63)
|
|
|
(378)
|
Balance at end of period
|
$
|
21,115
|
|
$
|
1,062
|
|
$
|
6,829
|
|
$
|
10,757
|
|
$
|
589
|
|
$
|
40,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
4,076
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,840
|
|
$
|
59
|
|
$
|
7,975
|
Collectively evaluated for impairment
|
|
17,019
|
|
|
1,000
|
|
|
6,829
|
|
|
6,917
|
|
|
530
|
|
|
32,295
|
Acquired with deteriorated credit quality
|
|
20
|
|
|
62
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
82
|
Total ending allowance balance
|
$
|
21,115
|
|
$
|
1,062
|
|
$
|
6,829
|
|
$
|
10,757
|
|
$
|
589
|
|
$
|
40,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
46,321
|
|
$
|
418
|
|
$
|
5,989
|
|
$
|
12,574
|
|
$
|
63
|
|
$
|
65,365
|
Collectively evaluated for impairment
|
|
740,365
|
|
|
77,027
|
|
|
158,159
|
|
|
223,093
|
|
|
32,434
|
|
|
1,231,078
|
Acquired with deteriorated credit quality
|
|
15,452
|
|
|
4,253
|
|
|
320
|
|
|
1,554
|
|
|
67
|
|
|
21,646
|
Total ending loans balance
|
$
|
802,138
|
|
$
|
81,698
|
|
$
|
164,468
|
|
$
|
237,221
|
|
$
|
32,564
|
|
$
|
1,318,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
1-4 Family
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Real Estate
|
|
Residential
|
|
Construction
|
|
Commercial
|
|
Other
|
|
Total
|
At June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
21,749
|
|
$
|
1,016
|
|
$
|
11,177
|
|
$
|
9,827
|
|
$
|
915
|
|
$
|
44,684
|
Loans charged-off
|
|
(129)
|
|
|
(213)
|
|
|
-
|
|
|
(3,404)
|
|
|
(419)
|
|
|
(4,165)
|
Recoveries
|
|
23
|
|
|
195
|
|
|
128
|
|
|
966
|
|
|
319
|
|
|
1,631
|
Provision for loan losses
|
|
720
|
|
|
(138)
|
|
|
(668)
|
|
|
1,812
|
|
|
22
|
|
|
1,748
|
Balance at end of period
|
$
|
22,363
|
|
$
|
860
|
|
$
|
10,637
|
|
$
|
9,201
|
|
$
|
837
|
|
$
|
43,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
3,706
|
|
$
|
59
|
|
$
|
50
|
|
$
|
2,965
|
|
$
|
99
|
|
$
|
6,879
|
Collectively evaluated for impairment
|
|
18,617
|
|
|
786
|
|
|
10,551
|
|
|
6,236
|
|
|
738
|
|
|
36,928
|
Acquired with deteriorated credit quality
|
|
40
|
|
|
15
|
|
|
36
|
|
|
-
|
|
|
-
|
|
|
91
|
Total ending allowance balance
|
$
|
22,363
|
|
$
|
860
|
|
$
|
10,637
|
|
$
|
9,201
|
|
$
|
837
|
|
$
|
43,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
32,756
|
|
$
|
919
|
|
$
|
4,490
|
|
$
|
13,743
|
|
$
|
137
|
|
$
|
52,045
|
Collectively evaluated for impairment
|
|
898,483
|
|
|
73,471
|
|
|
210,792
|
|
|
249,342
|
|
|
38,571
|
|
|
1,470,659
|
Acquired with deteriorated credit quality
|
|
21,472
|
|
|
5,432
|
|
|
1,627
|
|
|
2,033
|
|
|
148
|
|
|
30,712
|
Total ending loans balance
|
$
|
952,711
|
|
$
|
79,822
|
|
$
|
216,909
|
|
$
|
265,118
|
|
$
|
38,856
|
|
$
|
1,553,416
|
NOTE 4: 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 estimatin
g 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 1
Quoted prices in active markets for identical
instruments
.
Level 2
Observable 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 3
Unobservable 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 changes in valuation methods used to estimate fair value during the
six months
ended
June 30, 2013
.
A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:
Loans held for sale
– Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis
based on loan commitments
.
Prior year g
uaranteed student loans held for sale are carried at the lower of cost or market, which is determined on an aggregate basis.
Available for sale securities
– The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of other investments such as obligations of state and political subdivisions is estimated based on quoted market prices.
We
obtain
fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things.
We
review the prices supplied by
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 va
lue of a
single
private equity investment is estimated based on
our
proportionate share of the net asset v
alue, $
2.1
million and $
1.
7
million as of
June 30, 2013
and
December 31, 2012
, respectively. The investee invests in small and mid-siz
ed U.S. financial inst
itutions and other financial-related companies. This investment has a quarterly redemption with
sixty-five days’
notice.
Derivative instrument
–
We utilize
an interest rate swap agreement to convert one of
our
variable-rate subordinated debentures to a fixed rate (cash flow hedge). The fair value of the interest rate swap agreement is obtained from dealer quotes.
The following table summarizes financial assets measured at fair value on a recurring basis as of
June 30, 2013
and
December 31, 2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
(Dollars in thousands)
|
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
|
$
|
7,087
|
|
$
|
-
|
|
$
|
7,087
|
|
$
|
-
|
Government guaranteed commercial real estate
|
|
|
|
|
55
|
|
|
-
|
|
|
55
|
|
|
-
|
Other loans held for sale
|
|
|
|
|
75
|
|
|
-
|
|
|
75
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
|
|
|
|
119,593
|
|
|
-
|
|
|
119,593
|
|
|
-
|
Obligations of state and political subdivisions
|
|
|
|
|
34,076
|
|
|
-
|
|
|
34,076
|
|
|
-
|
Residential mortgage-backed securities
|
|
|
|
|
195,524
|
|
|
-
|
|
|
195,524
|
|
|
-
|
Asset-backed securities
|
|
|
|
|
9,261
|
|
|
-
|
|
|
9,261
|
|
|
-
|
Equity securities
|
|
|
|
|
2,191
|
|
|
124
|
|
|
2,067
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instrument
|
|
|
|
|
(1,678)
|
|
|
-
|
|
|
(1,678)
|
|
|
-
|
Total
|
|
|
|
$
|
366,184
|
|
$
|
124
|
|
$
|
366,060
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
|
$
|
4,680
|
|
$
|
-
|
|
$
|
4,680
|
|
$
|
-
|
One-to-four family residential
|
|
|
|
|
5,112
|
|
|
-
|
|
|
5,112
|
|
|
-
|
Government guaranteed commercial real estate
|
|
|
|
|
21,794
|
|
|
-
|
|
|
21,794
|
|
|
-
|
Other loans held for sale
|
|
|
|
|
96
|
|
|
-
|
|
|
96
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
|
|
|
|
115,614
|
|
|
-
|
|
|
115,614
|
|
|
-
|
Obligations of state and political subdivisions
|
|
|
|
|
35,558
|
|
|
-
|
|
|
35,558
|
|
|
-
|
Residential mortgage-backed securities
|
|
|
|
|
203,675
|
|
|
-
|
|
|
203,675
|
|
|
-
|
Asset-backed securities
|
|
|
|
|
7,671
|
|
|
|
|
|
7,671
|
|
|
|
Equity securities
|
|
|
|
|
1,797
|
|
|
111
|
|
|
1,686
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instrument
|
|
|
|
|
(3,195)
|
|
|
-
|
|
|
(3,195)
|
|
|
-
|
Total
|
|
|
|
$
|
392,802
|
|
$
|
111
|
|
$
|
392,691
|
|
$
|
-
|
Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:
Impaired loans
– Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on third-party appraisals or Level 3 inputs based on customized discounting criteria. Certain other impaired loans are remeasured and reported through a specific valuation allowance allocation of the allowance for loan losses based upon the net present value of cash flows.
Other real estate
– Other real estate fair value is based on third-party appraisals for 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 ha
s been no impairment during
2013
or
2012
; therefore, no fair value adjustment was recorded through earnings.
Core deposit premiums
– The fair value of core deposit premiums are based on third-party appraisals. There has been no impairment during
201
3
or
2012
; therefore, no fair value adjustment was recorded through earnings.
Mortgage loan servicing rights
– There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.
Assets that
were
measured at fair value on a nonrecurring basis as of
June 30, 2013
and
December 31, 2012
are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total Gains
|
(Dollars in thousands)
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Losses)
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered impaired loans at fair value :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
20,336
|
|
$
|
-
|
|
$
|
20,336
|
|
$
|
-
|
|
$
|
2,625
|
One-to-four family residential
|
|
11
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
-
|
Real estate construction
|
|
2,978
|
|
|
-
|
|
|
2,978
|
|
|
-
|
|
|
42
|
Commercial
|
|
11,199
|
|
|
-
|
|
|
11,199
|
|
|
-
|
|
|
(2,090)
|
Other consumer
|
|
59
|
|
|
-
|
|
|
59
|
|
|
-
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered other real estate
|
|
145
|
|
|
-
|
|
|
145
|
|
|
-
|
|
|
(1,491)
|
Covered other real estate
|
|
1,666
|
|
|
-
|
|
|
1,666
|
|
|
-
|
|
|
(397)
|
Total
|
$
|
36,394
|
|
$
|
-
|
|
$
|
36,394
|
|
$
|
-
|
|
$
|
(1,289)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered impaired loans at fair value :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
33,137
|
|
$
|
-
|
|
$
|
33,137
|
|
$
|
-
|
|
$
|
(6,674)
|
One-to-four family residential
|
|
23
|
|
|
-
|
|
|
23
|
|
|
-
|
|
|
(7)
|
Real estate construction
|
|
232
|
|
|
-
|
|
|
232
|
|
|
|
|
|
3,532
|
Commercial
|
|
13,473
|
|
|
-
|
|
|
13,473
|
|
|
-
|
|
|
(6,637)
|
Other consumer
|
|
81
|
|
|
-
|
|
|
81
|
|
|
-
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered other real estate
|
|
11,315
|
|
|
-
|
|
|
11,315
|
|
|
-
|
|
|
(3,998)
|
Covered other real estate
|
|
3,643
|
|
|
-
|
|
|
3,643
|
|
|
-
|
|
|
(180)
|
Mortgage loan servicing rights
|
|
2,321
|
|
|
-
|
|
|
-
|
|
|
2,321
|
|
|
(465)
|
Total
|
$
|
64,225
|
|
$
|
-
|
|
$
|
61,904
|
|
$
|
2,321
|
|
$
|
(14,398)
|
Noncovered impaired loans measured at fair value with a carrying amount of $
47.4
million were written down to a fair value of $
34.6
million, resulting in a life-to-date impairment of $
12.8
million, of which $
0.6
million was included in the provision for loan losses for the
six months
ended
June 30, 2013
. As of
December 31, 2012
, noncovered impaired loans measured at fair value with a carrying amount of $
61.0
million were
written down to the fair value of $
46.9
million at
December 31, 2012
, resulting in a life-to-date impairment charge of $
14.1
million, of which $
9.8
million was included in the provision for loan losses for the year ended
December 31, 2012
.
As of
June 30, 2013
, noncovered and covered other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $
1.5
million and $
0.4
million, respectively, which was included in noninterest expense for the
six months
ended
June 30, 2013
.
As of
December 31, 2012
, noncovered and covered other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $
4.0
million and $
0.2
million, respectively, which was included in noninterest expense for the year ended
December 31, 2012
.
For the
six months
ended
June 30, 2013
there was no impairment of mortgage loan servicing rights. Fo
r the year ended
December 31, 2012
, mortgage loan servicing rights were written down to their fair values, resulting in impairment charges of $
0.
5
million, which
was
included in noninterest income for
that
period.
ASC 825,
Financial Instruments
,
requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:
Cash and cash equivalents
– For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities held to maturity
– The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.
Loans
– Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics.
Our
loans have been aggregated by categories consisting of commercial, real estate, student, and other consumer. The fair value of loans is estimated by discounting the cash flows using risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks.
Accrued interest receivable
– The carrying amount is a reasonable estimate of fair value for accrued interest receivable.
Investment included in other assets
– The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.
Deposits
– The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Other liabilities and accrued interest payable
– The estimated fair value of other liabilities, which primarily includes trade accounts payable and accrued interest payable, approximates their carrying values.
Other borrowings
– Included in other borrowings are FHLB advances, securities sold under agreements to repurchase, and treasury tax and loan demand notes. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.
Subordinated debentures
– Two
of our
subordinated debentures have floating rates that reset quarterly and
our
third subordinated debenture has a fixed rate. The fair value of
our
fixed rate subordinated debenture is based on market price. The fair value of the floating rate subordinated debentures approximates carrying value at
June 30, 2013
.
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
follow
s
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
At December 31, 2012
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Dollars in thousands)
|
Values
|
|
Values
|
|
Values
|
|
Values
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
298,972
|
|
$
|
298,972
|
|
$
|
288,079
|
|
$
|
288,079
|
Securities held to maturity
|
|
11,758
|
|
|
12,188
|
|
|
12,797
|
|
|
13,659
|
Accrued interest receivable
|
|
6,067
|
|
|
6,067
|
|
|
6,365
|
|
|
6,365
|
Investments included in other assets
|
|
8,543
|
|
|
8,543
|
|
|
8,531
|
|
|
8,531
|
Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of allowance
|
|
1,277,737
|
|
|
1,238,307
|
|
|
1,332,017
|
|
|
1,301,942
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,615,961
|
|
|
1,546,071
|
|
|
1,709,578
|
|
|
1,666,653
|
Accrued interest payable
|
|
1,020
|
|
|
1,020
|
|
|
1,116
|
|
|
1,116
|
Other liabilities
|
|
7,586
|
|
|
7,586
|
|
|
9,985
|
|
|
9,985
|
Other borrowings
|
|
74,334
|
|
|
77,651
|
|
|
70,362
|
|
|
74,057
|
Subordinated debentures
|
|
81,963
|
|
|
82,722
|
|
|
81,963
|
|
|
82,998
|
NOTE 5: DERIVATIVE INSTRUMENT
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
June 30, 2013
was
3.13
%.
The estimated fair value of the interest rate derivative contract outstanding as of
June 30, 2013
and
December 31, 2012
resulted in a pre-tax loss of $
1.7
million and $
3.2
million, respectively, and was included in other liabilities in the
u
naudited
c
onsolidated
s
tatement of
f
inancial
c
ondition.
We
obtained the counterparty valuation to validate its interest rate derivative contract as of
June 30, 2013
and
December 31, 2012
.
The effective portion of
our
gain or loss due to changes in the fair value of the derivative hedging instrument, a $
0.9
million
gain
and a $
0.2
million loss for the
six months
ended
June 30, 2013
and
June 30, 2012
, respectively, is included in other comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.
Net cash flows as a result of the interest rate swap agreement were $
0.4
million for both the
six months
ended
June 30, 2013
and
June 30, 2012
, and were included in interest expense on subordinated debentures.
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by
our
asset/liability management committee.
Our
credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with
our
derivative contract.
The fair value of cash and securities posted as collateral by
us
related to the derivative contract was $
4.1
million and $
4.2
million at
June 30, 2013
and
December 31, 2012
, respectively.
NOTE
6
: TAXES ON INCOME
Net deferred tax as
sets totaled $
30.3
million at
June 30, 2013
and $
32.2
million at
December 31, 2012
. Net deferred tax assets are included in other assets and no
valuation allowance is recorded.
We are
in a cumulative pretax loss position for the trailing
three
-year period ended
June 30, 2013
. Un
der current accounting guidance, this represents
significant negative evidence in the determination of the need for a valuation allowance.
Included in the
three
-year pretax lo
ss position is $
101.0
million related to the nonrecurring sale of nonperforming assets and potential problem loans
that occurred in the fourth quarter of 2011
.
We
conducted an interim analysis to assess the need for a valuation allowance at
June 30, 2013
. As part of this analysis management considered neg
ative evidence associated with our
trailing cumulative loss position against positive evidence associated with
the
taxable income generated in the first
six months
of
201
3
,
a
long
history of taxable income, and projected pre-tax 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
.
ASC 704,
Income Taxes
,
defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more
likely
than
not” to be sustained by the appropriate taxing authority. During the
prior period
, information was obtained related to tax credits taken on
previously filed
tax returns that may not be sustained upon examination. After analyzing all available information,
we
recorded a liability against the previously recorded tax benefit.
Subsequently, management has obtained new information that supports
that
the more
likely
than
not threshold has been met and the tax benefits are now believed to be sustainable. The previously recorded liability of
$0.3
million was released during the second quarter, the first subsequent financial reporting period preceding the change in judgment.
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 2009.
NOTE
7
: 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, b
asic earnings per
common
share
is
computed based upon net income
available to common shareholders
divided by the weighted average number of
common
shares outstanding during each period
, which 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 options using the treasury stock method. Stock options and warrants with exercise prices greater than the average market price of common shares were not included in the computation of earnings per diluted share as they would have been antidilutive. On
June 30, 2013
there were
no
antidilutive stock options
,
and as of
June 30, 2012
there
w
ere
14,500
antidilutive
stock
options to purchase common shares, respectively.
On May 29, 2013, we repurchased the warrant issued to the U
.
S
.
Treasury as part of the TARP Capital Purchase Program (the “CPP”). The warrant provided the
U.S.
Treasury the right to purchase u
p to 703,753
shar
es of
our
common stock
.
We previously
repurchased all of the outstanding shares of
our
Fixed Rate Cumulative Perpetual Preferred Stock issued to the
U.S.
Treasury under the CPP
in August 2012
.
The following
table shows the computation of basic and diluted earnings per common share
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
For the six months
|
|
ended June 30,
|
|
ended June 30,
|
(Dollars in thousands, except earnings per share data)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
4,414
|
|
$
|
4,117
|
|
$
|
6,803
|
|
$
|
9,328
|
Preferred dividend
|
|
-
|
|
|
(913)
|
|
|
-
|
|
|
(1,817)
|
Warrant amortization
|
|
-
|
|
|
(193)
|
|
|
-
|
|
|
(382)
|
Net income available to common shareholders
|
$
|
4,414
|
|
$
|
3,011
|
|
$
|
6,803
|
|
$
|
7,129
|
Earnings allocated to participating securities
|
|
(45)
|
|
|
-
|
|
|
(52)
|
|
|
-
|
Numerator for basic earnings per common share
|
$
|
4,369
|
|
$
|
3,011
|
|
$
|
6,751
|
|
$
|
7,129
|
Effect of reallocating undistributed earnings
|
|
|
|
|
|
|
|
|
|
|
|
of participating securities
|
|
45
|
|
|
-
|
|
|
52
|
|
|
-
|
Numerator for diluted earnings per common share
|
$
|
4,414
|
|
$
|
3,011
|
|
$
|
6,803
|
|
$
|
7,129
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share -
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
19,692,420
|
|
|
19,446,086
|
|
|
19,642,111
|
|
|
19,445,392
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Warrant
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Denominator for diluted earnings per common share
|
|
19,692,420
|
|
|
19,446,086
|
|
|
19,642,111
|
|
|
19,445,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.22
|
|
$
|
0.15
|
|
$
|
0.34
|
|
$
|
0.37
|
Diluted
|
$
|
0.22
|
|
$
|
0.15
|
|
$
|
0.34
|
|
$
|
0.37
|
NOTE 8: OPERATING SEGMENTS
We
operate
five
principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment, the Texas Banking segment, and the Kansas Banking segment provide deposit and lending services. The Secondary Market segment consists of residential mortgage lending services to customers
.
Other Operations includes
our
funds management unit, SNB Wealth Management, 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.
Effective January 1, 2013, and as a result of new management,
we
began to
identif
y
reportable segments by
geographic location of relationship manager.
Operating results are adjusted for allocated service
and management
costs.
In addition to this realignment, management decided to eliminate a capital credit allocation between the reportable segments.
The p
rior year information has been realigned and reallocated for
consistency with
current identified reportable segments.
The accounting policies of each reportable segment are the same as
ours
. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting, and audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated at statutory rates. The Other Operations segment records the tax expense or benefit necessary to reconcile to the consolidated financial statements.
Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk.
The following table summarizes financial results by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2013
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations
|
|
Company
|
Net interest income
|
$
|
8,434
|
|
$
|
4,593
|
|
$
|
2,560
|
|
$
|
165
|
|
$
|
(618)
|
|
$
|
15,134
|
Provision for loan losses
|
|
(714)
|
|
|
(1,269)
|
|
|
107
|
|
|
(12)
|
|
|
1,012
|
|
|
(876)
|
Noninterest income
|
|
1,787
|
|
|
307
|
|
|
485
|
|
|
847
|
|
|
65
|
|
|
3,491
|
Noninterest expenses
|
|
6,876
|
|
|
1,080
|
|
|
3,179
|
|
|
612
|
|
|
1,092
|
|
|
12,839
|
Income (loss) before taxes
|
|
4,059
|
|
|
5,089
|
|
|
(241)
|
|
|
412
|
|
|
(2,657)
|
|
|
6,662
|
Taxes on income
|
|
1,420
|
|
|
1,727
|
|
|
(99)
|
|
|
137
|
|
|
(937)
|
|
|
2,248
|
Net income (loss)
|
$
|
2,639
|
|
$
|
3,362
|
|
$
|
(142)
|
|
$
|
275
|
|
$
|
(1,720)
|
|
$
|
4,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2012
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations
|
|
Company
|
Net interest income
|
$
|
9,933
|
|
$
|
6,642
|
|
$
|
2,246
|
|
$
|
283
|
|
$
|
643
|
|
$
|
19,747
|
Provision for loan losses
|
|
(2,183)
|
|
|
2,514
|
|
|
(299)
|
|
|
-
|
|
|
-
|
|
|
32
|
Noninterest income
|
|
1,908
|
|
|
432
|
|
|
479
|
|
|
475
|
|
|
307
|
|
|
3,601
|
Noninterest expenses
|
|
6,942
|
|
|
3,633
|
|
|
4,031
|
|
|
566
|
|
|
1,597
|
|
|
16,769
|
Income (loss) before taxes
|
|
7,082
|
|
|
927
|
|
|
(1,007)
|
|
|
192
|
|
|
(647)
|
|
|
6,547
|
Taxes on income
|
|
2,640
|
|
|
339
|
|
|
(379)
|
|
|
71
|
|
|
(241)
|
|
|
2,430
|
Net income (loss)
|
$
|
4,442
|
|
$
|
588
|
|
$
|
(628)
|
|
$
|
121
|
|
$
|
(406)
|
|
$
|
4,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2013
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations*
|
|
Company
|
Net interest income
|
$
|
16,693
|
|
$
|
9,608
|
|
$
|
5,046
|
|
$
|
301
|
|
$
|
(908)
|
|
$
|
30,740
|
Provision for loan losses
|
|
156
|
|
|
(1,563)
|
|
|
30
|
|
|
(13)
|
|
|
1,012
|
|
|
(378)
|
Noninterest income
|
|
3,554
|
|
|
694
|
|
|
950
|
|
|
1,561
|
|
|
269
|
|
|
7,028
|
Noninterest expenses
|
|
14,247
|
|
|
3,687
|
|
|
6,074
|
|
|
1,174
|
|
|
2,045
|
|
|
27,227
|
Income (loss) before taxes
|
|
5,844
|
|
|
8,178
|
|
|
(108)
|
|
|
701
|
|
|
(3,696)
|
|
|
10,919
|
Taxes on income
|
|
2,203
|
|
|
3,082
|
|
|
(40)
|
|
|
264
|
|
|
(1,393)
|
|
|
4,116
|
Net income (loss)
|
$
|
3,641
|
|
$
|
5,096
|
|
$
|
(68)
|
|
$
|
437
|
|
$
|
(2,303)
|
|
$
|
6,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes externally generated loss of $1.1 million, primarily from investing services, and an internally generated revenue of $0.4 million from the funds management unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at period end
|
$
|
656,352
|
|
$
|
444,327
|
|
$
|
210,189
|
|
$
|
7,217
|
|
$
|
4
|
|
$
|
1,318,089
|
Total assets at period end
|
|
661,036
|
|
|
436,460
|
|
|
215,489
|
|
|
10,035
|
|
|
708,942
|
|
|
2,031,962
|
Total deposits at period end
|
|
1,171,876
|
|
|
173,735
|
|
|
248,805
|
|
|
4,807
|
|
|
16,738
|
|
|
1,615,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2012
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations*
|
|
Company
|
Net interest income
|
$
|
20,256
|
|
$
|
13,600
|
|
$
|
4,765
|
|
$
|
669
|
|
$
|
1,306
|
|
$
|
40,596
|
Provision for loan losses
|
|
245
|
|
|
2,994
|
|
|
(1,491)
|
|
|
-
|
|
|
-
|
|
|
1,748
|
Noninterest income
|
|
3,668
|
|
|
889
|
|
|
1,020
|
|
|
1,025
|
|
|
513
|
|
|
7,115
|
Noninterest expenses
|
|
13,992
|
|
|
6,589
|
|
|
6,825
|
|
|
1,047
|
|
|
2,625
|
|
|
31,078
|
Income (loss) before taxes
|
|
9,687
|
|
|
4,906
|
|
|
451
|
|
|
647
|
|
|
(806)
|
|
|
14,885
|
Taxes on income
|
|
3,617
|
|
|
1,831
|
|
|
168
|
|
|
242
|
|
|
(301)
|
|
|
5,557
|
Net income (loss)
|
$
|
6,070
|
|
$
|
3,075
|
|
$
|
283
|
|
$
|
405
|
|
$
|
(505)
|
|
$
|
9,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes externally generated revenue of $0.8 million, primarily from investing services, and an internally generated revenue of $1.0 million from the funds management unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at period end
|
$
|
751,759
|
|
$
|
588,370
|
|
$
|
189,291
|
|
$
|
23,996
|
|
$
|
-
|
|
$
|
1,553,416
|
Total assets at period end
|
|
784,137
|
|
|
583,257
|
|
|
196,349
|
|
|
26,654
|
|
|
673,726
|
|
|
2,264,123
|
Total deposits at period end
|
|
1,327,514
|
|
|
154,818
|
|
|
274,233
|
|
|
3,921
|
|
|
27,893
|
|
|
1,788,379
|
NOTE 9
: NEW AUTHORITATIVE
ACCOUNTING
GUIDANCE
In December 2011,
the Financial Accounting Standards Board (“
FASB
”)
issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 201) – Disclosures about Offsetting Assets and Liabilities
(“ASU 2011-11”)
.
ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement.
In January 2013, FASB issued Accounting Standards Update No. 2013-01
Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
(“ASU 2013-01”) which
clarifies that ordinary trade receivables are not within the scope of ASU
2011-11.
ASU 2011-11, as amended by ASU 2013-01, became effective for
us
on January
1, 2013
and did not have a significant impact on the financial statements.
In October 2012, FASB issued Accounting Standards Update No. 2012-06, Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a financial Institution (“ASU 2012-06
”
). ASU 2012-06 requires that when a reporting entity initially recognizes an indemnification asset (in accordance with Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity would be required to account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value of the indemnification asset would be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining term of the indemnified assets). The amendments resulting from ASU 2012-06 would be applied prospectively to any new indemnification assets acquired and to changes in expected cash flows of existing indemnification assets occurring on or after the date of adoption. The guidance
became
effective for us
on
January 1, 2013 and
did
not have a significant impact on
the
financial statements.
In February 2013, FASB issued Accounting Standard Update No. 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02
became
effective for us
on
January 1, 2013 and did not have a significant impact on the financial statements.
SOUTHWEST BANCORP, INC.
ITEM 2. MANAGEMENT’S DIS
C
USSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies followed by Southwest Bancorp, Inc.
(
“we”, “our”, “us”,
“Southwest”)
conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the financial services industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While
we base our estimates
on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates.
We
consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on
our
financial statements. Accounting policies related to the allowance for loan losses and goodwill and other intangible assets are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.
There have been no significant changes in
our
application of critical accounting policies since
December 31, 2012
.
GENERAL
We are a
bank holding company for Stillwater National Bank and Trust Company (“Stillwater National”) and Bank of Kansas.
Through
our
subsidiaries,
we offer
commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services from offices in Oklahoma, Texas, and Kansas, and on the Internet, through SNB DirectBanker®. We were organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. At
June 30, 2013
,
we had total assets of $
2.0
billion, deposits of $
1.6
billion, and shareholders’ equity of $
249.4
million.
Our area of expertise focuses on the special financial needs of healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. We established a strategic focus on healthcare lending in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of
June 30, 2013
, approximately $
429.4
million, or
33
%, of our noncovered loans were loans to individuals and businesses in the healthcare industry. We conduct regular market reviews of our current and potential healthcare lending and the appropriate concentrations within healthcare based upon economic and regulatory conditions.
We also focus on commercial real estate mortgage and construction credits.
S
ubprime residential lending has never been a part of our business strategy, and our exposure to subprime mortgage loans and subprime lenders is minimal. One-to-four family mortgages account for
6
% of total noncovered loans. As of
June 30, 2013
approximately $
945.6
m
illion, or
73
%, of our noncovered loans were commercial real estate mortgage and construction loans, including $
285.7
million of loans to individuals and businesses in the healthcare industry.
Our
common stock is traded on the NASDAQ Global Select Market under the symbol OKSB.
We
focus on converting
our
strategic vision into long-term shareholder value.
Our subsidiary, Southwest Capital II, holds o
ur public trust preferred securities
that
are traded on the NASDAQ Global Select Market under the symbol OKSBP.
It
is
our intention to redeem the
$34.5 million of 10.5% T
rust
P
referred
S
ecurities
in mid-September
2013
, subject to regulatory approval.
At
June 30, 2013
, the Oklahoma Banking segment accounted for $
656.4
million in loans, the Texas Banking segment accounted for $
444.3
million in loans, the Kansas Banking segment accounted for $
210.2
million in loans, and the
Secondary
Market segment accounted for $
7.2
million in loans. Please see “Financial Condition: Loans” below for additional information.
For additional information on
our
operating segments, please see
“Note 8:
Operating Segments” in the Notes to Unaudited Consolidated Financial Statements.
FINANCIAL CONDITION
Investment Securities
The following table
shows
the composition of the
investment
portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Federal agency securities
|
$
|
119,593
|
|
$
|
115,614
|
|
$
|
3,979
|
|
3.44
|
%
|
Obligations of state and political subdivisions
|
|
45,834
|
|
|
48,355
|
|
|
(2,521)
|
|
(5.21)
|
|
Residential mortgage-backed securities
|
|
195,525
|
|
|
203,675
|
|
|
(8,150)
|
|
(4.00)
|
|
Asset-backed securities
|
|
9,261
|
|
|
7,671
|
|
|
1,590
|
|
20.73
|
|
Equity securities
|
|
2,190
|
|
|
1,797
|
|
|
393
|
|
21.87
|
|
Total
|
$
|
372,403
|
|
$
|
377,112
|
|
$
|
(4,709)
|
|
(1.25)
|
%
|
Loans
Total loans, including loans held fo
r sale, were $
1.3
billi
o
n at
June 30, 2013
.
The following table
shows
the composition of the loan portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
Total
|
|
Total
|
(Dollars in thousands)
|
Noncovered
|
|
Covered
|
|
Noncovered
|
|
Covered
|
|
$ Change
|
|
% Change
|
Real estate mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
786,686
|
|
$
|
15,452
|
|
$
|
870,975
|
|
$
|
18,298
|
|
$
|
(87,135)
|
|
(9.80)
|
%
|
One-to-four family residential
|
|
77,445
|
|
|
4,253
|
|
|
70,954
|
|
|
4,881
|
|
|
5,863
|
|
7.73
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
158,907
|
|
|
320
|
|
|
130,753
|
|
|
382
|
|
|
28,092
|
|
21.42
|
|
One-to-four family residential
|
|
5,241
|
|
|
-
|
|
|
3,656
|
|
|
-
|
|
|
1,585
|
|
43.35
|
|
Commercial
|
|
235,667
|
|
|
1,554
|
|
|
240,498
|
|
|
2,037
|
|
|
(5,314)
|
|
(2.19)
|
|
Installment and consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed student loans
|
|
4,520
|
|
|
-
|
|
|
4,680
|
|
|
-
|
|
|
(160)
|
|
(3.42)
|
|
Other
|
|
27,977
|
|
|
67
|
|
|
31,512
|
|
|
109
|
|
|
(3,577)
|
|
(11.31)
|
|
Total loans
|
$
|
1,296,443
|
|
$
|
21,646
|
|
$
|
1,353,028
|
|
$
|
25,707
|
|
$
|
(60,646)
|
|
(4.40)
|
%
|
The composition of loans held for sale and
a
reconciliation to total loans is shown in the following table
:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
$
|
-
|
|
$
|
4,680
|
|
$
|
(4,680)
|
|
(100.00)
|
%
|
One-to-four family residential
|
|
7,087
|
|
|
5,112
|
|
|
1,975
|
|
38.63
|
|
Government guaranteed commercial real estate
|
|
55
|
|
|
21,794
|
|
|
(21,739)
|
|
(99.75)
|
|
Other loans held for sale
|
|
75
|
|
|
96
|
|
|
(21)
|
|
(21.88)
|
|
Total loans held for sale
|
|
7,217
|
|
|
31,682
|
|
|
(24,465)
|
|
(77.22)
|
|
Noncovered portfolio loans
|
|
1,289,226
|
|
|
1,321,346
|
|
|
(32,120)
|
|
(2.43)
|
|
Covered portfolio loans
|
|
21,646
|
|
|
25,707
|
|
|
(4,061)
|
|
(15.80)
|
|
Total loans
|
$
|
1,318,089
|
|
$
|
1,378,735
|
|
$
|
(60,646)
|
|
(4.40)
|
%
|
Allowance for Loan Losses
Management determines the appropriate level of the allowance for loan losses
using an established methodology
. (See
“Note 3
:
Loans and
Allowance for Loan Losses
”
in the Notes to Unaudited Consolidated Financial Statements.)
Management believes the amount of the allowance is appropriate, based on
our
analysis.
The allowance for loan losses on noncovered loans is comprised of two components. Loans deemed to be impaired (
loans on nonaccrual status and greater than one-hundred thousand, and all troubled debt restructurings
) are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off.
The allowance on the unimpaired noncovered loans is determined by use of historical loss ratios adjusted for qualitative internal and external risk factors, segmented into loan pools by type of loan and market area.
The composition of
the allowance for loan losses
is shown in the following table
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
As of December 31, 2012
|
(Dollars in thousands)
|
Loan Balance
|
|
Allowance
|
|
Allowance
%
|
|
Loan Balance
|
|
Allowance
|
|
Allowance %
|
Noncovered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
$
|
29,513
|
|
$
|
3,938
|
|
13.3
|
%
|
|
$
|
35,104
|
|
$
|
7,740
|
|
22.0
|
%
|
Performing TDR
|
|
35,852
|
|
|
4,037
|
|
11.3
|
|
|
|
40,570
|
|
|
3,983
|
|
9.8
|
|
All other
|
|
1,223,861
|
|
|
32,295
|
|
2.6
|
|
|
|
1,245,672
|
|
|
34,771
|
|
2.8
|
|
Total noncovered
|
$
|
1,289,226
|
|
$
|
40,270
|
|
3.1
|
%
|
|
$
|
1,321,346
|
|
$
|
46,494
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total covered
|
$
|
21,646
|
|
$
|
82
|
|
0.4
|
%
|
|
$
|
25,707
|
|
$
|
224
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,310,872
|
|
$
|
40,352
|
|
3.1
|
%
|
|
$
|
1,347,053
|
|
$
|
46,718
|
|
3.5
|
%
|
The decrease in the allowance for nonaccrual loans was the result of current period charge-offs related to nonperforming loans.
The decrease in the allowance relating to the other noncovered loans re
sulted from the decrease in the
loan portfolio
, the decrease in the dollar amounts of impaired loans in
the loan portfolio
,
and
in
consideration of trends and qualitative factors, including portfolio loss trends as well as management’s assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans.
The amount of the loan loss provision
, or negative provision,
for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the first
six months
of
2013
were $
6.0
million,
an increase
of $
3.5
million, or
136
%, from the $
2.5
million recorded for the first
six months
of
201
2
. The provision for loan losses for the first
six months
of
201
3
was
a credit (or negative
provision
)
of
$
0.4
, representing
a decrease
of $
2.1
million, or
122
%, from the $
1.7
million
provision
recorded for the first
six months
of
201
2
.
The decline in the provision is due to the improvement in the overall quality of the loan portfolio combined with the lower average of historical net charge-offs.
Nonperforming Loans
/ Nonperforming Assets
At
June 30, 2013
, the allowance for loan losses was
136.44
% of noncovered nonperforming loans, compared to
121.10
% of noncovered nonperforming loans, at
December 31, 2012
(see “Provision for Loan Losses” on page
2
). Noncovered nonaccrual loans, which comprise the majority of noncovered nonperforming loans, were $
29.5
million as of
June 30, 2013
,
a decrease
of $
5.6
million, or
16
%, from
December 31, 2012
.
We have taken cumulative
net
charge-offs related to these noncovered nonaccrual loans of
$
12.6
million as of
June 30, 2013
. Noncovered nonaccrual loans at
June 30, 2013
were comprised of
29
relationships and were primarily concentrated in commercial real estate (
42
%)
, commercial and industrial (
36
%)
,
and real estate construction (
20
%) loans. All noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible amounts. These noncovered loans are believed to have sufficient collateral and are in the process of being collected
. Covered nonperforming loans of $
3.1
million
were
subject to protection under the loss share agreements with the FDIC
at
June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
(Dollars in thousands)
|
Noncovered
|
|
Covered
|
|
Noncovered
|
|
Covered
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
$
|
12,325
|
|
|
$
|
2,787
|
|
|
$
|
18,337
|
|
|
$
|
3,087
|
|
One-to-four family residential
|
|
418
|
|
|
|
74
|
|
|
|
563
|
|
|
|
52
|
|
Real estate construction
|
|
5,989
|
|
|
|
130
|
|
|
|
3,355
|
|
|
|
130
|
|
Commercial
|
|
10,718
|
|
|
|
71
|
|
|
|
12,761
|
|
|
|
324
|
|
Other consumer
|
|
63
|
|
|
|
-
|
|
|
|
88
|
|
|
|
2
|
|
Total nonaccrual loans
|
|
29,513
|
|
|
|
3,062
|
|
|
|
35,104
|
|
|
|
3,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
-
|
|
|
|
-
|
|
|
|
747
|
|
|
|
-
|
|
Commercial
|
|
1
|
|
|
|
-
|
|
|
|
2,471
|
|
|
|
-
|
|
Other consumer
|
|
1
|
|
|
|
-
|
|
|
|
72
|
|
|
|
-
|
|
Total past due 90 days or more
|
|
2
|
|
|
|
-
|
|
|
|
3,290
|
|
|
|
-
|
|
Total nonperforming loans
|
|
29,515
|
|
|
|
3,062
|
|
|
|
38,394
|
|
|
|
3,595
|
|
Other real estate
|
|
145
|
|
|
|
1,666
|
|
|
|
11,315
|
|
|
|
3,643
|
|
Total nonperforming assets
|
$
|
29,660
|
|
|
$
|
4,728
|
|
|
$
|
49,709
|
|
|
$
|
7,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to portfolio loans receivable and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other real estate
|
|
2.30
|
%
|
|
|
20.28
|
%
|
|
|
3.73
|
%
|
|
|
24.66
|
%
|
Nonperforming loans to portfolio loans receivable
|
|
2.29
|
|
|
|
14.15
|
|
|
|
2.91
|
|
|
|
13.98
|
|
Allowance for loan losses to nonperforming loans
|
|
136.44
|
|
|
|
2.68
|
|
|
|
121.10
|
|
|
|
6.23
|
|
Government-guaranteed portion of nonperforming loans
|
$
|
72
|
|
|
$
|
2,180
|
|
|
$
|
76
|
|
|
$
|
2,456
|
|
At
June 30, 2013
,
five
credit relationships represented
87
% of noncovered nonperforming loans. These were all commercial or commercial real estate lending
collateral dependent
relationships and had an aggregate principal balance of $
25.7
million and related impairment reserves of $
3.2
million. Aggregate charge-offs for these
five
relationships were $
11.1
million as of
June 30, 2013
.
Noncovered performing loans considered potential problem loans
(
loans which are not included in the past due or nonaccrual categories but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms
)
amounted to approximately $
94.1
million at
June 30, 2013
,
compared to $
94.4
million at
December 31, 2012
. Substantially all of these loans were performing in accordance with their present terms at
June 30, 2013
. Additionally,
as of
June 30, 2013
and December 31, 2012,
there
were
$
3.4
million and $
3.2
million, respectively, of covered potential problem loans, which are subject to protection under the loss share agreements with the FDIC. Loans may be monitored by management and reported as potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms.
At June 30, 2013, noncovered other real estate was $145,000
,
down from $11.3 million at December 31, 2012.
During the first six months of 2013,
there
was
$9.4 million in
sa
les of other real estate properties
and
$1.9 million in other real estate write-downs.
At
June 30, 2013
, the reserve for unfunded loan commitments was $
3.2
million, a $
0.4
million, or
13
%,
increase
from the amount at
December 31, 2012
. Management believes the amount of the reserve is appropriate
and is included in other liabilities on the unaudited consolidated statement of financial condition
. The increase
related to loss ratios in categories where commitments are centered
.
Deposits and Other Borrowings
Our
deposits
were $
1.6
billion
and $1.7 billion
at
June 30, 2013
and
December 31, 2012
, respectively
.
The following table
shows
the composition of deposits at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Noninterest-bearing demand
|
$
|
412,176
|
|
$
|
424,008
|
|
$
|
(11,832)
|
|
(2.79)
|
%
|
Interest-bearing demand
|
|
138,502
|
|
|
112,012
|
|
|
26,490
|
|
23.65
|
|
Money market accounts
|
|
408,145
|
|
|
423,417
|
|
|
(15,272)
|
|
(3.61)
|
|
Savings accounts
|
|
38,611
|
|
|
37,693
|
|
|
918
|
|
2.44
|
|
Time deposits of $100,000 or more
|
|
295,179
|
|
|
351,273
|
|
|
(56,094)
|
|
(15.97)
|
|
Other time deposits
|
|
323,348
|
|
|
361,175
|
|
|
(37,827)
|
|
(10.47)
|
|
Total deposits
|
$
|
1,615,961
|
|
$
|
1,709,578
|
|
$
|
(93,617)
|
|
(5.48)
|
%
|
Some of our interest-bearing deposits were obtained through brokered transactions and we participate in the Certificate of Deposit Account Registry Service (“CDARS”).
There were no brokered certificates of deposit as of
June 30, 2013
or
December 31, 2012
.
CDARS deposits totaled
$
4.9
million at
June 30, 2013
and $
9.9
million as of
December 31, 2012
.
Other borrowings, which includes short-term federal funds purchased, FHLB borrowings, and repurchase agreements,
increased
$
4.0
million, or
6
%, to $
74.3
million during the first
six months
of
2013
. The
increase
primarily reflects the
timing
of repurchase
agreements
for
the period.
Shareholders’ Equity
Shareholders’ equity
increased
$
3.4
million, or
1
%, primarily due t
o
net
inc
ome o
f $
6.8
million, for the first
six months
of
2013
, offset in part by the repurchase of the common stock warrant from the U.S. Treasury for $2.3 million
.
Net unrealized holding gains on available for sale investment securities and derivative instruments (net of tax)
decreased to a
net unrealized holding
loss of
$
1.5
million at
June 30, 2013
,
which reflects changes in the interest rate environment.
At
June 30, 2013
,
we
, Stillwater National, and
Bank of Kansas
continued to exceed all applicable regulatory capital requirements. See “Capital
Requirements
” on page
2
.
RESULTS OF OPERATIONS
FOR THE THREE
MONTH
PERIOD
S
ENDED
JUNE 30, 2013
and
20
12
Net income available to common shareholders for the
second
quarter of
2013
of $
4.4
million represented
a
n
in
crease
of $
1.4
million from the
$
3.0
million net
income
recorded for the
second
quarter of
201
2
. Diluted earnings per share were $
0.22
for the second quarter of 2013,
compared to $
0.15
for the second quarter of 2012
.
The
increase
in quarterly net income available
to common shareholders was the result of
a $
3.9
million, or
23
%, decrease
in
noninterest expense, a $1.1 million decrease primarily in dividends on preferred stock due to the repurchase
of shares issued to the
U.S.
Treasury
during 2012, a $0.9 million
decrease in the provision for loan losses
, and a
$
0.2
million, or
7%
,
de
crease in income tax expense
,
offset in part by a $4.6 million, or 23%, decrease in net interest income and a $0.1 million, or 3%, decrease in noninterest income.
Provision
s
for loan losses are booked in the amounts necessary to
maintain
the allowance for loan losses
at
an appropriate level at period end after
net
charge-offs for the period. (See
“Note 3
:
Loans and
Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements
and “Provision for Loan Losses” on page
2
.)
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
16,415
|
|
$
|
21,708
|
|
$
|
(5,293)
|
|
(24.38)
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
426
|
|
|
411
|
|
|
15
|
|
3.65
|
|
Mortgage-backed securities
|
|
833
|
|
|
1,319
|
|
|
(486)
|
|
(36.85)
|
|
State and political subdivisions
|
|
302
|
|
|
257
|
|
|
45
|
|
17.51
|
|
Other securities
|
|
33
|
|
|
152
|
|
|
(119)
|
|
(78.34)
|
|
Other interest-earning assets
|
|
255
|
|
|
193
|
|
|
62
|
|
32.17
|
|
Total interest income
|
|
18,264
|
|
|
24,040
|
|
|
(5,776)
|
|
(24.03)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
37
|
|
|
59
|
|
|
(22)
|
|
(37.29)
|
|
Money market accounts
|
|
190
|
|
|
234
|
|
|
(44)
|
|
(18.80)
|
|
Savings accounts
|
|
12
|
|
|
13
|
|
|
(1)
|
|
(7.69)
|
|
Time deposits of $100,000 or more
|
|
613
|
|
|
1,185
|
|
|
(572)
|
|
(48.27)
|
|
Other time deposits
|
|
590
|
|
|
1,051
|
|
|
(461)
|
|
(43.86)
|
|
Other borrowings
|
|
222
|
|
|
222
|
|
|
-
|
|
-
|
|
Subordinated debentures
|
|
1,466
|
|
|
1,529
|
|
|
(63)
|
|
(4.12)
|
|
Total interest expense
|
|
3,130
|
|
|
4,293
|
|
|
(1,163)
|
|
(27.09)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
15,134
|
|
$
|
19,747
|
|
$
|
(4,613)
|
|
(23.36)
|
%
|
Net interest income is the difference between the interest income
we earn
on
our
loans, investments, and other interest-earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowings.
Net interest income is affected by changes in market interest rates b
ecause
rates on
different types of assets and liabilities may react differently and at different times to changes in market interest rates.
W
hen interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Similarly, w
hen interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest cou
ld reduce net interest income.
AVERAGE BALANCES, YIELDS AND RATES
The following table
shows
average interest-earning assets and interest-bearing liabilities and the average yields and rates
on them
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
2013
|
|
2012
|
|
Average
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Average
|
(Dollars in thousands)
|
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Balance
|
|
Interest
|
|
Yield/Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered loans (1) (2)
|
$
|
1,296,589
|
|
$
|
16,018
|
|
4.96
|
%
|
|
$
|
1,565,342
|
|
$
|
21,125
|
|
5.43
|
%
|
Covered loans (1)
|
|
22,361
|
|
|
397
|
|
7.12
|
|
|
|
31,853
|
|
|
583
|
|
7.36
|
|
Investment securities (2)
|
|
374,353
|
|
|
1,594
|
|
1.71
|
|
|
|
339,435
|
|
|
2,139
|
|
2.53
|
|
Other interest-earning assets
|
|
282,067
|
|
|
255
|
|
0.36
|
|
|
|
202,040
|
|
|
193
|
|
0.38
|
|
Total interest-earning assets
|
|
1,975,370
|
|
|
18,264
|
|
3.71
|
|
|
|
2,138,670
|
|
|
24,040
|
|
4.52
|
|
Other assets
|
|
63,390
|
|
|
|
|
|
|
|
|
147,822
|
|
|
|
|
|
|
Total assets
|
$
|
2,038,760
|
|
|
|
|
|
|
|
$
|
2,286,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
$
|
126,250
|
|
$
|
37
|
|
0.12
|
%
|
|
$
|
120,648
|
|
$
|
59
|
|
0.20
|
%
|
Money market accounts
|
|
420,477
|
|
|
190
|
|
0.18
|
|
|
|
356,758
|
|
|
234
|
|
0.26
|
|
Savings accounts
|
|
38,833
|
|
|
12
|
|
0.12
|
|
|
|
34,632
|
|
|
13
|
|
0.15
|
|
Time deposits
|
|
633,647
|
|
|
1,203
|
|
0.76
|
|
|
|
880,007
|
|
|
2,236
|
|
1.02
|
|
Total interest-bearing deposits
|
|
1,219,207
|
|
|
1,442
|
|
0.47
|
|
|
|
1,392,045
|
|
|
2,542
|
|
0.73
|
|
Other borrowings
|
|
71,857
|
|
|
222
|
|
1.24
|
|
|
|
59,754
|
|
|
222
|
|
1.49
|
|
Subordinated debentures
|
|
81,963
|
|
|
1,466
|
|
7.15
|
|
|
|
81,963
|
|
|
1,529
|
|
7.46
|
|
Total interest-bearing liabilities
|
|
1,373,027
|
|
|
3,130
|
|
0.91
|
|
|
|
1,533,762
|
|
|
4,293
|
|
1.13
|
|
Noninterest-bearing demand deposits
|
|
402,224
|
|
|
|
|
|
|
|
|
387,057
|
|
|
|
|
|
|
Other liabilities
|
|
10,561
|
|
|
|
|
|
|
|
|
50,696
|
|
|
|
|
|
|
Shareholders' equity
|
|
252,948
|
|
|
|
|
|
|
|
|
314,977
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
2,038,760
|
|
|
|
|
|
|
|
$
|
2,286,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
$
|
15,134
|
|
2.80
|
%
|
|
|
|
|
$
|
19,747
|
|
3.39
|
%
|
Net interest margin (3)
|
|
|
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
3.71
|
%
|
Ratio of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average interest-bearing liabilities
|
|
143.87%
|
|
|
|
|
|
|
|
|
139.44%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material.
|
|
(2) Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material.
|
|
(3) Net interest margin = annualized net interest income / average interest-earning assets
|
|
Compared to the
second
quarter of
201
2
, the
second
quarter
2013
yields on
our
interest-earning assets
decreased
81
basis points, while the rates paid on
our
interest-bearing liabilities
decreased
22
basis points, resulting in
a decrease
in the interest rate spread to
2.80
%. During the same periods, annualized net interest margin was
3.07
% and
3.71
%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities
increased
to
143.87
% from
139.44
%.
RATE VOLUME TABLE
The following table analyzes changes in
our
interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period’s rate); and (ii) changes in rates (changes in rate multiplied by the prior period’s volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
With the rate environment remaining low in the short to mid-term, earning assets are repricing at lower rates.
The decrease in net interest income is the result of the reduction in loan volume
and the lower repricing rates
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
2013 vs. 2012
|
|
Increase
|
|
Due to Change
|
|
Or
|
|
In Average:
|
(Dollars in thousands)
|
(Decrease)
|
|
Volume
|
|
Rate
|
Interest earned on:
|
|
|
|
|
|
|
|
|
Noncovered loans receivable (1)
|
$
|
(5,107)
|
|
$
|
(3,421)
|
|
$
|
(1,686)
|
Covered loans receivable
|
|
(186)
|
|
|
(169)
|
|
|
(17)
|
Investment securities (1)
|
|
(545)
|
|
|
203
|
|
|
(748)
|
Other interest-earning assets
|
|
62
|
|
|
73
|
|
|
(11)
|
Total interest income
|
|
(5,776)
|
|
|
(3,314)
|
|
|
(2,462)
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
(22)
|
|
|
3
|
|
|
(25)
|
Money market accounts
|
|
(44)
|
|
|
37
|
|
|
(81)
|
Savings accounts
|
|
(1)
|
|
|
1
|
|
|
(2)
|
Time deposits
|
|
(1,033)
|
|
|
(548)
|
|
|
(485)
|
Other borrowings
|
|
-
|
|
|
41
|
|
|
(41)
|
Subordinated debentures
|
|
(63)
|
|
|
-
|
|
|
(63)
|
Total interest expense
|
|
(1,163)
|
|
|
(466)
|
|
|
(697)
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
(4,613)
|
|
$
|
(2,848)
|
|
$
|
(1,765)
|
|
|
|
|
|
|
|
|
|
(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 June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges
|
$
|
2,407
|
|
$
|
2,504
|
|
$
|
(97)
|
|
(3.87)
|
%
|
Other fees
|
|
200
|
|
|
427
|
|
|
(227)
|
|
(53.16)
|
|
Other noninterest income
|
|
53
|
|
|
53
|
|
|
-
|
|
-
|
|
Gain on sales of loans:
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
818
|
|
|
582
|
|
|
236
|
|
40.55
|
|
All other loan sales
|
|
13
|
|
|
-
|
|
|
13
|
|
-
|
|
Gain on sale/call of investment securities
|
|
-
|
|
|
35
|
|
|
(35)
|
|
(100.00)
|
|
Total noninterest income
|
$
|
3,491
|
|
$
|
3,601
|
|
$
|
(110)
|
|
(3.05)
|
%
|
Other fees
income
decreased
primarily
as
the
result of the
decreased brokerage fees, offset in part by
de
creased amortization
of mortgage servicing rights during the
second
quarter of
2013
.
Gain on sales of loans is
primarily
a reflection of the activity in the
residential
mortgage lending areas discussed elsewhere in this report.
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
8,039
|
|
$
|
7,354
|
|
$
|
685
|
|
9.31
|
%
|
Occupancy
|
|
2,679
|
|
|
2,635
|
|
|
44
|
|
1.67
|
|
FDIC and other insurance
|
|
400
|
|
|
699
|
|
|
(299)
|
|
(42.78)
|
|
Other real estate (net)
|
|
(1,394)
|
|
|
2,059
|
|
|
(3,453)
|
|
(167.70)
|
|
Unfunded loan commitment reserve
|
|
255
|
|
|
395
|
|
|
(140)
|
|
(35.44)
|
|
Other general and administrative
|
|
2,860
|
|
|
3,627
|
|
|
(767)
|
|
(21.15)
|
|
Total noninterest expense
|
$
|
12,839
|
|
$
|
16,769
|
|
$
|
(3,930)
|
|
(23.44)
|
%
|
The number of full-time equivalent employees
decreased
fro
m
412
at the beginning of the quarter to
408
as of
June 30, 2013
.
The increase
in personnel expense
from prior year is primarily the result of increased employee benefit expense and increased accrued bonus 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.
The
second
quarter of 2013 other real estate net expenses included
$2.3 million in gains on sales of other real estate properties primarily due to the sale of two properties totaling $9.2 million. The remainder of the decrease when compared to prior year second quarter is the result of decreased expense
, including write-down expenses.
The unfunded lo
an commitment reserve expense de
creased as a result of the application of our methodology to calculate the reserve.
The decrease in other general and administrative is primarily the result of lower
consulting fees and legal fees and decreased miscellaneous expense.
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2013
and
2012
Net income available to common shareholders for the
six months
en
ded
June 30, 2013
of $
6.8
million represented a
decrease
of
$
0.3
million from the $
7.1
million net
income
available to common shareholders
f
or
the
six months
ended
June 30, 2012
. Diluted earnings per share were $
0.34
for the six months ended June 30, 2013
, compared to $
0.37
for the six months ended June 30, 2012
. The
decrease
in net income available to common shareholders was the result of
a $9.
9
million, or
24
%, decrease in net interest income,
offset in part by a
$
2.1
million, or
122
%,
decrease
in the provision for loan losses
,
a $
3.9
million or
1
2%,
de
crease in noninterest expense
,
a $
1.4
million, or
26
%
de
crease in income tax expense, and
a $2.2 million decrease primarily in dividends on preferred stock due to the
repurchase of shares issued to the
U.S.
Treasury
during 2012.
Provisions for loan losses are booked in the amounts necessary to maintain the allowance for loan losses at an appropriate level at period end after net charge-offs for the period. (See “Note 3: Loans and Allowance for Loan Losses” in the Notes to Unaudited Consolidated Financial Statements and “Provision for Loan Losses” on page
2
.)
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
33,421
|
|
$
|
45,085
|
|
$
|
(11,664)
|
|
(25.87)
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
898
|
|
|
804
|
|
|
94
|
|
11.69
|
|
Mortgage-backed securities
|
|
1,700
|
|
|
2,638
|
|
|
(938)
|
|
(35.56)
|
|
State and political subdivisions
|
|
606
|
|
|
469
|
|
|
137
|
|
29.21
|
|
Other securities
|
|
81
|
|
|
174
|
|
|
(93)
|
|
(53.44)
|
|
Other interest-earning assets
|
|
495
|
|
|
377
|
|
|
118
|
|
31.29
|
|
Total interest income
|
|
37,201
|
|
|
49,547
|
|
|
(12,346)
|
|
(24.92)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
82
|
|
|
129
|
|
|
(47)
|
|
(36.43)
|
|
Money market accounts
|
|
426
|
|
|
520
|
|
|
(94)
|
|
(18.08)
|
|
Savings accounts
|
|
24
|
|
|
26
|
|
|
(2)
|
|
(7.69)
|
|
Time deposits of $100,000 or more
|
|
1,311
|
|
|
2,505
|
|
|
(1,194)
|
|
(47.66)
|
|
Other time deposits
|
|
1,251
|
|
|
2,258
|
|
|
(1,007)
|
|
(44.60)
|
|
Other borrowings
|
|
442
|
|
|
446
|
|
|
(4)
|
|
(0.90)
|
|
Subordinated debentures
|
|
2,925
|
|
|
3,067
|
|
|
(142)
|
|
(4.63)
|
|
Total interest expense
|
|
6,461
|
|
|
8,951
|
|
|
(2,490)
|
|
(27.82)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
30,740
|
|
$
|
40,596
|
|
$
|
(9,856)
|
|
(24.28)
|
%
|
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 b
ecause
rates on
different types of assets and liabilities may react differently and at different times to changes in market interest rates.
W
hen interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Similarly, w
hen interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase of market rates of interest cou
ld reduce net interest income.
AVERAGE BALANCES, YIELDS AND RATES
The following table
shows
average interest-earning assets and interest-bearing liabilities and the average yields and rates
on them
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
Average
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Average
|
|
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Balance
|
|
Interest
|
|
Yield/Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncovered loans (1) (2)
|
$
|
1,313,490
|
|
$
|
32,532
|
|
4.99
|
%
|
|
$
|
1,614,980
|
|
$
|
43,848
|
|
5.46
|
%
|
Covered loans (1)
|
|
23,621
|
|
|
889
|
|
7.59
|
|
|
|
33,951
|
|
|
1,237
|
|
7.33
|
|
Investment securities
|
|
377,422
|
|
|
3,285
|
|
1.76
|
|
|
|
327,180
|
|
|
4,085
|
|
2.51
|
|
Other interest-earning assets
|
|
275,269
|
|
|
495
|
|
0.36
|
|
|
|
191,839
|
|
|
377
|
|
0.40
|
|
Total interest-earning assets
|
|
1,989,802
|
|
|
37,201
|
|
3.77
|
|
|
|
2,167,950
|
|
|
49,547
|
|
4.60
|
|
Other assets
|
|
75,423
|
|
|
|
|
|
|
|
|
153,370
|
|
|
|
|
|
|
Total assets
|
$
|
2,065,225
|
|
|
|
|
|
|
|
$
|
2,321,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
$
|
129,905
|
|
$
|
82
|
|
0.13
|
%
|
|
$
|
120,626
|
|
$
|
129
|
|
0.22
|
%
|
Money market accounts
|
|
420,058
|
|
|
426
|
|
0.20
|
|
|
|
375,289
|
|
|
520
|
|
0.28
|
|
Savings accounts
|
|
38,777
|
|
|
24
|
|
0.12
|
|
|
|
34,609
|
|
|
26
|
|
0.15
|
|
Time deposits
|
|
658,266
|
|
|
2,562
|
|
0.78
|
|
|
|
905,900
|
|
|
4,763
|
|
1.06
|
|
Total interest-bearing deposits
|
|
1,247,006
|
|
|
3,094
|
|
0.50
|
|
|
|
1,436,424
|
|
|
5,438
|
|
0.76
|
|
Other borrowings
|
|
70,798
|
|
|
442
|
|
1.26
|
|
|
|
57,301
|
|
|
446
|
|
1.57
|
|
Subordinated debentures
|
|
81,963
|
|
|
2,925
|
|
7.14
|
|
|
|
81,963
|
|
|
3,067
|
|
7.48
|
|
Total interest-bearing liabilities
|
|
1,399,767
|
|
|
6,461
|
|
0.93
|
|
|
|
1,575,688
|
|
|
8,951
|
|
1.14
|
|
Noninterest-bearing demand deposits
|
|
402,882
|
|
|
|
|
|
|
|
|
383,008
|
|
|
|
|
|
|
Other liabilities
|
|
11,418
|
|
|
|
|
|
|
|
|
49,692
|
|
|
|
|
|
|
Shareholders' equity
|
|
251,158
|
|
|
|
|
|
|
|
|
312,932
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
2,065,225
|
|
|
|
|
|
|
|
$
|
2,321,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
$
|
30,740
|
|
2.84
|
%
|
|
|
|
|
$
|
40,596
|
|
3.46
|
%
|
Net interest margin (1)
|
|
|
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
3.77
|
%
|
Ratio of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to average interest-bearing liabilities
|
|
142.15%
|
|
|
|
|
|
|
|
|
137.59%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
six months
ended
June 30, 2012
, the
six months
ended
June 30, 2013
yields on our interest-earning assets
decreased
83
basis points, while the rates paid on our interest-bearing liabilities
decreased
21
basis points, resulting in
a
decrease
in the interest rate spread to
2.84
%. During the same periods, annualized net interest margin was
3.12
% and
3.77
%, respectively, and the ratio of average interest-earning assets to average interest-bearing liabilities
increased
to
142.15
% from
137.59
%. Included in both the
periods
were immaterial adjustments of the discount accretion on loans and the loss share receivable, offset
in part by immaterial interest reversal on nonaccrual loans.
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 are repricing at lower rates.
The decrease in net interest income is the result of the reduction in loan volume
and the lower repricing rates
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2013 vs. 2012
|
|
Increase
|
|
Due to Change
|
|
Or
|
|
In Average:
|
(Dollars in thousands)
|
(Decrease)
|
|
Volume
|
|
Rate
|
Interest earned on:
|
|
|
|
|
|
|
|
|
Noncovered loans receivable (1)
|
$
|
(11,316)
|
|
$
|
(7,697)
|
|
$
|
(3,619)
|
Covered loans receivable
|
|
(348)
|
|
|
(388)
|
|
|
40
|
Investment securities (1)
|
|
(800)
|
|
|
563
|
|
|
(1,363)
|
Other interest-earning assets
|
|
118
|
|
|
153
|
|
|
(35)
|
Total interest income
|
|
(12,346)
|
|
|
(7,369)
|
|
|
(4,977)
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
(47)
|
|
|
9
|
|
|
(56)
|
Money market accounts
|
|
(94)
|
|
|
57
|
|
|
(151)
|
Savings accounts
|
|
(2)
|
|
|
3
|
|
|
(5)
|
Time deposits
|
|
(2,201)
|
|
|
(1,137)
|
|
|
(1,064)
|
Other borrowings
|
|
(4)
|
|
|
94
|
|
|
(98)
|
Subordinated debentures
|
|
(142)
|
|
|
-
|
|
|
(142)
|
Total interest expense
|
|
(2,490)
|
|
|
(974)
|
|
|
(1,516)
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
(9,856)
|
|
$
|
(6,395)
|
|
$
|
(3,461)
|
|
|
|
|
|
|
|
|
|
(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 six months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges
|
$
|
4,747
|
|
$
|
4,925
|
|
$
|
(178)
|
|
(3.61)
|
%
|
Other fees
|
|
520
|
|
|
933
|
|
|
(413)
|
|
(44.27)
|
|
Other noninterest income
|
|
116
|
|
|
105
|
|
|
11
|
|
10.48
|
|
Gain on sales of loans:
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
1,612
|
|
|
1,117
|
|
|
495
|
|
44.32
|
|
All other loan sales
|
|
33
|
|
|
0
|
|
|
33
|
|
-
|
|
Gain on investment securities
|
|
-
|
|
|
35
|
|
|
(35)
|
|
100.00
|
|
Total noninterest income
|
$
|
7,028
|
|
$
|
7,115
|
|
$
|
(87)
|
|
(1.22)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fees income decreased
primarily
as a result of the
decreased brokerage fees for the first six months of 2013.
Gain on sales of loans is
primarily
a reflection of the activity in the
residential
mortgage lending areas discussed elsewhere in this report.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
|
|
(Dollars in thousands)
|
2013
|
|
2012
|
|
$ Change
|
|
% Change
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
16,175
|
|
$
|
14,601
|
|
$
|
1,574
|
|
10.78
|
%
|
Occupancy
|
|
5,253
|
|
|
5,180
|
|
|
73
|
|
1.41
|
|
FDIC and other insurance
|
|
891
|
|
|
1,482
|
|
|
(591)
|
|
(39.88)
|
|
Other real estate (net)
|
|
(1,041)
|
|
|
2,431
|
|
|
(3,472)
|
|
(142.82)
|
|
Unfunded loan commitment reserve
|
|
371
|
|
|
490
|
|
|
(119)
|
|
(24.29)
|
|
Other general and administrative
|
|
5,578
|
|
|
6,894
|
|
|
(1,316)
|
|
(19.09)
|
|
Total noninterest expense
|
$
|
27,227
|
|
$
|
31,078
|
|
$
|
(3,851)
|
|
(12.39)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of full-time equivalent employees
decreased
fro
m
422
at the beginning of the
year
to
408
as of
June 30, 2013
.
The increase
in personnel expense
from prior year is primarily the result of increased employee benefit expense and increased accrued bonus 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.
Other
real estate net expenses included $
3.5
million in
net
gains on sales of other properties
combined with decreased expenses associated with other real estate properties
.
The unfunded loan commitment reserve expense
de
creased as a result of the application of our methodology to calculate the reserve.
The decrease in other general and administrative is primarily the result of lower consulting fees
,
legal fees
, other loan costs, and bank exam 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 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 3
:
Loans and
Allowance for Loan Losses” in the Notes to Unaudited
Consolidated Financial Statements
and “Loans” on page
2
.)
Taxes on Income
Our
income tax expense was $
4.1
million for the first
six months
of
201
3
compared
to
$
5.6
million for the first
six months
of
201
2
,
a decrease
of $
1.4
million, or
26
%. The
de
crease in the income tax expense is the result of
de
creased income
and fluctuations in permanent book/tax differences
. The effective tax rate for the first
six months
of
2013
was
37.70
%.
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, Stillwater National
,
and
Bank of Kansas
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”).
Stillwater National also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program
. T
he
re
was
no
outstanding balance of those notes at
June 30, 2013
. Stillwater National has approved federal funds purchase lines totali
ng $
80.0
million with
four
banks
. There
was
no
outstanding
balance
on these li
nes at
June 30, 2013
. Stillwater National 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 Stillwater National to borrow up to
$
32.3
million. As of
June 30, 2013
, no borrowings were made through the BIC program. In addition, Stillwater National has available a $
207.5
million line of credit and Bank of Kansas has a $
42.4
million line of credit from the FHLB. Borrowings under the FHLB lines are secured by investment securities and loans. At
June 30, 2013
, the Stillwater National FHLB line of credit had an outstanding balance of $
20.0
million, and the Bank of Kansas line of credit had an outstanding balance of $
5.0
million.
(See also “Deposits and Other Borrowings” on page
2
for funds available on brokered certificate of deposit lines of credit and “Note 8: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for a discussion of
our
funds management unit.)
Stillwater National sells securities under agreements to repurchase with Stillwater National retaining custody of the collateral. Collateral consists of U.S. government agency obligations, which are designated as pledged with Stillwater National’s safekeeping agent. These transactions are for one to four day periods. Outstanding balances under this program were $
49.3
million and $
45.4
million as of
June 30, 2013
and
December 31, 2012
, respectively.
At
June 30, 2013
, $
286.2
million of the total carrying value of investment securities of $
361.4
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
six months
of
201
3
,
no
categor
y
of
short-term
borrowings
had an
average
balance that
exceeded
30%
of ending shareholders’ equity.
During the first
six months
of
2013
, cash and cash equivalents
in
creased by $
10.9
million, or
4
%, to $
299.0
million. This
in
crease was the net results of cash provided fro
m investing activities of $
67.1
million (primarily from net repayments of loans
and sales of other real estate properties
offset by purchases of available for sale securities) and cash provided by operating activities of $
35.6
million, offset in part by cash used in financing activities of $
91.8
million (primarily from
net
decreases in deposits).
During the first
six months
of
201
2
, cash and cash equivalents
in
creased by $
46.0
million, or
20
%, to $
275.9
million. This
in
crease was the net result of cash provided from investing of $
146.2
million (primarily net repayments of loans and proceeds from repayments, calls and maturities of securities) and cash provided by operating activities of $
20.9
million
, offset in part by
cash used in financing activities of $
121.0
million (primarily from
net
decreases in deposits)
.
CAPITAL
REQUIREMENTS
Bank holding companies are required to maintain capital ratios set by the
FRB
in its Risk-Based Capital Guidelines. At
June 30, 2013
,
we
exceeded all applicable capital requirements, having a total risk-based capital ratio of
23.78
%, a Tier I risk-based capital ratio of
22.48
%, and a
Tier 1
leverage ratio of
16.10
%. As of
June 30, 2013
, Stillwater National and Bank of Kansas 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, Stillwater National, or Bank of Kansas 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 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.
* * * * * * *