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Call Start: 9:30

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Southwest Bancorp, Inc.

Q4 2013 Earnings Conference Call

Jan 22, 2014 / 9:30 a.m. E.T.

Executives

Rusty LaForge – EVP and General Counsel

Mark Funke – President and CEO

Joe Shockley – EVP and Corporate CFO

Analysts

Brad Milsaps – Sandler O'Neill & Partners

Brady Gailey – Keefe, Bruyette & Woods

Matt Olney – Stephens, Inc.

John Roddis – FIG Partners LLC

Gary Tenner – D.A. Davidson & Co.

Daniel Cardenas – Raymond James

Bernard Horn – Polaris Capital Management, Inc.

Brian Hagler – Kennedy Capital

Operator

Good morning and welcome to the Southwest Bancorp Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to, Rusty LaForge. Mr. LaForge, please go ahead.

Rusty LaForge

Thank you and good morning, everyone. Welcome to the Southwest Bancorp Inc. fourth quarter 2013 earnings call. At this time, if you're logged into our webcast, please refer to the slide presentation available online, including our Safe Harbor statements on slide two. For those joining by phone, please note that the Safe Harbor statement and the presentation are available on our website www.banksnb.com. I’m joined today by Southwest President and CEO, Mark Funke; and Chief Financial Officer, Joe Shockley. After the presentation, we’ll be happy to address questions you may have as time permits.

With that, I’ll turn it over to Mark.

Mark Funke

Good morning, everyone. This is Mark Funke; I'm President and CEO of Southwest Bancorp and as Rusty said Joe is – Joe Shockley is with me here today, our CFO, and we will begin by giving you a few highlights. I'll cover a few highlights, brief highlights. And then, I'm going to turn it over to Joe to cover some additional details. And then, I'll take it back at the end with some closing comments and then we'll start the Q&A.

If you have the webcast in front of you in the PowerPoint presentation, I'm going to be starting on page three of that presentation and we'll walk through a couple pages before turning it back over to Joe.

Quarter four was very busy quarter for Southwest Bancorp, as we made very good projects on a number of objectives. We continue to improve the risk profile of this company and are building a foundation for future growth. As a result, we had many transactions that impacted our fourth quarter results.

I'm pleased to report earnings available to common shareholders, when compared to the third quarter of 2013 and for the full year of 2013 versus 2012 were very positive. We earned $6.8 million for the quarter and $17.4 million for the year, and this compares favorably to $3.8 million for the third quarter of 2013 and $12.4 million for the full year of 2012.

The fourth quarter earnings were supported by significant improvement and asset quality and improved net interest margins.

The management team has worked diligently over the last year to change the risk profile of this company. And during the fourth quarter, we experienced reductions in our nonperforming loans of about $10.6 million, or 36%, which we also generated principal recoveries on previously charged off loans or $5.8 million.

As I have said previously in these conference calls, we are aggressively managing our performing loan portfolio, emphasizing early identification at credit weaknesses and requiring decisive action plans to alleviate risk.

I believe this process, while it does keep potential problem loans of a high level, it ultimately reduces charge-offs and further portfolio deterioration.

As a result, we did experience a slight increase and potential problem loans during the quarter, which increased $2.9 million for the fourth quarter.

Our loans loss reserve methodology when calculated for the quarter did require a release of $6.5 million. It's driven primarily by $5.8 million in recoveries and other improvements in the portfolio. The loss reserves stands at 2.93 percent at the end of the quarter, and it remains appropriate, given our historical methodology.

If you move on to slide number four, the loan portfolio did fall by approximately $36 million during the quarter. And while we’re anticipating a flat quarter, the decrease was driven by several key reductions, $21 million in criticized loans, $2.6 million in reductions in covered loans. We also had $2.7 million in charge-offs, which impacted that as well.

We experienced one large commercial loan pay-off of approximately resuming from the sale of business and also a $10 million apartment project that was paid off in December, as a result of permanent financing.

We are have– ever very encouraged by the progress in our credit pipeline as it continues to improve.

New loans funded in the fourth quarter were substantially higher than the previous quarters. Our new loan production funded in the fourth quarter was approximately $88 million.

In the prior three quarters of 2013, we averaged only $56.5 million in new loans funded each quarter. So, nice improvement, as we move into the fourth quarter.

New customers have also been added as indicated by revolving line commitments that have increased 27% to $285 million since June, and funded balances remained at about 55% of the commitment level, so we still have room to grow with those customers.

Working pipeline averaged about 13.5% higher in the fourth quarter, when compared to the third quarter; 21% higher than the second quarter; and clearly, 80% better than we were the same quarter a year ago.

I'm pleased that our new bankers that have joined us throughout 2013 are adding new opportunities and new customers to our portfolio.

Along with our current employees, a key to our future success will be adding talented people to our organization. During the course of the year, we've added 32 new bank officers to our company, including 16 commercial bankers to treasury officers, to mortgage originators, three senior credit analysts, a chief information officer, a new controller and a new head of our loan review.

And considering all these, we actually have four fewer employees than we did at the start of the year. We will continue to add in individuals to the company. They can add capacity and value.

Our capital ratios remain strong and tier one capital exceeds 20%. The strong capital position provides us with the resources and the flexibility to do– grow the company in the future.

As we also completed in the fourth quarter the rebranding and charter consolidation for our company. After months of planning and much effort by our employees, we completed the consolidation of our bank charters and the rebranding of our company under the new name, Bank SNB.

This consolidation and rebranding will create efficiencies over the long run. It'll also provide our customers more convenience that unifies our company under a common operating name and it allows us to use our marketing dollars more consistently.

I'm pleased also to report that we are announcing a dividend for the fourth quarter. We will be paying a dividend on our common stock equal to $0.4 per share payable on February the 14th to shareholders of record on February 3rd. And we're very pleased to reinstate these dividends.

I'm going now turn it over to Joe Shockley, our CFO, to provide you some additional details on the finance results, and then I'll close out at the end with some comments concerning our 2014 objectives.

Joe Shockley

Thank you, Mark. Good morning, everyone. I'm pleased to report our balance sheet remains strong. The total assets remain stable at about $2 billion with overnight liquidity continuing to be around $250 million.

As Mark noted, loans declined about $36 million during the quarter due to fourth quarter pay downs. But also included in that was some non-performing loan pay downs since Mark also noted. And we're pleased to be able to show a pay down of non-performing loans at year-end.

Our deposits at year-end were just under $1.6 billion. While it shows a decrease of about $125 million from a year ago, we've showed you that we've allowed our senior relationship higher priced CDs– principally those are $100,000 and over to roll off. We had about $100 million of that category roll-off during the year and about $75 million of other CDs that were also single relationship and higher priced roll-off.

In looking at our other lower cost core deposit categories, certainly a DDA now money market in savings, that core group actually increased approximately $50 million over a year ago.

During 2014, as we see the loans grow, we are putting together a deposit strategy to focus on continued improvement in those deposit categories.

As Mark also noted, our capital remains strong at year-end at $259 million and we are exceptionally well capitalized.

Looking at the income statement– and I'm pointing on slide five– net income for the quarter was $6.8 million, up $3 million from the previous quarter. As previously noted, the improvement in asset quality and loan recoveries were drivers of these strong results.

On page six, you can see our net interest income for the fourth quarter is $16.6 million, up $1.4 million. But due primarily to $900,000 interest recovery on a non-performing loan during the quarter.

Interest expense was down from the previous quarter due to the late redemption– late in the third quarter, our 10.5% trust-preferred securities.

The net interest margin for the fourth quarter was reported at 3.42%. However, adjusting for that interest recovery of $900,000, the loan– the net interest margin would be about 3.23%, which is up from the previous quarter about 17 basis points.

The provision for loan losses for the quarter is a negative $6.5 million again due to improved asset quality.

As previously noted, the total recoveries for the fourth quarter were $5.8 million, while our gross charge-offs were $2.7 million, which had been substantially provided for in previous periods in our loan loss reserve. Our special assets group is working hard to maximize our recoveries on non-performing loans and assets.

For the fourth quarter, non-interest income was $3.1 million down $479,000 from the previous quarter, primarily due to lower gains on sell of mortgage loans due to reduced volumes, and also due to a legal settlement received in the third quarter of this year.

Non-interest expense for the fourth quarter totaled $15.1 million, an increase of $2 million over the previous quarter.

The increase was in salaries and benefits, other real estate and G&A expenses, due primarily to the charter consolidation and the rebranding of our subsidiary bank. And I will have more remarks relative to non-interest expense categories, when we get to page 18, our non-interest expense graphs.

Earnings per share for the fourth quarter was $0.34 per share versus $0.19 in the third quarter compared to $0.5 for the same quarter in 2012.

On page seven, you can see our loan, which are approximately $1.3 billion. There really have been no significant changes in loans by type. Healthcare and commercial real estate comprise the majority of our loans.

At loans by market, you can see that Oklahoma's the largest loan portfolio at $682 million, while Texas is $367 million, and Kansas is $188 million.

On slide eight, page eight, nonperforming loans decreased $10.6 million, as was previously noted down to a level of $18.6 million.

Healthcare is the highest dollar amount of nonperforming loans, and Texas shows the largest amount of nonperforming loans managed because that is where most of our special asset group resides.

On page nine, we've added nonperforming loans by geography. As you can see, approximately half of our nonperforming loans are in Arizona with $5 million in Oklahoma– excuse me– and Texas has a remainder– and Texas and Kansas has the remainder.

On page 10, we're pleased to continue to report that our non-covered other real estate is at a very highest level of $560,000, down from $11.3 million a year ago.

Moving in slide number 11. Nonperforming loans of $18.6 million decreased to $10 million from the previous quarter as was previously noted. And the decrease is due to a pay-off of a $9 million commercial real estate loan in Texas.

On page 12, our non-covered nonperforming assets are at $19.2 million, which includes both nonperforming loans and our modest level of other real estate, which compares very favorably to $49.7 million at year-end in 2012. And again, we're extremely pleased to be able to show this improvement. Yet, we know we have more work to do.

On page 13, the loan loss reserve is at $36.7 million, or 2.93% of total loans. Again, we believe in appropriate level.

The loan loss reserve coverage though to nonperforming loans, plus potential problem loans is at 31.4%. Again, appropriate coverage level.

On page 14, the risk profile continues to improve on a nonperforming assets to total assets is now down below 1%.

On page 15, the company's deposits again totaled almost $1.6 billion at year-end 2013. While down from year-end, the company has mentioned previously allowed its high-price relationship, single relationships on CDs roll-offs, particularly given the company's strong overnight liquidity throughout the year.

Again, we do plan to develop the deposit strategy this year. And the other note that I would make is that we did have a slight improvement in our cost of funds, which decreased and other 5 basis points during the quarter.

On page 16, you can see the trend line of our reducing cost of funds. Yet, our net interest margin shows an upswing. Again, due in part to the redemption of the 10.5% plus preferred that was redeemed late in the third quarter of 2013.

On page 17, noninterest income of $3.1 million, as I've previously noted was down due to decrease in the gain on sale of our mortgage activity and the legal settlement that was previously received in the third quarter 2013.

On page 18, we have noninterest expense, as previously noted, was $15.1 million, up from the previous quarter. Salaries and benefits were up about $400,000, due to additional health benefits and– health and benefits expenses combined with year-end incentives and some hiring bonuses in the fourth quarter.

Other real estate expense was up $717,000 due gains realized in the previous quarter of this year.

On the G&A expense side, they're up $786,000, due as previously mentioned, to the charter consolidation and rebranding of our bank subsidiary, Bank SNB.

The charter consolidation expenses of that amount were approximately $418,000 and the rebranding cost and other related expenses were approximately $300,000, as we had the right spot [ph] change signage throughout the company and had other various costs combined with the charter consolidation and also the rebranding.

Since they were all kind of done together, we're doing some– changing the supplies out– things of that nature.

As previously noted the capital position remains exceptionally strong and gives us the flexibility to grow organically for acquisition opportunities, again on page 19.

Before I turn it back over to Mark, I want to write a few comments regarding the recent announcement of the sale of our Kansas branches.

As we noted, I mentioned in the press release, the decision was a strategic one to focus our resources in capital to those markets that best fit our product line. We work with our adviser to identify banks that were well capitalized, have good management and good ownership and have a good reputation of customer service. We're pleased to be able to work with those banks and completing the transaction in the second quarter.

While the terms of the transaction will not be specifically disclosed, we will combine the net gain of combined transactions in the second quarter when the completion of the transaction is expected. The purchasing banks will assume approximately $134 million of combined deposits, and we'll purchase approximately $30 million in loans.

We estimate that we will reduce our noninterest expenses from this transaction by $1.6 million. But on the other side, we'll give up approximately $1.5 million in revenues. We expect to retain approximately $34 million in performing loans.

During 2013 and especially in the fourth quarter, we have made progressive changes to move our company forward in 2014 and beyond. I just want to say that I like our momentum, I like the things were doing and I'm proud to be a part of this team.

But this time, I'll turn it back over to Mark.

Mark Funke

Thank you very much, Joe. I'm going to start on page 20, which is an outline of 2014 priorities. These are the things that we'll be working on.

First and foremost, we're going to continue to be diligent about credit quality, improving the risk profile of our company and strengthening the balance sheet. A strong balance sheet is good for our shareholders. It gives confidence to our customers and it helps our employees reach career goals.

We acknowledge the need to grow the loan portfolio and add earning assets and grow our revenue base. We will maintain a respectable level of constraint, as we grow the portfolio with solid customer relationships. And we recognize that cycles are going to continue to occur, and we're going to be very prudent with our credit extensions and our overall risk management of the company.

That being said, we are aggressively pursuing growth opportunities in commercial lending to the expansion of our energy, our general C&I and our healthcare business segments.

We believe banking is still a very personal business driven by bankers. You know their customers and their markets. And our bankers are focused on aggressive calling efforts and responsive service.

Strengthening our fee-based products, in both our mortgage and our treasury function is also a key to our revenue growth and we are pursuing both very actively.

Improvement in our operating efficiency is a important part of our 2014 plan. We have contracted with a well-respected third party to help guide us through a constructed review of our internal processes with an eye towards improving the way we deliver service to our customers. We expect to achieve improvements in operating efficiencies and revenue growth and customer service beginning in the second and third quarters.

The efficiency ratio is impacted by both expense savings and revenue enhancements in this project that we're undertaking. We'll focus on both aspects of that equation.

Given our strong capital position and improved balance sheet, we believe we can enhance shareholder value by pursuing and completing strategic acquisitions in our footprint.

We are diligently seeking out and developing relationships with other banking and financial service organizations that will hopefully lead to those valuable partnerships in the future.

We will continue to seek bankers and banking teams that will add value to our company and create value for our shareholders. We have a strong core of employees that understand our culture and our customer base. And when combined with new talent, we will create an even stronger company.

We are investing in our business lines to enhance current product offerings. We announced that back in the summer, the implementation of a new consumer deposit product set that has been successful and we are currently investing in a new treasury management platform to be rolled out in the current quarter.

Our new Chief Information Officer is also evaluating a broad range of potential activities for further customer service delivery.

All of these is being done to drive a culture that produces consistent, conservative and sustainable earnings growth, as we've mentioned in the past, and that benefits our customers, our employees and our shareholders.

That concludes the formal part of our call today. I want to thank our employees for their continued hard work and their commitment to serving our customers in helping build a great company.

We're happy to take questions at this point, and we'd be ready to do that.

Question-and-answer Session

Operator

Thank you. We will now begin the questions and answer session. (Operator Instructions). At this time, we will pause momentarily to assemble our roster.

And our first question is from Brad Milsaps with Sandler Neill. Go ahead, please.

Brad Milsaps – Sandler O'Neill & Partners

Hey, good morning.

Joe Shockley

Good morning.

Mark Funke

Good morning, Brad

Brad Milsaps – Sandler O'Neill & Partners

Mark, I appreciate the color you gave us on fund and production during the quarter. I know you guys were hopeful to hold balances flat this quarter. But you mentioned a pay downs that didn't make that possible.

Just kind of curious, if you think it's, you know, kind of more middle part of the year that you begin to see more substantial growth in the loan book. Or do you think that's something that can happen, you know, early on in 2014?

Mark Funke

Well, we are certainly aggressively moving towards earlier than later loan production. We did have a couple of setbacks with some sales of some businesses and some refinancing of couple of real estate projects and the permanent financing in the fourth quarter. But we also drove a lot of problem loans out of the bank, which was an important aspect of what we're trying to accomplish here.

So, I was encouraged in the fourth quarter by the fundings that took place. They were positive and we added a number of new customers. I was also encouraged by the fact that our loan pipeline has remained very strong, as I mentioned in the comments. It's well ahead of where it was in the last two quarters.

And one thing that I would emphasize is that many of the new bankers that we have brought aboard that have prior customer relationships and that sort of thing, it takes a while for them to get fully engaged in our organization and understand the– you know, the aspects of what we do and how we do it. And many of the bankers we have hired and brought aboard didn't join us until the third, and certainly second and third quarters. So, we're just navigating to see some good opportunities in production from that standpoint.

I'm hopeful we'll see good production in the first quarter and I'm encouraged by the pipeline that we have today and we'd anticipate a good year for 2014 with loan opportunities.

Brad Milsaps – Sandler O'Neill & Partners

Okay, great. And then just maybe one follow-up questions for Joe. In terms of the branch sale, will you fund most of that out of the excess liquidity that you've got in Fed funds and other interest earning assets? Is that how to think about that?

Joe Shockley

Yes, absolutely. We've got overnight liquidity of $250 million. Our net liquidity that would be based on our deposits. Less the loans and other assets, it'll be somewhere around $95 million to $100 million that– our net liquidity that we would be giving out there.

Brad Milsaps – Sandler O'Neill & Partners

Okay, great. Thank you, guys.

Operator

Our next question is from Brady Gailey with KBW. Go ahead, please.

Brady Gailey – Keefe, Bruyette & Woods

Hey. Good morning, guys.

Joe Shockley

Good morning, Brady.

Brady Gailey – Keefe, Bruyette & Woods

So, it's great to see the common dividend come back. I like to hear your thoughts on, you know, repurchasing stock. You know your stock is still relatively cheap on tangible book of about 135%. I mean did you all consider repurchasing stock? Or do you think you will consider repurchasing stock sometime in the near term?

Joe Shockley

I do think we will reconsider it. We have looked at those options. We felt like that the best way to begin the reward our shareholders was to reinstate a dividend at this time and then we'll continue to evaluate a stock buyback plan, which we'll be visiting with the board with, over the next couple of quarters.

Brady Gailey – Keefe, Bruyette & Woods

Okay. And when you look at the margin, yet as you said you backed out kind of the one-time recovery that's in that 320 to 325 range. Do you think that's a good run rate going forward? And also, I noticed this is the first quarter in a couple of years that we saw the loan yield actually go up. The non-covered loan yield as up about 15 basis points. I wonder if you could comment on what's driving that as well.

Joe Shockley

Well, to the extent, again, the loan yield reflected that recovery. And so, adjusting it, it has improved some. But we believe that that interest margin hopefully will be stable. And as loans go through out the period, we'll be converting effectively that overnight funds with 25 basis points into market rate loans. And so, we would expect to– and hopefully improve throughout the year through for a successful one and reaching our loan growth that we've budgeted for 2014.

Brady Gailey – Keefe, Bruyette & Woods

Okay. Thanks for the color.

Joe Shockley

You're welcome.

Operator

Our next question is from Matt Olney with Stephens. Go ahead, please.

Matt Olney – Stephens, Inc.

Hey. Thanks. Good morning, guys.

Mark Funke

Good morning, Matt.

Joe Shockley

Good morning, Matt.

Matt Olney – Stephens, Inc.

Hey. It sounds like you made some progress in your problem loan resolution program. Can you give us any more color how far along you are in this program? And what's the goal on 2014 within that program?

Mark Funke

Well, we did make good progress in our problem loan resolution. We have– when you focus really good people on very clear strategies. They tend to do good work, and that's what's happened with our group and special assets.

We had some, you know– the improvement in that area is a combination of skill, a little bit of luck and a lot of cooperation. And we found that in several transactions that occurred during the fourth quarter relating in some nice recoveries. And I do believe that there will be an opportunity, as we move forward in the 2014, for perhaps some additional opportunities there.

You know we still have a fair number of problem loans on our books, as evidenced by the reports in our numbers. So, we have plenty of inventory, so to speak to work through. And– but I do think we're going to make progress there. I can't give you a number to say we're going to be down below a certain level or something to that nature but I can tell you, we're going to work just as far in 2013, as we did in '13. And you can see it in 2013; we had a very strong improvement in our credit quality, in our recovery area and so on.

We continue to evaluate the appropriateness of our loan loss reserve. We think it's correct, based on appropriate, based on where we are today, and we'll continue to focus on that in the future.

So, I would anticipate that improvement in 2014 in our balance sheet problem assets and we'll continue to work on that in the future.

Joe Shockley

You know, Mark, I would just add that certainly in a restructuring situation, particularly when you've got a high level of nonperforming assets, certainly clearly that was our number one priority. And our– people managing these special assets group– we've worked with them to be realistic about what the assets were worth. We've been realistic about how much monies we were having to either pump in to some other real estate properties and/or in terms of legal cost and so forth, at the same time, trying to– putting all that together to maximize recoveries.

So, it has been a strong coordinated effort and again we're pleased to have results. But as noted and Mark noted, we realized we still have more work to do and we have– with Mark's leadership created a culture, where we're more timely in trying to identify weaknesses that might be in some of our credits. So, that could be more timely addressed and move forward and hopefully not get to a worse stage, if you will, if that can be prevented or reduced.

Matt Olney – Stephens, Inc.

Okay. That's good color. Thank you for that.

And Mark, as follow-up, I think you mentioned that you've engaged a third party to help improve some of your efficiencies. Have these changes already been implemented? And what was the timing of– that we should expect in terms of when we'll see this impact in quarter results.

Mark Funke

No, they have not been implemented yet. Of course we do whatever we can, as time goes on, to improve the efficiency organization. But part of this was driven by the hiring of a new CIO back in the summer of last year, as he joined the organization and looked at a variety of things we were doing and working on from prior experience.

He suggested that perhaps we engage a third party to help us evaluate our process, procedure and things of that nature that looked like there maybe opportunities for us.

We did engage that firm back in November. They've done a good study for us. They've spent a fair amount of time in the organization and we will begin with a kick-off of this program in early February with our employee base in helping figure out how we can do things better, faster and more efficiently and provide better customer service.

It is clearly two parts of the equation; find out where you can improve the revenue side, as well as manage the expense side. And we will be diligently working on this– will probably take us a couple of quarters to work through all of the initiatives and the ideas that they have– helped us developed. And we should– hopefully, by the end of second quarter– begin seeing some definitive results of that process, both on the revenue and the expense side.

So, we're anxious and excited to get going with the process we've been working off for several months. And this will be a good opportunity for our company to get better.

Matt Olney – Stephens, Inc.

Okay. Thanks, guys.

Mark Funke

You bet.

Operator

Our next question is from John Roddis with FIG Partners. Go ahead.

Mark Funke

Good morning, John.

Joe Shockley

Good morning, John.

John Roddis – FIG Partners LLC

Mark, maybe just a follow up on the– I guess, the loan fundings in the quarter. I think you said $88 million. Could you sort of characterize where there any, you know, single bigger credits in there? Or was it fairly granular?

Mark Funke

Well, to be candid with you, it was across the board. We didn't have any one single big deal that made up that. We had a variety of different things. And it ranged everywhere from new healthcare opportunities to real estate to the energy sector and some C&I business.

So, what was, I think, really positive about the fourth quarter is that it was diversified.

Previously, you saw this bank; do a lot of very large real estate projects. That did not make up the fundings in the fourth quarter. We were diversified across a broad look, certainly some real estate in there, for sure. But it also encompass healthcare, energy and general C&I business, which is what we were hoping for.

John Roddis – FIG Partners LLC

Okay, okay. And if you sort of– just want to hear your thoughts on– if you look at the branch– the sale of the branches and if you adjust for the deposits that leave, I guess, the $130 million.

Joe Shockley

Right.

John Roddis – FIG Partners LLC

Your loan to deposit ratio is sort of around 85%, 86% today. What do you sort of think is an optimal level going forward for the company?

Joe Shockley

We believe that, you know, 85% to 90% is probably a leverage– a level that we're comfortable with. We've got some repost that certainly or deposit relationships but they may help fund our investment portfolio. But with our core deposits, we really feel comfortable with probably an 85% to 90% loan to deposit ratio.

John Roddis – FIG Partners LLC

Okay. Thanks, Joe. And then, just– Joe, maybe one other question on the...

Joe Shockley

Sure.

John Roddis – FIG Partners LLC

The salary line item was...

Joe Shockley

Good.

John Roddis – FIG Partners LLC

You said it was up about $400,000 and I think you said driven by, I guess, healthcare and then some incentive payments and, I guess, some sign-on bonuses.

Sort of going forward, do we sort of start around the $8 million level and sort of build off that? And obviously you guys might have some new hires and so forth? Or do we back off that $8 million a little bit?

Joe Shockley

I think the increase in– from the third to fourth quarter is probably half of what we would see going forward. So, you know, of the $400,000, we know we've got some healthcare costs that are going up. Next year, we know we've hired some people in the fourth quarter that will be a part of our time that may not have had the full quarter salary.

So, I'd say out of that $400,000, probably about half maybe of what we'd see going forward to be added to that.

John Roddis – FIG Partners LLC

Okay. So, start around the $7.8 million level? Give or take, I guess?

Joe Shockley

Yes, $7.8 million, $7.9 million would be my guess.

John Roddis – FIG Partners LLC

Okay. And then you also said, I guess, in the G&A expense, it sounds like roughly $700,000 was sort of one-time in nature. Is that correct there?

Joe Shockley

Yes, yes.

John Roddis – FIG Partners LLC

Short of consolidation are we branding. Okay.

Joe Shockley

Right. Okay.

John Roddis – FIG Partners LLC

Thanks, guys. Nice quarter.

Joe Shockley

You're welcome. Thank you.

Operator

Our next question is from Gary Tenner with D.A. Davidson. Go ahead, please.

Gary Tenner – D.A. Davidson & Co.

Good morning, guys.

Mark Funke

Good morning.

Joe Shockley

Good morning, Gary.

Gary Tenner – D.A. Davidson & Co.

Good morning. Joe, a question on the branch sale. You talked about a reduction of management expenses about one point $6 million. In terms of deposit cost associated with those branches, are the deposit rates there similar to the broader franchise? Or is there a different mix of deposits or costs?

Joe Shockley

Yes, they're pretty similar throughout. I mean, they're, you know, core community deposits. And so, they're probably representative of what our other core deposit relationships and price stats.

Gary Tenner – D.A. Davidson & Co.

Okay. And then, Mark, just a question regarding your comment on looking for M&A opportunities, you know, on partnership opportunities. Can you give us a little bit of color in terms of size, type of deal that you'd be looking at? And what kind of metrics you use as you look at those transactions?

Mark Funke

Well, a key would be something that adds strategic value to the company. So, I wouldn't say we're targeting a particular size as much as we're targeting a strategic partner or an entity that would really add value to our company.

But realistically from a size perspective, you know, you would assume probably $1 billion or less. We have a substantial amount of excess capital today. We have markets that we would like to grow in and enhance our presence. So, you know, probably a typical size might be a $300 million to $700 million organization that would enhance the market that we're already in and make our footprint a little bit stronger.

So– and that give you kind of a range. But we're talking to a lot of different people and hopefully something positive on that front in the next 2014 period.

Gary Tenner – D.A. Davidson & Co.

Okay. And just a follow-up on that. As you look at kind of pricing and tangible book. How do you think about tangible book dilution kind of weighted against earnings accretion?

Joe Shockley

Well, as Mark mentioned, certainly the primary focus would be a strategic partnership with any acquisition. But certainly we want to look at any dilution that would be brought about by an acquisition and certainly have an earned back probably– hopefully in the four-year range and less and yet we're going to focusing more on what we think is that– the long-term franchise value and strategic value is of taking on that bank as a partner.

Gary Tenner – D.A. Davidson & Co.

Alright. Thank you.

Joe Shockley

You're welcome. Thank you.

Operator

Our next question is from Daniel Cardenas with Raymond James. Go ahead, please.

Daniel Cardenas – Raymond James

Good morning, guys.

Joe Shockley

Good morning.

Mark Funke

Good morning, Daniel. How are you?

Daniel Cardenas – Raymond James

Good. I'm good. I guess just a quick follow up on the M&A. I mean is there– are there any particular markets that you're more interest in or offer more potential for M&A than others?

Mark Funke

Well, if you look at the footprint that we're in, clearly the key markets are the larger metropolitan areas– Oklahoma City or Tulsa, Dallas, San Antonio– I mean all of those key markets for us represent good opportunities. We probably won't be in a role markets. We exited that– with the sale, the two role markets we ran up in Kansas. And I would say our focus would be, you know, more south towards Texas, certainly. But we like the Kansas market a lot and we are very comfortable there with what we remain in that market, in which still in Hudginson. Certainly, Oklahoma is our home base and there are good opportunities that could filter up in both Oklahoma City and Tulsa, and we're very familiar with those markets. And then, Dallas also and San Antonio– those represent very strong key growth markets in Texas.

And we are not focused on just one market. We like our footprint. We like where we are today. And any one of those markets that would represent a good opportunity for us, we would be open to– not outside of our footprint though.

Daniel Cardenas – Raymond James

And does the Noble Bank branch expansion– does that play any significant part in your growth strategy near term?

Mark Funke

Likely not. You know there are certainly could be some opportunities for that. But that would probably not be a strategic objective to open up or "de novo" location.

And you know if we could enhance our position and still water mark with an additional branch some place or something in that nature, we might consider that. But that would not be– that would probably not be something that we would immediately consider.

Daniel Cardenas – Raymond James

Okay. And could we expect additional branch rationalization over the next year or so?

Mark Funke

By meaning further sales?

Daniel Cardenas – Raymond James

Correct.

Mark Funke

Not at this time. We did a pretty hard look over the last year at where we wanted to be and what we felt like we were good at. And we chose the three branches to exit from the company. And going forward, we're good with where we are.

Daniel Cardenas – Raymond James

Great. Alright. Host us back. Thanks, guys.

Joe Shockley

Yes. Thank you, Daniel.

Operator

Our next question is from Bernard Horn with Polaris Capital. Please go ahead.

Mr. Horn, are you there?

Bernard Horn – Polaris Capital Management, Inc.

I am here. Sorry about that. Had it on mute.

So, good morning.

Mark Funke

Good morning, Bernie.

Joe Shockley

Good morning, Bernie.

Bernard Horn – Polaris Capital Management, Inc.

Just wanted to question on the loan loss provision and asset quality. I'm– jumped on a little bit late here so I apologize if this has been covered. And I'm sorry, if we can take it offline.

But basically, question is, you know, clearly the nonperforming loans and even the potential problem loans have– had pretty good sequential trends here. I think the only stubborn place looks like it's in Texas on the potential problem loans.

But– so, knowing that, as you point out in the press release, about 296 basis points of loan loss provisions to total loans. And I'm just kind of curious if you think that that's adequate or a little bit heavy, given the trends in nonperforming loans? Or you still see some– you know they have been a lot of false starts in the trends of nonperforming loans. It's southwest over the– last several years.

So, maybe you could give us an idea of whether you think that loan loss provision is adequate? Or you think it's going to get driven down a little bit lower by recoveries and so forth?

Joe Shockley

Yes, Bernie. This is Joe Shockley. I'll comment on that.

Certainly, we believe our loan loss reserve at year-end is appropriate. We focus on a methodology and we also look at impaired loans on a loan-by-loan basis. However, I think that– to the extent that we're successful in having lower levels of charge-offs and losses going forward, that that would likely reduce our historical percentage, and that would potentially indicate that we might not need a level of 2.93%.

However, we hope that– to have loan growth during the year. And if we're fortunate enough, then maybe it will all kind of balance out throughout the year.

I do know that we're working on our nonperforming loans particularly and we're hopeful that at some point in time during the year, we'll have additional recoveries. But to actually predict and expect when that might occur– but we've got our fingers crossed that we will likely have some additional recoveries, hopefully within the first six months of the year. But, again, only time will tell.

Bernard Horn – Polaris Capital Management, Inc.

Anything specific that– through– of the potential nonperformings up in Texas?

Joe Shockley

Well, the schedule that you may be looking at– it shows our– I'm trying to think which one.

Bernard Horn – Polaris Capital Management, Inc.

Before the end of this press release.

Joe Shockley

One of the schedule shows that the loans is where they're being managed. There's a slide behind that that shows where the nonperforming loans are by geography. And the largest amount is in Arizona.

However, those Arizona loans are being managed by our Texas. So, I don't want to misconceive what we're trying to portray there.

Bernard Horn – Polaris Capital Management, Inc.

Okay. So, the...

Joe Shockley

I think on slide 18. Is it?

Bernard Horn – Polaris Capital Management, Inc.

Yes, the potential– okay. I was looking at the press release. I wasn't looking at the slides. Sorry about that.

Joe Shockley

Okay.

Bernard Horn – Polaris Capital Management, Inc.

And I...

Mark Funke

Bernie, this is Mark. And terms of the potential problem loans and I mentioned this early on in the conference and you may not have been there.

But philosophically, I am very much a proponent of early identifications of problems; know your weaknesses, get after immediately, and trying get an action place in place.

It's going to drive up and keep our non– keep our potential problem loans at a high level simply because we're going to work them harder than perhaps they might have been worked in the past.

So, I'm all in favor of early identification, quick action plans. And I believe in the long run, that will reduce the end result of higher charge-offs and the higher nonperformings.

So, that's the philosophy we're going to take. It may continue to keep it– potential problems at a higher level. But hopefully, over time, you'll see a much better charge-off ratio and a much lower non-accrual situation.

Joe Shockley

Yes. And Bernie this is Joe again. I went back and looked at the table I think you're referring to; a potential problem loan increase in Texas.

Bernard Horn – Polaris Capital Management, Inc.

Yes.

Joe Shockley

Yes. That was a healthcare-related loan. And that borrower has, I think, new management into that. And I think we've seen some improvement over the last 90 days in that particular credit, in terms of– improvement in terms of occupancy, how it's managed and revenues.

Bernard Horn – Polaris Capital Management, Inc.

Okay. Well, thanks very much, and thanks very much for reinstating the dividend.

Joe Shockley

You're welcome.

Mark Funke

Thank you.

Bernard Horn – Polaris Capital Management, Inc.

Yes.

Operator

Our next question is from Brian Hagler with Kennedy Capital. Go ahead, please.

Brian Hagler – Kennedy Capital

Good morning, guys.

Joe Shockley

Good morning.

Mark Funke

Good morning, Brian.

Brian Hagler – Kennedy Capital

Congrats on the progress. And 2013– I know is a lot of heavy lifting.

Joe Shockley

Thank you.

Brian Hagler – Kennedy Capital

Appreciate the color on M&A. It seems like leveraging the capital is obviously one of the priorities going forward. I think we kind of covered that.

I just had a follow-up question on your efficiency program. I guess, Mark, can you– or Joe– give us any color on, you know, where you think a– even if it's arranged– a normalized efficiency ratio for your company, you know, what that might look like? And I realize it may take higher short-term rates to help the revenue side of that equation. But any thoughts there from...

Joe Shockley

Yes.

Brian Hagler – Kennedy Capital

It looks like you ran basically the low 70s all year.

Joe Shockley

Right. Our goal, Brian, would certainly to be– at somewhere below 60%, based upon our model. Certainly, it'll take improvement both in terms of the expense side and also the revenue side. The consulted, as Mark noted, is– we're working with on looking for ways to improve noninterest income in certain areas. At the same time, we're looking to work how we could improve our work processes and become more efficient and how we're delivering services to customers.

But we believe that there'll be improvements throughout the year, depending on our loan growth and other revenues that might come from that. But I'd say with over the next two to three years, we would hope to get that down in the mid 60s and hold on down to– at 60% or slightly below.

Brian Hagler – Kennedy Capital

Great. Appreciate the color. Thanks.

Joe Shockley

You're welcome.

Operator

This concludes our question-and-answer session. I would like to turn the conference over to Mr. Mark Funke for any closing remarks.

Mark Funke

Well, first of all, I want to thank everybody who called in today. I appreciate the– a number of the folks that our investors in the company as well as you that oversee the company from the standpoint and write reports on us and that sort of thing. And we really do appreciate your interest and the loyalty that you showed to our brand and to our company. We're going to continue to work hard in 2014 to make everybody here proud and hopefully you, on the line as well. We look forward to further conversations with you next quarter.

And I also want to reiterate, we have a great group of employees that have been working really hard this year to build the momentum that I think we have in the company today. And hopefully, with their help we will move forward in 2014 and have good results each quarters as we go forward.

So, thank you very much and appreciate your interest in our company.

Operator

The conference has now concluded. Thank you for attending today's presentation and please disconnect your lines.

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