Good morning and welcome to the Southwest Bancorp Incorporated Second 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. Please go ahead.
Thank you and good morning, everyone. Welcome to the Southwest Bancorp Inc. second quarter 2014 earnings call. At this time, if you’re logged into our webcast, please refer to the slide presentation available online, including our Safe Harbor statement on Slide 2. For those joining by phone, please note that the Safe Harbor statement and the presentation are available on our Web site, oksb.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.
Thank you, Rusty, and good morning everyone. I am here with Joe Shockley, our CFO and Rusty already introduced us. So I'm going to provide you some brief highlights on our second quarter numbers and then Joe will cover the results in little bit more detail and I’ll have some closing comments at the end before we go into the Q&A.
If you have the PowerPoint presentation available to you, I'm going to start on Slide 3 and begin to walk through that. I'm pleased to report that our Company reported net income of $6.2 million for the second quarter or $0.31 a share, which included good loan growth and continued improved in credit quality.
And the second quarter of 2014 was another very good and busy quarter for our bank. It also marks several onetime events had positively impacted our financial results and as I have said in the past we’ve been focused on a number of objectives that will improve the long-term opportunities for our Company. I'm happy to report today that the previously announced branch sales were completed during the second quarter and we're reporting a pretax gain on the sale of $4.4 million. The branch sale included $27.9 million in loans and $130.6 million in deposits that were sold in that transaction.
The transaction was initiated to concentrate our Company’s operations in certain geographic markets and to focus our managements’ attention where we believe we have the most opportunity for future growth and while the three branches that were sold were in Kansas, we remain committed to the Kansas market and to the Hutchinson, South Hutchinson and Wichita markets, where we have a solid presence.
Despite the sales of the branches and associated loans and deposits, I'm pleased to report that we continued growth in our loan portfolio. This was the second consecutive quarter reflecting growth in the portfolio which has not been accomplished since the first quarter of 2009. If you adjust for the sales of branches, loans increased by $59.5 million, excluding the $27.9 million in loans that were sold. The quarter’s loan growth came in our C&I and our energy portfolios, which advanced about $33.8 million while year-to-date our largest loan growth has been in the Oklahoma market, the second quarter reflected strong growth in our Texas operations, which made up $36 million of the adjusted $59.5 million in overall portfolio loan growth.
And I'm pleased that the bankers we’ve added in Texas are beginning to produce growth in our portfolio. As we've discussed, it takes some time for new bankers to begin producing positive results and we’re beginning to see good trends evolving in our company. We are also seeing the value of newly hired bankers as they learn the philosophy and the credit culture and they are able to tell our new clients about our capabilities and our service level. We are also pleased that we continue to benefit from the experience and strong relationships held by our tenured bankers in our markets as well. Markets like, Stillwater, Oklahoma represents strongholds for our Company, where we have excellent long-term loan and deposit relationships.
We've also grown two other aspects of our portfolio which I think provide a level of confidence regarding future loan growth. Loan commitments approve for projects to fund in the future now approximate a $145 million. This is up from $84.2 million at 6.30 of ’13 and we’ve also registered an increase in our revolving line of credit commitments from $224 million at June last year to $310 million at June of this year and our working pipeline remains strong, averaging over $300 million for the quarter.
As we’ve stated in the past, we continue to be focused on improving the risk profile of our Company and building a foundation for future growth. During the second quarter, we experienced improvement in key credit risk of metrics. Nonperforming loans remained stable during the quarter while potential problem loans reduced by $7.6 million or 8%.
Our loans loss reserve methodology did require a release of $400,000 from our reserve. While we did make this release, the loan loss reserves still remains equal to 2.46% of our portfolio and over 200% of our nonperforming loans. We incurred net charge-offs with the quarter of $1.4 million or 45 basis points.
Subsequent to the end of the second quarter and not included in our second quarter results was a successful transaction involving a longstanding problem credit. This transaction resulted in a $1.3 million recovery of a prior period loss and the payoff of the related $6.8 million restructured potential problem loan. Now our third quarter results will incorporate this successful transaction in those numbers.
Overall, the portfolio continues to show positive signs of improvement and we’re seeing good momentum as we work through the remaining problem assets. In the last six months, we’ve seen the reduction of $15.6 million in our potential problem loans and $3.4 million or 17% in our nonperforming loans. Based on various activities and progress that we’re making on individual deals and transactions and strong emphasis being placed by management on these credits, I think I anticipate that we will continue to see improvement in credit quality in the coming quarters.
As I mentioned previously, we -- along with our current employees, a key to our success is going to be continuing to add talented people to our organization. We have added several bankers in key markets over the last quarter including Wichita, San Antonio, and Dallas. We'll continue to add talented people as situations and opportunities warrant. We have also added a new Chief Credit Officer into our support for our Texas market and she will be handling the growth that we have in the Texas market, along with Brent Bates who serves as our Chief Credit Officer for our Company.
We have also added new positions in our Human Resources area, dealing with compensation and recruiting to assist our new HR Director and we’ll continue to assess and improve and add talent to the organization as is warranted by our growth and opportunities that we see
Our capital ratios remain strong, with tier one weighted capital exceeding 20% and our tangible common equity to tangible assets, it now stands at 14.3%. And the strong capital position provides us with the resources and the flexibility to grow the Company in the future as we continue to look for opportunities to growth our revenue base. I'm also pleased to report that we’re announcing a dividend for the second quarter and we’ll be paying a dividend on common stock equal to $0.04 per share payable on August 15th to shareholders of record as of August 1, 2014.
We're now going to turnover to Joe Shockley, who will add some details on our financials and discuss the sale of the three branches which we have previously disclosed and then I'll close out with some comments at the ends. So I'll turn it over to Joe.
Thank you, Mark. Good morning everyone. First of all, let me mention to you that you may notice in our earnings release that we no longer separate covered assets and non-covered assets on our balance sheet. This is because the nonresidential loss share agreement has ended its five-year term and we only have a small amount of covered loans remaining under the residential loss share agreement. So we've decided to simplify reporting by reporting all of the balance sheet items together. This is especially important in our slides and tables that I will go over in the slide deck.
For example, where we very previously excluded covered non-performing loans from this slide on non-performing loans, we are now including all non-performing loans in our tables. For tables and charts that include prior periods, we are combining these amounts in those periods for the comparisons around a level playing field.
Although, if you are comparing current financial disclosures compared to prior disclosures, you want to keep this in mind and this change in reporting style. Starting on Slide No. 5 I'll comment on some of the financial highlights. Total assets for the company ended up $1.9 billion at quarter end after the sale of the three Kansas branches. The Kansas branches were conducted with two different banks with the sale of approximately $28 million in net loans and a $131 million in deposits previously mentioned.
Our total loans at June 30 were $1.35 billion, an increase of almost $32 million over the first quarter adjusting for the loans sold in the branch sale but adjusting for that, the total growth as Mark mentioned was $59.5 million. Total deposits for quarter end were almost $1.5 billion and stockholder’s equity was $271 million. Tangible common equity was 14.3% and our Tier 1 risk based capital 21%. So intangible book value at June 30, is $13.65 per share.
Also as Mark mentioned, our net income for the second quarter was $6.2 million and $0.31 per common share, up from 4.4 million or $0.22 per common share for the same period a year ago. And that’s up from $3.7 million or $0.19 for the previous quarter. Our net income for the first six months was $9.8 million or $0.50 per common share up from a year ago for the same period of $6.8 million or $0.34 per common share.
On Page 6, I will walk through some of the items on the income statement. Our net interest income was $16.6 million. Included in this quarter’s interest income is approximately $751,000 of accelerated discount on performing loans sold with the Kansas branches. Many of those loans were performing loans and still part of the loss share -- under the loss share agreement. And so we had some acceleration in discount of about $750,000.
While the reported net interest margin was 3.5%, if you adjust for that accelerated discount, we're about 3.34% on a normalized basis. Also noting that we had strong loan growth in the quarter, but a lot of that loan growth took place in the later part of the quarter. As I mentioned at the end of the quarter, loans were $1.352 billion compared to average for the quarter of $1.330 billion.
So, we were $21 million higher at the quarter end over the average for the quarter. The negative provision for loan losses for the second quarter was $355,000. As we look at the loan growth during the quarter, that absorbed approximately $800,000 of our loan loss reserve. As Mark noted, the loan loss reserve is 2.46% of total loans.
Looking at non-interest income for the quarter, reported at $8.2 million, again this includes the net gain on the sale of the branches with this $4.4 million pre-tax. Netted against that gain a write-off of our core deposit intangibles of $1.1 million, approximately $600,000 in expenses and about $300,000 in other write-offs such as signage and miscellaneous assets and so forth. Also included in our second quarter non-interest income, we had a security gain of $629,000. This gain was the sale of stock that was collateral on a previously charged off loan.
Adjusting for the one-time items, non-interest income was in the range of $3.2 million. Looking at non-interest expense of $15.3 million, the second quarter included also a couple of one-time items. Included in the personnel cost is a restructuring and benefits expense of approximately $450,000. In other expense we have litigation, contingencies on a couple of legal items that we set aside, about $275,000 and OREO expense was higher for the month as we wrote down some other real estate related to the loss share assets and that additional write down was about $320,000 on non-single family items related to assets under the agreement.
Also as disclosed on Page 6, our pre-tax pre-provision reports $9.5 million. However, normalizing for the income and expense items that I just walked through on the one-time, we're at approximately $4.9 million, which is fairly consistent with the first quarter. On Page 7, as we discussed, loans accrued to $1.35 billion, almost rounded to $1.4 billion on the schedule. The loan growth of $59.5 million adjusted for the loan sales came from Texas of about little over $36 million, Oklahoma at $19 million and Kansas $2.4 million and mortgage and other operations about $1.7 million.
Most of the growth came in June as I previously mentioned. So growth from those earnings will not be really seen until the third quarter. As we continue to see growth in the healthcare sector, as Mark mentioned the C&I and the energy and also a little bit of growth in the commercial real estate. As you can see on the charts to the right, Oklahoma represents 57% of the portfolio with Texas 30% and Kansas just 11% of our total loans.
On Page 8, the nonperforming loans at June 30 were $16.5 million, are down $32.6 million over a year ago and yet pretty stable from quarter-to-quarter. On Slide 9, the nonperforming loans by collateral location shows that $6.9 million are Oklahoma, $5.4 million in Arizona and $3.1 million in Kansas.
Walking forward to Page 10 or Slide No. 10 or other real estate of $4.3 million, a slight decrease compared to previous quarter and as I mentioned, we took some additional right downs on some of those loss share and other real estate assets. Looking on Slide 11, our nonperforming loans are down $16.1 million from a year ago and again stable pretty much from quarter-to-quarter, no significant changes.
One page 12, the total nonperforming assets are down $34.4 million a year ago to $20.7 million and that’s a decrease of $14 million. So the loan loss reserve as reflected on Page 18 to total nonperforming loans plus potential problem loans remains strong at almost 33% and if you look across that trend line, you can see that that ratio has been in the 30% range plus or minus a few percent since 2012.
On Page 14, you can see the improved risk profile of our nonperforming assets to total assets over the past three years. Potential problem loans have continued to decline and as mentioned, the nonperforming assets have stabilized over the last couple of quarters. We continue to place a high priority on identifying and proactively addressing non-performing assets.
On Page 15, the bank continues to have a good core deposit franchise with 29% for our deposits and non-interest bearing deposits and another 29% in money market accounts. As previously mentioned, last quarter we’ve developed a deposit strategy to grow deposits to help fund our loan growth in the quarters ahead. As also mentioned, we do not expect our deposit cost, although we saw a slight improvement in the quarter to continue to climb as we will adjust our rates on selected deposit products to be more competitive.
Looking at Page 16, as again I mentioned, we don’t expect our deposit cost to decline. We’ll be more competitive to retain and attract deposit relationships. Also as previously noted, our reported net interest margin is 3.5 but normalized and about 3.34, adjusting for the discount accretion.
On Page 17, our non-interest income again adjusted for the gains in the sale of branches and security gains is pretty much normalized at about $3.2 million, which is slightly higher than the two previous quarters. We saw some improvement on the gain on sale of mortgages during the second quarter. We had little stronger activity in that area.
On Page 18, our non-interest expense of $15.3 million had some one-time items that I previously mentioned of approximately $1.1 million and we continue to work with our consultants on our efficiency study and we will make further implementations in the third and fourth quarters of this year. On Page 19, as previously noted our capital remains strong and increased further due to the net income reported in the second quarter that included certainly a nice gain on the sale of the branches. So we’re pleased to report that.
At this time I’ll turn it back over to Mark for some final comments.
Thanks Joe. I’m going to start on Page 20 and I'm going to focus on our continuation of our 2014 priorities. We're going to continue to be very diligent about credit quality and improving risk profile of our company and strengthening our balance sheet. We believe a strong balance sheet is good for our shareholders and gives confidence to our customers and it also helps our employees reach their career goals. We continue to make good progress during the second quarter and I’m confident that we’re going to continue that trend during the remainder of 2014. We experienced good loan growth throughout the second quarter and until this year this bank has been void of loan growth since 2009.
Our consistent focused effort to acquiring new talent and to providing our tenured bankers with clear direction and objectives is beginning the payoff as we’re seeing consistency in the loan growth and in the pipeline expansion. We recognize that's it's important to add earning assets and to grow our revenue base. We will maintain strong credit standards and a respectable level of constraint as we grow the portfolio with solid customer relationships and we’re going to continue to be aggressive as we recognize problems and deal with those as they come about.
We recognize the cycles will continue to occur and we will be prudent with our credit extensions and overall risk management. That being said our banking operations are located in dynamic, geographic and economic regions including some of the fastest growing and some of the most stable economic markets in the U.S.
We are aggressively pursuing growth opportunities in commercial banking and treasury services and we’re going to continue to expand our reach in the Energy sector, General C&I business and the Healthcare business segments. We believe banking is still a personal business delivered by bankers who know their customers and their markets. Our bankers are focused on aggressive calling efforts and responsive solution based services. We'll continue to focus on recruiting talented bankers and teams that wish to be part of a dynamic organization, serving customers in that fashion. We have strong core of employees that understand our culture and our customer base and when combined with new talent, we are creating an even stronger company.
We continue to work on improvements in our operating efficiencies. As we’ve mentioned in the past, this is an important aspect of our 2014 plan. This process we kicked off and talked about last time was started in February of 2014 and we are beginning to identify opportunities for improvements in operating efficiencies internally. This is a long process and we’re beginning to see some positive results internally but the expected financial results will not be notable until the third and the fourth quarters of this year.
This effort, combined with the efforts to strengthen our revenues is expected to drive our efficiency ratio down in the future years. Most importantly, we are focusing on creating a culture of continuous improvement in service quality and efficiency, which will benefit our Company and our clients for many years to come.
Strengthening our fee-based business products and our service delivery in the mortgage and consumer and treasury functions, those are keys to our success and our revenue growth and we’re actively pursuing these opportunities. I mentioned last quarter that we named a new manager for our mortgage banking operation and for our consumer banking operation to increase focus in these areas and these individuals are assessing and making appropriate changes in enhancement in these groups now for the long-term benefit of our Company and our clients.
We consolidated the management of treasury services under commercial banking unit in the first quarter to better align the sales efforts of our commercial and our treasury bankers and we're seeing an improvement in our sales pipeline and in opportunities as a result. The sales cycle in treasury is long and must be enhanced with consistent calling efforts and good products and I believe we put both of those in place and that it will serve our clients and provide a better platform for revenue growth.
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. This will allow us to complement the organic growth we're achieving with more dynamic market growth. We will diligently seek out and develop relationships with other banking and financial service organizations that will hopefully lead to those valuable partnerships. Additionally, our focus will be to continue on developing and improving our core business so that we can improve our client’s experience while building profitable organic growth. All of this is being done to drive a culture that produces consistent, conservative and sustainable earnings growth, which benefits our clients, our employees and our shareholders.
And that concludes our formal part of our call today and we would be happy to take any questions that you have for us.
We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Brad Milsaps from Sandler O'Neill. Please go ahead.
Brad Milsaps - Sandler O'Neill
Hey Mark and Joe, I know you guys have talked about the third party consultant you brought in to really look at all aspects of the operating structure of the bank. Just curious if you can give any update there on maybe some numbers we could wrap our arms around in terms of improvement you might see in the second half of the year in terms of fee income and expenses?
I probably won’t comment directly on any numbers but I can tell you that we’ve made some pretty organic changes in the structure of our consumer bank very recently. We’ve also made changes in our mortgage operations as well. We’ve looked overall at a number of processes internally that include the way we process loans, the way we look at our analysis process, commitment reports, the way we deal with credit internally and we're making a number of those changes. I would hesitate to put a direct number on that as we see these things fall into place. But we are making some pretty strong changes internally in our operations and structure and our organizational chart.
Yes, Brad I would also say that as we begin to look at the implementation of some of these recommendations, we're really trying to drill down in terms of what the total impact might be because some may take a little bit of time to fully implement it. So to say, we’re going to get this much in the third quarter and this much in the fourth quarter, we’re not quite there yet although we know that there will be some improvements. But part of them might be a little progressive as we implement some of these different recommendations which are quite a few.
Yes, I would also say we’re looking not just on the expense side, but revenue enhancements, we’re looking at some putting in place some changes in service charge routines, the way we collect fee income, timing of the fee income collection, looking at waivers that we’ve been making historically and things of that nature. So this is not just an expense efficiency look. This is also a revenue look that goes pretty deep in the organization. I think we're making a lot of internal progress and we're implementing some things. I just hesitate to put a number on it because those things take some time to get implemented and moving and some of those charges are quarterly charges that won’t really see an impact up until into the third, into the fourth quarter.
Brad Milsaps - Sandler O'Neill
And Joe, given the larger of the two branch sales just completed it looks like at the very end of the quarter, is your thought it's still pretty much a neutral impact to the income statement in terms of fees and expenses? We won’t see any kind of big pickup either way in the third quarter?
Right, as far as net, obviously there will some improvement on the expense side probably, but it's pretty neutral, the net impact for the quarter. You got revenues. We sold some loans. We got some noninterest income from those areas, but when you look at that it’s pretty much offset. So it was probably running about $400,000 a quarter in expense, maybe a little bit more than that as far as income versus expenses.
Brad Milsaps - Sandler O'Neill
Okay and then just final question. Mark as you think about your capital, I know, you guys have discussed M&A in the past where banks are selling in your market, how are you guys thinking about a share buyback as this point, given where your stock is, kind of vis-à-vis what M&A opportunities may or may not be out there?
Share buyback is still certainly on the table for our discussion internally with our Board, but we’re really focused on preserving our capital in the event that we have opportunity to acquire assets, which we think could be longer term a better use in terms of revenue production for our company. So, it’s certainly on the table and in discussions, but we'd like to preserve capital for other uses that could produce revenue.
Our next question comes from Brady Gailey from KBW. Please go ahead.
Brady Gailey - KBW
Just following up on Brad’s last question about the excess capital and possible M&A, now are you in a position where you’d be comfortable exploring on M&A opportunity as of today? Or do you think that you’re still ironing some stuff out internally that that's really more of a ’15, ‘16 opportunity?
Well, I would say that we put a lot of things in place over the course of the last 18 months to prepare the Company for potential M&A activity. The sale of the branches was certainly one of those things that we want to accomplish, the rebranding of the company, the payoff of the troughs. A lot of the things that we’ve done in the course of the last 18 months are preparing to the Company for that. We're -- as we've completed the sale of those branches, we’ve been able operationally to do that very successfully.
So I think the Company's positioned today where we would be comfortable, given the right size, right geographic market and the right fit. Strategically, we would be very comfortable entering into a transaction for our company. What we've said all along is that it really does have to make sense for us. It has to make sense strategically. It has to add value. And so we’re not just looking to buy assets. We definitely want to find ways to improve. As I've said internally in the Company, any acquisition needs to raise our IQ and make us better and that’s what we'll look for in the long term. But I think the Company is certainly getting close to being prepared to do that and I think we’ve prepared effectively pretty well so far, Joe.
Yes, as Mark basically described, we’re looking for a strategic partner that certainly adds value certainly to an expansion in the metropolitan area that would expand the market niche for us and/or product niche. So, yes. And we visited with a number of bankers over time for them to kind of get to know us and we get to know them and understand the improvements that we made within our Company and kind of talk different cultures and velocity over time to -- if somebody decides do something, hopefully we'll be considered and get a call to say, hey we’d like to sit down and visit with you et cetera.
Yes, and that being said Brady, we also recognize where our share price is relative on a P/E basis and we better be cautious about dilution of our existing shareholder base and so it has to be a transaction that really makes sense for us to do that. But operationally I think we’re getting really close to being in that position.
Brady Gailey - KBW
Okay, then on the margin, you actually back out the accelerated discount recapture, that’s around 334. I would expect with the loan growth you all are putting on and kind of the remix more in the loans, that your margin would have a slightly upward bias kind of from here on out. Is that the right way to think about that?
We would expect that to happen, yes.
Our next question comes from John Rodis from FIG Partners. Please go ahead.
John Rodis - FIG Partners
Hey, Joe, maybe just a quick follow-up for you. When you talked about operating expenses, you mentioned some onetime items. Could you just go over those really quickly again?
Sure, in the personnel cost that we had about $450,000 of restructuring/benefits expense, we think that there may be some things there as we continue to implement some of the strategies. Secondly, we got -- had a couple of litigation items as we sat down and looked at some possible exposure on those. We felt appropriate to set aside about $275,000 on a couple of items. It’s not our intent to pay anything but we have to be prudent about some of the items and how we deal with them. And then thirdly, as I mentioned our OREO expense was up for the quarter. And with the respect to the wind down of the FDIC loss share agreement, we made some adjustments on the VAT carrying value of some other real estate stay and those write downs on a couple of properties were totaling about $320,000.
John Rodis - FIG Partners
Okay. So, I think in total you said that was about 1.01 million. It looks like that's [indiscernible].
Right, and again also for the quarter and yet we're going to have this from time to time but dealing with a couple of property problem credits, we had higher legal expenses, we had a little bit of consulting expenses. So that’s probably in the neighborhood of pre-tax $200,000. But we're going to have some pluses and minuses from time to time. But when I looked at that I thought, hopefully it will be quite at that level.
John Rodis - FIG Partners
Okay, and then the just to reiterate what you said, the $320,000 in other real estate write down, did you said that was primarily related to the covered portfolio?
John Rodis - FIG Partners
What was covered I guess?
That’s correct, yeah.
John Rodis - FIG Partners
Okay, thanks Joe. And then Mark, maybe just a quick question for you on the loan growth. Obviously you've got two consecutive quarters now of growth. You've got all the new lenders. In this quarter if you back out the impact of the loan sales, it looks like the growth was around 4% - 4.5% linked quarter. Do you think you can sort of continue at this pace and I realize it’s going to be lumpy and stuff but can you just comment on that?
Yes, I’m encouraged by the production level that we are seeing across our footprint. I would tell you certainly that we still have a large number of problem loans on the books, $84 million plus in potential problem loans that we’re trying to push out. So we certainly would expect to see continued new assets going on the books but at the same time, we've got our objectives on shoving some stuff out too. So, that could offset some of that growth in the future but I would tell you I’m very encouraged by the new bankers we've had. I mentioned that we've added new bankers. We added a new general C&I banker in San Antonio and one in Dallas. We also added one in Wichita over the last quarter and I believe that we'll start seeing some production there as well. So I think we'll continue to see the same level of loans going on the books but we also have our sights on moving some stuff out as well.
John Rodis - FIG Partners
Okay, and then I think in your prepared remarks you've mentioned that within the C&I portfolio, it sounds like most of that growth was in the energy sector, is that correct?
Well, we had good growth in the energy sector for the quarter and that was driven -- we've got two guys now on the payroll that our good energy bankers they are beginning to get their footprint here in our markets and so yes, we had nice growth in the energy sector in the second quarter and I’m hopeful we'll continue to see that as we continue to promote aggressive calling in that market.
Our next question is from Matt Olney from Stephens. Please go ahead.
Matt Olney - Stephens
I wanted to go back to the top of the stock buyback. Can you remind us, is there currently an authorization in place today?
No, that expired and so given the other priorities that the board had set, that has not been put back in place at this time yet.
Matt Olney - Stephens
And given Mark, your comments about preserving capital for M&A, I hear you on that. That makes sense. But is there a price where a buyback does make more sense in M&A?
Actually we're having that discussion with the board at this time and just kind evaluating what those parameters need to be but we think there could be.
Matt Olney - Stephens
Okay, and my other questions have already been addressed. So, thank you so much.
Our next question is from Gary Tenner from D.A. Davidson. Please go ahead.
Gary Tenner - D.A. Davidson
I just had a follow up question again on M&A, most of my other questions have been answered. As you think about kind of selling the I guess social aspects of doing your transaction, given your relative valuations with other banks and you've talked to some folks preliminarily at least, what’s the sense on your end of the willingness of a bank maybe take less on the front end of a deal with expectations that the buying company has a nice growth opportunity down the road?
Well, I think you mentioned it a little bit at the beginning, the social issues are important. I think the banks that we're talking to are obviously for the most part privately held organizations, most of which have some family or close ties in terms of their ownership group and they probably want to preserve their management team or have a slot for their management team and if they see that they can add value to our Company, then that certainly gives them a longer term track record as opposed to being acquired by someone much larger who may do away with that management team. So there is some value from that standpoint.
I also think that people recognize that perhaps our stock maybe undervalued and has an opportunity for growth in the future as the Company continues to show some improvement. So, you could certainly take a stock that’s already trading at 2 or 2.5 times and there may not be as much upside, could be but maybe not, but at least with ours, there is a perception perhaps by some that we could see expanded stock valuation in the future as continue to improve.
So I think a combination of the social issues and certainly the potential upside of our organization as we continue to grow and improve are the two aspects that seem to have people more interested in us maybe than they have been in the past. And the management team frankly, I think the management team where we’ve assembled is a good team that people view as being progressive and wanting do the right things and set the right standard. So those things all combined together hopefully will make us an attractive suitor for someone.
Yes, I would just echo what Mark said and add that certainly our capital strength, our capacity, the ability to leverage operations obviously I think is attractive to some organizations that want to continue to be a viable component of another organization. And we bring the social issues and the cultural issues together, I think that there are some opportunities, could some opportunities for us that really have to leverage that and so we’ll see what happens overtime.
Gary Tenner - D.A. Davidson
Okay thanks for that color. And then just on the loan growth front, it sounds like if I heard you correctly that the pace of pushing out problem loans is really the wildcard in whether the full year loan growth could go from the high single digit kind of level that you’ve stressed in the past something over that into the low teens. Is that fair?
Yes, I think that’s very fair. I think the ability for us to continue to have credit on is going to be good but we do have certainly credits that we want to move out so strengthen the balance sheet and improve credit quality and we’ll continue to do that. So it is a wildcard and those are large transactions that could occur or could not and they will have a definite impact on our loan growth in the future.
I think an example of that as what we disclosed. Just shortly the effort quarter end, we had a payoff of $6.9 million potential problem loan and yet a recovery of $1.3 million. So that just kind of demonstrates really the proactive nature of which we’re trying to move out these potential problem credits and problem credits.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Funke for any closing remarks.
Well, first of all thank you all that have joined us on the phone and your continued interest in our Company and that you follow us and pay attention at what we’re doing so I appreciate that very much. I also want to thank our employees for their continued hard work and commitment to serving our clients and helping build the great company and we certainly look forward to talking everyone again next quarter. So thank you all very much.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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