Southwest Bancorp's (OKSB) CEO Mark Funke on Q4 2015 Results - Earnings Call Transcript

| About: Southwest Bancorp, (OKSB)

Southwest Bancorp Incorporated (NASDAQ:OKSB)

Q4 2015 Earnings Conference Call

January 20, 2016 11:00 AM ET

Executives

Rusty LaForge - EVP and General Counsel

Mark Funke - President and CEO

Joe Shockley - EVP and CFO

Analysts

Brady Gailey - KBW

Matt Olney - Stephens

John Rodis - FIG Partners

Gary Tenner - D.A. Davidson

Bernard Horn - Polaris Capital

Daniel Cardenas - Raymond James

Joe Fenech - Hovde Group

Operator

Good morning, and welcome to the Southwest Bancorp’s Fourth Quarter 2015 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, General Counsel. Please go ahead sir.

Rusty LaForge

Thank you and good morning, everyone. Welcome to the Southwest Bancorp Inc.’s fourth quarter 2015 earnings call. At this time, if you are 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 presentation are available on our Web site www.oksb.com.

I am joined today by Southwest President and CEO, Mark Funke and CFO, Joe Shockley. After the presentation, we’ll be happy to answer and 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 CEO of Southwest Bancorp and as Rusty mentioned, Joe Shockley is here with me and Rusty of course opened our call and he serves as our General Counsel. I want to thank each of you for joining us today and for your continued interest in our Company. I’m pleased to report and to announce that Southwest Bancorp reported fourth quarter earnings of $4.6 million or $0.23 per fully diluted share and net income for the year of $17.4 million or $0.90 per fully diluted share for 2015. Now this compares to $21 million or $1.07 per share in 2014, but I would remind you that 2014 earnings were enhanced with a pre-tax gain on branch sales of $4.4 million and an additional $3 million in loan loss reserve releases. Pre-tax pre-provision income was $23.6 million in 2015, compared to $22.6 million in 2014 when excluding the benefit of the branch sale gain.

Now before we get into the details of the fourth quarter, I want to give you a perspective on our overall year. As I see it and address some of the issues that we think are important. Hopefully, each of you have access for our PowerPoint presentation and I’ll begin by going through some of the issues outlined on Page 3.

I have already mentioned our successful full year earnings report, so I won’t discuss that. But we did complete the acquisition of First Commercial Bank adding five branches in Oklahoma City and Foreign Colorado. We successfully closed and integrated this transaction in early October, over the Converse Day weekend. We also identified and acquired talent throughout the organization during the year, adding new market leadership in Denver, Austin and in Tulsa. We also recruited a new Director of Consumer Banking and added new talent in our operations and technology groups.

We announced and implemented a significant restructuring in our Commercial Banking operation in the fourth quarter, which will improve our focus on our market growth, customer responsiveness and efficiency. We continue to have positive credit results recording four consecutive quarters of net recoveries totaling $1.2 million for the year and we maintain high credit quality standards, while accelerating loan growth which has now continued for eight consecutive quarters. Our core loan growth for 2015 was about 13%.

We’ve continued our focus on operating efficiencies achieving an efficiency ratio of 68.3% for the year, when you exclude the acquisition deal cost. Now this compares favorably with the 72% we recorded in 2014, if you exclude the branch sales gains. We increased our investment in the mortgage operating systems that we talked about earlier and we’ve added talent and delivery channels in Texas and in Colorado. We’ve positioned the Company to continue producing consistent, conservative and sustainable earnings and revenue growth into the future. 2015 marks just the third full year of operations for this management team and Joe and I proudly report on the performance of our team.

One Page 4, we’ve highlighted the financial performance for the fourth quarter. Because of the acquisition many of our numbers reflect large changes resulting from the addition of First Commercial Bank, and we’ve tried to isolate and carefully explain the results for comparative purposes and Joe will get into more details as he goes through his part of the presentation.

In addition to the loan growth, we’ve recorded -- during the acquisition our core loan growth continued in the fourth quarter adding $37 million in new fundings to the portfolio or 9.6% annualized and core loan growth for the year was a respectable 13%. We benefited from a slight increase in our net interest margin to 3.48% from 3.34%. And well our credit numbers may have a period that shows some deterioration in the fourth quarter this is primarily the result of adding-in the acquired loans into our totals. The acquisition added $11.4 million to our potential problem loans, $20.7 million to our criticized loans and $4.1 million to our non-performing loan category. Without those additions, we would have shown continuation of consistent improvement in our credit quality.

Our great confidence in our ability to manage credit problems as we have successfully demonstrated that over the last three years, as evidence we recorded four consecutive quarters of recoveries in 2015 totaling $1.2 million. Our loan loss reserve stands at 1.47% of total loans at year-end when taking into account the purchase discount on acquired loans the reserve would be 1.96% of gross loans. Our consistently applied methodology did require us to release approximately $600,000 from our loan loss reserve this quarter.

I am continuing on Page 5 and we point out our net interest income showed a continued improvement as our mortgage operations in Texas begin to show some positive production. We also had a good improvement in deposit service charges and we were able to facilitate additional interest rate protection swaps for our clients in the fourth quarter.

Our capital ratios remain well above regulatory standards giving us protection against the potential of an extended economic slowdown in our region, as well as positioning us to take advantage of growth and acquisition opportunities in the future. Excluding deal costs our efficiency ratio was 66.9% for the quarter, an improvement from both the last quarter, as well as the fourth quarter of 2014. And our Board also approved yesterday an increase in our common dividend from $0.06 to $0.08 per share payable on February 12, for shareholders of record as of January 29, 2016.

Now I know each of you are interested in our exposure to the energy sector, so I’ll spend the few minutes here at the frontend of the conference call addressing those issues. Few expected the energy pricing to fall to this level this quickly and I think few are expecting or predicting a rapid turnaround. I am pleased that our energy portfolio was reasonably well positioned with good borrowers and we have a fairly limited exposure directly to the energy sector at this time. We have positioned ourselves for a continued low price point. We have been very cautious about new direct energy exposure and did not add any new direct energy exposure in 2015, except the one deal which was less than $1 million.

On Page 6, we’ve outlined the key highlights of our energy portfolio that I’ll go through with you. As of year-end 2015, our total direct committed energy exposure was $96.7 million with a funded balance of 63.4 million. This is down from 107.9 million and 68.6 million respectively at the end of the third quarter, so funded balance has actually decreased $5.2 million since the last quarter. The energy sector now represents only 3.6% of our total funded energy portfolio, or if you look at it another way 2.1% of our total funded portfolio -- our credit portfolio is reserve base and 1.5% is related to the service sector.

We have four credits, two service and two reserve base credits that are criticized totaling $9.1 million or 14.3% of this portfolio segment. One of those credits totaling $5.5 million was previously downgraded into the third quarter to non-accrual and it does have a specific reserve that we placed on it in the third quarter of $1.2 million and that’s remained unchanged. Including the specific allocation the loss reserve allocated to our total funded energy portfolio sector is 4% at the end of the fourth quarter.

We have no participations purchased in our reserve base portfolio. We have only 10 reserve base credits and three service sector credits with committed exposure in excess of $1 million. We approved one new energy credit in 2015 in excess of $1 million and it is expected to close sometime at the latter part of the first quarter of this year. The reserve base portfolio is rated at about 83% oil and the balance in gas. In the fourth quarter, we stressed our energy portfolio with two different methodologies; first, we stressed oil pricing to $30 and $1.80 gas flat to the life of the engineered wells; second, we stressed our NYMEX based strip pricing on the frontend to $22.78 for oil pricing and $1.64 for gas.

We also continue to monitor the three year cumulatively undiscounted cash flow with the current price curve, compared to our funded balances. In these pricing scenarios some of our customers would need to make additional principal payments or pledge additional collateral to conform with existing credit terms at those price levels. For this reason we continue to be in infrequent contact with our reserve based energy clients as they transition through this pricing environment.

The service sector portfolio continuous to be concentrated in three credits that we have discussed in the past, representing about 75% of the totaled funded debt in this segment of the portfolio, an 84% of the commitments. These are all participations from larger banks with companies that are based in our geography. We have spoken about these credits in the past all are currently showing positive cash flow and sufficient debt coverage although at lower levels in past quarters. Each has the capacity to service their current debt loads and they also are not capital constrained.

Well, at -- our bank has been focused in the energy sector for only three years, we entered with experienced bankers. We chose to do business with customers and companies with long track-records and good property sets and limited leverage. At the current pricing of $30 and below it’d sustain for the next couple of quarters. We will see further deterioration in grade levels and certain credits will have weaker cash flows. This could call for extended terms and credit restructuring, but we're fortunate to have a relatively small portfolio extended to the energy sector at this time. We do remain committed to our customers and this industry. We do know this cycle we’ll likely turnaround once supply and demand comes to a more balanced situation, but we do not expect that to happen to any significant degree in 2016. We'll be happy to take more questions on the energy sector later on, but with those opening comments I'm going to turn it over to Joe for more details on the financials.

Joe Shockley

Thanks Mark. Good morning, everyone. I'll provide some financial highlights listed set forth on Slide Number 7 for the fourth quarter and then get into more detailed comments on the following pages. Our total assets at year-end 2015 are just under 2.4 billion, which is an increase of 415 million compared to a year ago. Certainly this includes the acquisition of First Commercial Bancshares which was 290 million of total assets at acquisition date. Total loans at year-end 2015 were 1.780 billion, which is an increase of 379 million or 27% over a year ago. First Commercial Bank loans at December 31 were $194 million. Core loan growth for the year was 185 million or 13.2%. Our core loan growth in the fourth quarter was 37% or 9.6% annualized. We've seen good loan growth in our Texas and Oklahoma markets. We look forward to expanding those markets in 2016 and also in Denver with our new Market President and two commercial bankers working with our bankers acquired with the First Commercial acquisition.

Deposits at December 31, 2015 were just under 1.9 billion, an increase of $350 million. Again, First Commercial’s deposits at year-end were 228 million. Our core deposit growth for 2015 was 122 million or 8%. Our total equity capital at year-end 2015 was 296 million, an increase of 25 million over a year ago. While we issued 22 million in additional common stock for the First Commercial transaction, we recorded an additional 15 million in goodwill and deposit intangibles. Our tangible equity capital was 279.7 million compared to 269 million a year ago. During the year, we repurchased 503,740 common shares for a total of 8.5 million. During the fourth quarter of this year of 2015, we repurchased 254,248 common shares for a total of 4.4 million. As a reminder, we could not repurchase any shares predominantly during the third quarter due to the pending acquisition of First Commercial Bancshares.

To-date, through our two repurchase programs beginning in August of 2014 we've repurchased 1.122 million common shares for a total of 18.8 million. Our capital ratio has remained strong after the leverage of First Commercial acquisition and the continued execution of our stock repurchase program. Net income for the fourth quarter as Mark noted was 4.6 million, which was $0.23 per share compared to 4.1 million in the previous quarter, which was $0.22 per common share. First Commercial contributed 1.1 million after-tax earnings for the fourth quarter. But that was substantially offset by deal and acquisition cost of $1 million net of tax. I will provide more comments on the fourth quarter’s results on the next slide.

Our fourth quarter’s results produced a return on average assets of approximately 80 basis points and a return on average equity at just over 6%. Our net interest margin for the quarter was 3.48% which compares favorably to the previous quarter of 3.34%. I do want to mention that during the fourth quarter we had strong loan fees and additional accelerated accretion on loans totaling approximately $283,000. If we normalize the net interest margin for the fourth quarter it would be about 3.43%. Our reported efficiency ratio for the quarter was 71.5%, however adjusting it for the deal and related acquisition cost the efficiency ratio for the quarter would be 67%. Our loan loss reserve at year-end 2015 was 26.1 million or 1.47% of total loans, but as Mark noted when combined with the purchase discount on loans our total reserves and discount are 1.95% of total loans.

Our tangible book value at December 31, 2015 is 13.98, which is the same as it was a year ago. Our tangible book value per share has been impacted in 2015 certainly by our positive earnings, payment of common dividends, series issued for the acquisition partially reduced by goodwill, deposit intangibles and our stock repurchase program. Overall, it's been a great busy and productive 2015 and we're pleased with the growth and progress we have made. Strong loan growth, the completion of the First Commercial acquisition, execution over stock repurchase program and we had good momentum in our markets. We are encouraged going into 2016, but certainly well aware of the energy headwinds in our region.

Moving to Slide 8, to provide more detail of the fourth quarter’s net income results. This quarter results includes two and two-thirds months for First Commercial. As previously mentioned, the First Commercial contributed 1.1 million to this quarter’s net income, but substantially offset by deal and related acquisition cost of $1 million net of tax. Our net interest income was 19.5 million for the quarter, which was up 3 million over the previous quarter. Of that amount, First Commercial contributed 2.6 million, which included the accelerated discount on loans I previously mentioned. We had about 400,000 improvement in core net interest income from our core loans and legacy loans.

The provision for loan losses was a negative provision of 566,000 for the quarter, compared to a slight provision in the previous quarter. The negative provision was attributed to net recoveries in the fourth quarter of $100,000 and reductions in certain impaired loans non-energy related. Our bankers carried a higher than peer reserve due to the Bank’s historical credit issues over the past five years. As we have had good improvement in credit quality, particularly over the last three years, our historical charge-offs have caused us -- caused our calculation of our loan loss reserve to remain higher than our peers. As previously noted, our loan loss reserve combined with our purchase discount was 1.95% of total loans. Excluding the First Commercial acquired loans and the related purchase discount for loan loss reserve of 26.1 million is 1.64% of core loans, which we believe is appropriate at December 31, 2015.

Non-interest income for the quarter was 4.2 million, an increase of 150,000 over the previous quarters. The increase is due to the increased service charges and fees from First Commercial and higher mortgage revenues partially offset by lower fees on interest rate swap during the quarter. Our non-interest expense for the quarter was 17.1 million. This amount includes the 1.4 million in deal and acquisition cost previously mentioned, but it also includes First Commercial’s non-interest expense for the quarter, which was 1.2 million of the increase. We also had approximately $300,000 primarily in severance costs and then some additional hiring bonuses during the quarter and those were partially offset by a negative expense or release of the unfunded commitment reserve of $142,000.

The Company’s effective tax rate was 36%, which is consistent with the prior quarter, but down from the 37.5% from a year ago. Our net income for the fourth quarter of 4.6 million or $0.23 per common share. This compares to the previous quarter of 4.1 million or $0.22 per share and pre-tax, pre-provision income for the quarter was 6.6 million compared to 6.4 million in the previous quarter.

Moving along to Slide 8, which displays our loan portfolio by type and by market segment. Loans at year-end were $1.780 billion, an increase of 380 million over a year ago. Our largest component by type is non-owner occupied commercial real estate which is at $630.7 million, which is an increase over a year ago by 221.8 million. The second largest component is C&I loans, which includes about 63 million of funded energy loans and was 507 million at year-end 2015. This sector increased 157 million, which included a decrease in our energy loans from a year ago as Mark previously noted.

The third largest sector is owner occupied commercial real estate, which stood at 307.4 million at the end of 2015. This sector type actually decreased 37.8 million from a year ago at 2014. Residential real estate is 183.4 million, an increase of 97 million from a year ago. First Commercial residential real estate portfolio was approximately $65 million, plus we’ve added a few residential real estate borrowers during the year to our own portfolio. Construction and development loans are 129.5 million, which is a decrease of 58.5 million from a year ago and consumer loans stayed relatively flat at 21.4 million.

The charts on the right show the loans by market segment. Oklahoma represents 57% or $1 billion of total loans, Texas represents 33% or 581 million, and Kansas at 151 million, at 8% of total loans. The Colorado portfolio at the end of 2015 was $39 million. The Oklahoma and Texas markets grew 27.4% and 25.9% respectively during 2015. Oklahoma’s growth was due impart certainly to the First Commercial acquisition.

On Slide 10, we show the non-performing loans by type and by geographic locations. Our non-performing loans at December 31, 2015 were 20.3 million, an increase of 10.9 million from a year ago, due impart to the First Commercial acquisition. Our largest loan type is energy C&I which totals 5.5 million, the next largest loan type is healthcare C&I which is $4.8 million. Our core C&I is 3.1 million and non-owner occupied commercial real estate is 2.9 million. By geographic location our non-performing loans attributed to Arizona at 4.5 million, loans in Texas 7.8 million, Oklahoma 4.8 million and the balance of 3.2 as is in Kansas and other states.

On Slide 11, we show the trend in our criticized assets. Criticized assets increased during the fourth quarter primarily due to the First Commercial acquisition. At year-end 2015 criticized assets totaled 71 million, a $20 million increase from the previous quarter-end. Non-performing loans increased 5.2 million to 20.3 million. Potential problem loans increased 9.3 and special mentioned loans increased about 5.6 million. Other real estate remained flat.

Moving to Slide 12, which shows the trend in our loan loss reserve to non-performing loans, plus potential problem loans. The ratio declined in the fourth quarter again due to the acquired loans net of the purchase discount not being included in the loan loss reserve. On Slide 13, the improved trend in the risk profile of our credit quality. The increase in the fourth quarter again is due to acquired loans and the overall credit quality of First Commercial was fully assessed during our due diligence and factored into our purchase discount.

On slide 14, displays the strong components of our deposit franchise. We have begun to see an uptick in our cost of funds as our loans have grown throughout the year, plus the addition of First Commercial. We have 40% of our deposit based in demand accounts and a 31% in savings and money market accounts. Our time deposits of 100,000 or more are just under 20% of our total deposits. We are seeing to continue to see a slight increase in deposit cost as deposit rates will be moving up due to the recent Fed movement, although we expect some lag effect. We’ve not seen any banks in our market that has become overly aggressive in the deposit pricing at least as of yet.

On Slide 15, we show the trend in our cost of funds and it includes the trend in the net interest margin. As previously noted our reported net interest margin was 3.48%, but while adjusting for the accelerated discount on acquired loans our normalized net interest margin would be about 3.43%. Loan fees or normal component of the net interest margin and were slightly higher in the fourth quarter due to some prepayment penalties. Also our net interest margin could be adversely impacted as I mentioned and where we see deposit cost increase.

Looking at Slide 16, shows the trend in our non-interest income and we are hopeful that this will continue, however depending on seasonal mortgage revenues. On Slide 17, the trend in our non-interest expense, as we have previously noted it includes 1.4 million of deal and acquisition cost in the fourth quarter and in addition it includes 1.2 million of First Commercial core non-interest expenses. We also have approximately 300,000 of primarily severance cost and some hiring bonus partly offset by 142,000 of negative expense on the release of our unfunded commitment reserve.

Looking at Slide 18, reflects our strong capital position after the First Commercial acquisition our organic loan growth in the fourth quarter and the continued execution of our stock buyback program. As I turn it back to Mark, I again want to say we had a good year in growing our Company and its revenues and we are looking forward to the New Year despite the headwinds from the energy sector. We have a strong management team and dedicated bankers throughout our Company that meet challenges head on.

I'll now turn it back to Mark for his closing comments.

Mark Funke

Thank you, Joe. There is additional information in the PowerPoint presentation that starts on Slide 20, for you to review on your own, but I'm going to go over the 2016 priorities on Slide Number 19 that is our focus points for 2016. Maintaining strong credit quality and conservative balance sheet management in light of the downturn in the energy sector in our region are at the highest priority for us. We are well aware of the negative economic impacts this slowdown we have in our geographic region if sustained for multiple quarters. We think we’ll appropriately assess, measure and manage all of our risk points.

We have staffed each of our market with strong leadership, the restructure of our commercial bank in the fourth quarter our senior management team will help create more growth opportunities and more efficient management of our markets. We expect to use our talented team to continue our growth trends in commercial banking sectors in both lending and fee-based income. It will also be important for us to focus our attention on deposit growth commensurate with our expected loan growth.

Expanded products and growth in our fee-based income categories will remain an important focus for us in 2016, as we grow our mortgage and consumer products and delivery channels and expand our commercial treasury products. We continue to add talent in our markets, our business lines and in our operational infrastructure as when necessary and appropriate. We have excellent expertise and product sets that are focused on the healthcare sector and we will endeavor to exploit that in the markets.

Excess capital is a strong suite for our Company and we will seek out opportunities to prudently acquire institutions or assets that have the capacity to add long-term value to our shareholders. We will continue to be patiently aggressive in this process, but we will remain interested in growth. We have made some improvements in operating efficiencies, but know that we are investing in new markets and new systems and in talent and we will focus our Company on continuing to build a great Company. We will appropriately manage our expense base and we will drive and improve deficiency ratio. We will continue to assess the strategic value of our stock repurchase and dividend programs and enhance them as appropriate to provide the best returns to our shareholders.

I am very confident in this management team and the leadership we have built throughout the Company. We acknowledge the headwinds of the energy sectors as well as the general economic and political uncertainties in this environment that we operate in. I believe we have appropriately managed our credit risk and other risks inherent in our business. And we have established the reserves that are necessary, based on the known risks that are present in our balance sheet, given our current environment. I am also confident in our ability to take advantage of the fully integrating First Commercial Bank acquisition that allows us or has allowed us to expand our presence in Oklahoma City, as well as our presence along the front-range in Colorado. I look forward to a challenging but a rewarding 2016 for our employees and for our shareholders.

And that does conclude our prepared comments and we are happy now to answer any questions that you might have.

Question-and-Answer Session

Operator

Thank you. [Operator instruction] And our first question will come from Brady Gailey of KBW.

Brady Gailey

I was wondering your loan loss reserve model, how backward looking is that, I am just trying to figure out when we might see your shift from negative provisioning to positive provisioning?

Mark Funke

The model that we use goes back and looks three years prior, so we are looking three years behind where we are today.

Joe Shockley

And I would expect depending on growth that we would see that turn in the early to mid-2016.

Mark Funke

The release this year was -- this quarter was really driven by the recoveries that we had along with some pay downs on the specific loans that had allocations to them. So that definitely was the biggest part of the release part.

Brady Gailey

Okay. All right, great and then you have First Commercial done and in the books but as you look at additional acquisition opportunities clearly you guys still have excess capital, banks in your markets, pricing is under pressure a lot of the Texas banks have sold off. Do you think you will use this time of turmoil to try to buy a bank cheaper than you could previously or are you in the acquisition game as of today?

Mark Funke

Well we are continuing to do the same thing that we have been doing over the last couple of years as Joe and Rusty and I have continued to seek out partnerships that make sense and get acquainted with banks that we think might fit in our footprint appropriately and we will continue to do that as we see over the course of next 12 months. It's hard to say what's going to happen with bank pricing over the course of the next 12 months, we will have to wait and see. But we will be very diligent about our calling effort, very diligent about relationship building and if an opportunity exists that makes really good strength for us we will try to take advantage of that in these times and if it doesn't we will continue on with our organic growth as we build our markets out.

Joe Shockley

Yes, we would also be very diligent in terms of reviewing the loan portfolio that any opportunity would have and kind of deeper looking into that due diligence process.

Mark Funke

But as I said in my comments I mean we are interested in growing the Company. We think we have got the right management team to do that and we will certainly look for those opportunities but they're going to have to be great opportunities that make sense for us.

Brady Gailey

All right. And then lastly so your stock has kind of transitioned from the $18 level down to the $16 level, are you going to be more aggressive in buying back your stock at this level in 1Q ’16?

Mark Funke

Candidly, I think we will be continuing a steady program because who knows what is really going to happen to the overall sector and the market conditions. So our intent would be to just keep at a steady pace and if a unique block comes on we will evaluate it but for the most part we would just continue a steady pace.

Brady Gailey

Okay. Thanks for the color guys.

Operator

The next question will come from Matt Olney of Stephens.

Matt Olney

I guess this is for Joe, I am trying to get a better idea for the expense outlook for 2016, if I exclude the merger expense this quarter, am at call it $14.5 million. There were some puts and takes that you've mentioned earlier, is that a good run rate for 2016?

Joe Shockley

No, that would be lite because of the 2.6 million that we mentioned in the earnings release, there was 1.2 million of that that is part of the core First Commercial non-interest expense component. So, I would add the 1.2 to the 14.5. So more a 15.7 range plus at some point in time probably some expansion et cetera but that probably would be in that range with modest growth improvement.

Matt Olney

Okay. And then on the energy portfolio you guys did detail on the slide deck, I'm also curious to hear to be in markets as far as energy lending, how compares at a smaller bank like yours compared to some of the larger banks that have reported so far the 4Q earnings over last few days and last week, I mean obviously those larger banks have more snakes than you guys do, but I'm just trying to understand why the larger energy banks have a energy allowance close to 5%, 6%, 7%, or that some of the smaller banks have a much lower energy allowance?

Joe Shockley

Well, I don't know, that maybe above my pay grade to analyze the difference between the big and the small banks, but I'd say from our standpoint whether it's a shared national credit or one that we originate ourselves we're going to look at it the same way. The shared national credit to the extent you're in it you'll be forced to a grade level, certainly by whatever the lead bank has, fortunately we don't have any reserve base credits today that are shared national credits. We do have three that are in the energy or in the services sector that I pointed out earlier, all three of those and we're actively involved in those credits we pay attention to them, we know the borrowers on the front side and we are asked by the borrowers to participate in that, but overall looking at the shared national credit, I'm sure that you'd the considerable scrutiny at the level of the lead bank, there's going to be plenty of engineering and the light that goes on that level, maybe more so than the small bank, but I certainly wouldn't want to comment on the difference in how a small bank versus a large bank besides us looks at a reserve.

Matt Olney

And then just lastly, in the acquisition as you noted you acquired a handful of classified loans, can you remind us what the associated mark was on those loans?

Joe Shockley

The total portfolio was about 3.75%.

Operator

And the next question comes from John Rodis of FIG Partners.

John Rodis

Joe just back to the share buyback, I'm just trying to -- how many shares do you have left? Is it around 700,000 or?

Joe Shockley

Yes, probably a little bit below that now.

John Rodis

Mark I guess a question for you, just I guess as it relates to the loan portfolio going forward. You guys ended up growing the portfolio 12%-13% without the acquired loans and I think in prior conversations you've talked about maybe high single-digit growth going forward. Can you talk about what your outlook is for loan growth given the current environment?

Mark Funke

John I still think a high single-digit for us probably given the talent, and team that we've added, I'm particularly excited about our entering into the front-range of Colorado and the new players that we've put in place there. I was in Denver last week and saw a very robust environment there, certainly there'll be some slowdown from the energy sector but I saw nine cranes in downtown Denver, they were doing construction and the customers I visited with not in the energy sector, none of them were in the energy sector, were all fairly optimistic about their business opportunities in the next 12 months. So, I certainly would expect high single-digits for our team given the talent we've added. I still think we'll see good robust growth in the healthcare sector which is an area that we're very good at and have a good reputation in. We're also seeing some opportunities in the technology and transportation areas which have been positive. So, I don't want to be overly optimistic about loan growth, but I do think that given our team and where we're situated today that I think we can produce mid to high single-digit loan growth in 2016.

John Rodis

And Mark as far as I mean adding any new lenders, any I mean I guess if the right person comes along, but do you feel like you need to add more staff right now?

Mark Funke

We have added obviously the staff up in Colorado. We continue to want to grow in Colorado. We recently added a new Senior Banker in Tulsa and we added a new Senior Banker in Austin, all markets where we felt like we had opportunities to source out really good folks that wanted to join our team and liked our story. So, well I would say yes, we're sufficiently staffed to handle what we have today, we're always going to be on the lookout for talented individuals and if they come along and want to be part of our culture then we’ll try and snag them up if it makes sense.

John Rodis

Okay, fair enough. Joe maybe just one quick question for you again on the margin, I guess if you look at it on a core pay basis you said 3.43%, it sort of sounds like, sort of reading between the lines it sounds like flat to down maybe some just given the funding trends and so forth?

Joe Shockley


Yes I would kind of be in the 3.40 to 3.43 range.

John Rodis

Okay.

Joe Shockley


It’s hard to predict the level of accelerated accretion that we might get on some loan payoffs or transactions related to the acquired loans, but we have not seen a significant increase in funding cost, but we do anticipate and expect that over the coming months.

Operator

The next question comes from Gary Tenner of D.A. Davidson.

Gary Tenner

So my questions have largely been asked, but just in terms of the folks you’ve added in the Denver market, and you sort of alluded to this a little bit Mark. But could you give us a sense of kind of what your expectations would be for the first 12 months in terms of production levels from that franchise?

Mark Funke

Well, it’s hard to say in exact dollar amount. I can tell you that we have a pipeline and the Denver market is pretty robust at this point in time. The guys we hired are good bankers that have been in the market for a long time and I think we’ll see positive production, I really wouldn’t want to put a number on it today, because you just never know about things like that, but I do you see positive production at a faster growth rate in Denver than say we would have maybe in one of our other markets.

Gary Tenner

Okay. And then in terms of the funding cost, I think Joe you just said you hadn’t really seen an increase yet in terms of any kind of rate impacts. But it looks like sequentially your interest bearing deposit costs were a bit higher. Was that just the acquired deposits or did anything change in the mix that drove that?

Joe Shockley


Predominantly the acquired deposits, but also as our loan portfolio has grown our incremental funding cost has kind of bumped up a little bit more in the 45 basis point range. And so that’s had some impact on it. But we saw an uptick I guess whatever a couple of basis points or so.

Gary Tenner

Okay. But that just general kind of growth dynamics versus having to be more competitive in terms of other banks raising rates [Multiple Speakers]?

Joe Shockley


In the fourth quarter yes, but we expect that to continue a little bit going into next year or this year actually.

Gary Tenner

Okay, great. And then last question I had. You had referenced about $200,000 of severance was that included in the 1.4 million of merger related cost or was that over and above that number?

Joe Shockley


No, no it was over and above that.

Gary Tenner

Okay.

Joe Shockley


Yes. That’s why I segregated that component out of the 1.4 million I mentioned it in addition, I should have said in addition to but yes I want to clarify that.

Gary Tenner

Okay, great. That’s helpful. Thanks guys.

Joe Shockley


Sounds good, thank you, Gary.

Mark Funke

Thanks.

Operator

The next question will come from Bernard Horn of Polaris Capital.

Mark Funke

Good morning, Burney.

Operator

Mr. Horn your line is open. Are you possibly, have your phone on mute.

Bernard Horn

I did my phone on mute, sorry about that.

Mark Funke

Good morning, Burney.

Bernard Horn

Good morning. I had a question on a couple of bullet points on the energy side and then an outlook question. On the slide mentions full credits of about 9 million were criticized and then the next well it talks about credit of 5.5. Is that 5.5 included in the 9 or in addition to it?

Joe Shockley


It’s included in, it’s part of the 9.3 million that is criticized.

Bernard Horn

Okay, very good. And then on the outlook, my question is whether you’re seeing, obviously we know the downside risks in energy lending, but I’m curious if you’re seeing any uptick in activity as a result of lower gas prices and other prices coming through at the pump and just through the retail level and/or is it affecting, are these lower energy costs also affecting other non-energy but maybe secondarily related industries in a negative or positive way?

Joe Shockley


I have not seen a positive impact or at least it hasn’t been brought to my attention by any of our current clients that says hey we are doing really better because of the reduced energy prices. I’m sure there will be some customers maybe in the transportation business and otherwise, I did ask the client the other day whether or not they have seen the fuel surcharges come off of their vendor bills and he said no, that he has seen that happen yet, but he was certainly hopeful that it would. And I would imagine you’ll see some of that in the future, we have financed a company that is somewhere in the transportation business in the Dallas market area recently and I’m assuming that will be beneficial to their particular company. And one energy credit that we did approved last year, but it’s not funded yet, but that was a specific credit where a very wealthy family feels there is great opportunity to go into the market and acquire some things and that would be a credit facility to allow them to do that. So I think you’ll probably see some bottom fishing that will begin to take place in the next couple of quarters certainly in the energy sector, but I’m not immediately hearing any benefit that any customers are telling us that's happening because of the energy slowdown.

Bernard Horn

So I guess the only follow-up is. Can you identify and I mean obviously people are saving quite a lot of money at the pump and if it's not showing up in let's say final consumption and demand where do you see it going I mean as you kind of look at your deposit flows and things like that do you have any guess as to what people are doing with these savings again?

Joe Shockley

I would have to guess people are holding a little bit of their savings and probably reducing debt whether it's on their prepaying a mortgage or prepaying a credit card or something of that nature I'm trying to get rid of some high rate debt. We've not seen a lot of movement in our consumer portfolio with folks borrowing that I know there is a lot of auto borrowing that's going on right now people are buying certainly larger vehicles and SUVs and alike but -- and my guess is from probably read some of the same things that you do that people are a little hesitant to go out and spend a lot of money right now and are keeping it.

Bernard Horn

Yes. Thanks, and congratulations on a good quarter and keep it up.

Operator

Our next question comes from Daniel Cardenas of Raymond James.

Daniel Cardenas

Just returning to the margin quickly I think Joe you mentioned that loan fees had a small impact on the margin this quarter. Could you kind of quantify that as to what impact it had on the margin?

Joe Shockley

Yes, we had a large loan that combined some borrowings and paid off and we had a prepayment penalty on that loan combined with another fee. I think those combined fees for the quarter were about $165,000, but we’re going to have some of those, those are hard to predict as to how often and when that will happen, but I just want to make a note that we did have a little bit higher fees during the quarter but we typically have loan fees throughout the quarter I think this quarter was just a little bit higher than we've typically have seen.

Daniel Cardenas

Okay, great. And then as I look at your loan portfolio could you remind me again what percentage of your portfolio is the variable rate in nature?

Joe Shockley

All right. Yes, we have actually excluding the variable rate with floors our loan portfolio is about 45% floating we have about $430 million of variable rate but that has floors in them at an average of about 4.31% and so now some of those would be maturing and reprising during the year, but as I had a conversation with our Treasurer and one of the loan officers whether or not you can get an increase if the floors say 4.5% today and if it's been a good customer, a good payment et cetera you may have to keep that floor 4.5% rather than bump it to 4.75% if you will. So we've set that aside so -- and then First Commercial had a fairly high level of fixed rate loans, but a number of their loans would reprise maybe annually or every two years or three years they had like I mentioned a pretty strong portfolio of residential loans in the portfolio, some of those were kind of arm tight of loans and so -- but if you set back and look all-in-all it's a fairly -- we're about 65% fixed rate but again a portion of that would mature during the year, but 45% that is just pure variable rate.

Daniel Cardenas

And that's tied to LIBOR or is that tied to prime are those loans tied to prime?

Joe Shockley

Generally tied to prime, yes just only the larger loans that we have would be tied to LIBOR and so most of the loans that would be have floors of or fixed rates are generally tied to Wall Street prime.

Daniel Cardenas

Okay. So then in a rising interest environment you should see some positive impact on the margin correct?

Joe Shockley

Yes, yes. Being modest but we expect to see a positive impact. That's correct.

Daniel Cardenas

And have you guys budgeted -- are you budgeting the rate increase or rate increases in 2016?

Joe Shockley

Yes we are. We budgeted the one that's happened in December now we’ve really not budgeted another one, I mean I know everybody has got their opinions about how many and if and when but given certain economic conditions and so forth we’ve budgeted only the one that the Fed approved and -- made in the mid-December.

Daniel Cardenas

Okay. And then just one last question and I'll step back here, in terms of competition I am sure pricing in competition is still intense, but are you seeing any give on the structural side, any unreasonable terms or for giving us guarantees et cetera from competitors?

Joe Shockley

On very high quality credits they would have the ability to do that yes, you certainly are seeing a or what I would say, I hate to say a reduction in terms and conditions, but certainly there are certain borrowers out there that have a balance sheet and cash flow abilities to negotiate that and typically they will find the bankers willing to do those things. We do try the whole pretty fast on guarantees and alike, but you do see it from a competitive standpoint. I am not seeing in crazy terms, I am -- maybe it just the deals we are looking at, we are competing against good banks or I am just not seeing really crazy terms at this point. I think all the banks are hopefully paying attention and not doing those kind of deals that would promote poor credit quality.

Daniel Cardenas

Okay. And is that most of the larger guys that you are seeing it from or is it across the board?

Joe Shockley

All I’d say it's across the board. I wouldn’t want to single anybody out because we kind of get to compete with the a little bit of everybody. But it's really on the high quality deals I am not seeing it on the modest moderate smaller deals that may have any credit issues that I think the banks at least that we compete with seem to be being smart about stuff and trying to do the right thing. Pricing is tough. And I would tell you pricing is tough people still want to do cheap pricing but I think times are holding fairly consistent.

Daniel Cardenas

Okay great, thanks guys. Good quarter.

Operator

And next we have a follow-up question from John Rodis.

John Rodis

Just one follow-up on expenses, I think you said that on top of the merger charges of 1.4 million, you said there was some additional severance expense. Is that correct?

Joe Shockley

Yes, approximately $300,000 primarily severance, but also included a couple of hiring bonuses. But that’s in the $300,000 that would be in addition to the 1.4 million deal cost.

John Rodis

Okay. So if you look at operating expenses, if you back-out the 1.4 million you come to the 15.7 that you were talking about before.

Joe Shockley

Right.

John Rodis

Is the 15.7 a good run rate or should we back-out the 300,000 and use 15.4?

Joe Shockley

Honestly, I mean it is within a couple of 100,000 I think in the 55 to 57 range.

John Rodis

Okay.

Joe Shockley

I mean we are going to have as Mark said we’ve added a few people. We are expanding in some markets, so I’ll try to give you a little bit of flexibility for some growth and expansion in kind of the Denver market we have expanded some in Austin and San Antonio markets and so probably a 15.6 range, 15 would be probably a ballpark run rate if you will.

John Rodis

Okay, no that’s fair enough. I just wanted to make sure I heard that right so. Okay thanks guys.

Operator

And the next question will come from Joe Fenech of Hovde Group.

Joe Fenech

My questions were answered thanks a lot.

Joe Shockley

Okay sounds good. Thanks Joe.

Operator

Okay. This will conclude our question-and-answer session then. I would like to turn the conference back over to Mark Funke for any closing remark.

Mark Funke

Okay, well, thank you very much. I want to thank each of you who joined us on the call this morning for your continued interest in our Company, we really do appreciate that. I also want to thank the many loyal employees of our organization and the Board members of Southwest Bancorp and Bank SNB, who are helping us all, build a great Company. Thank you for your attention and we will talk to you next quarter.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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