Southwest Bancorp, Inc. (NASDAQ:OKSB)
Q2 2016 Earnings Conference Call
July 20, 2016, 11:00 AM ET
Rusty LaForge - EVP & General Counsel
Mark Funke - President and CEO
Joe Shockley - EVP & CFO
Joe Fenech - Hovde Group
Brady Gailey - KBW
Matt Olney - Stephens Inc.
Gary Tenner - D.A. Davidson
John Rodis - FIG Partners
Daniel Cardenas - Raymond James
Good morning and welcome to the Southwest Bancorp Incorporated Second Quarter 2016 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, the event is being recorded.
I would now like to turn the conference over to Rusty LaForge, General Counsel. Please go ahead.
Thank you and good morning, everyone. Welcome to Southwest Bancorp Inc's second quarter 2016 earnings call.
At this time, if you're logged on to our webcast, please refer to the slide presentation 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 website, oksb.com.
I'm joined today by Southwest's President and CEO, Mark Funke; and CFO, Joe Shockley. After the presentation, we will be happy to answer and address questions you have as time permits. With that, I will turn it over to Mark.
Well good morning, everyone. I am Mark Funke, President and CEO of Southwest Bancorp, and as Rusty mentioned, Joe Shockley, our CFO is also here with us and I want to thank you for your continued interest in our company and for joining us today.
Hopefully you all have our PowerPoint Presentation, you have access to that, I am going to start on Slide number 3. I am pleased to announce today that Southwest Bancorp has reported second quarter earnings of $5.4 million or $0.28 per fully diluted share and this compares to $4.2 million, or $0.22 per fully diluted share for the second quarter of 2015 and we reported $1.9 million or $0.10 per share for the first quarter of 2016.
This represents a good rebound for us from the first quarter results and it puts us back on the appropriate path to produce positive and improving results over the balance of 2016.
We continue to see positive loan production during the quarter with the portfolio of loans ending up at $1.82 billion or up $40 million for the quarter or about 8.9% annualized. New loan commitments booked for the quarter, totaled about $82.6 million. Loan growth included increases in our residential mortgage portfolio along with commercial real estate construction and loans to general commercial businesses.
We experienced small declines in our energy portfolio as well as commercial real estate sectors. Our growth was offset somewhat by payoffs, but not nearly at the same level as we’ve experienced in the first quarter of this year. The new production was primarily in Oklahoma and Texas while Kansas was basically flat for the quarter.
Our net interest margin did decline slightly for the quarter to 3.48% from 3.54% during the quarter, but remains well above the 3.31% we experienced at the end of the second quarter of 2015.
Our pretax pre-provision income was $8 million for the second quarter that was up 7.5% when you compare it to the first quarter at $7.5 million, which was -- and if you look at our pretax pre-provision for the quarter, it's at 50.7% from the $5.3 million we reported a year ago in the second quarter of 2015.
We have discussed our efficiency ratio a number of times during this quarterly call and we’re making some notable progress in this area. Our second quarter efficiency ratio improved to 65.7%.
While we hope to be at this level at the end of 2015, we are nonetheless very pleased with the progress in the second quarter. This ratio was down from 71.8% at the end of the second quarter of last year. So good progress is evident.
We initiated a second expense review initiative early in the second quarter of this year, which included both the Management Group and the Board Committee to review our operating expense structure as well as the efficiency of our processes.
As some of you may recall we did engage an outside firm two years ago that helped us to identify various processes that would help to improve our efficiency of operations and while we did implement a number of those recommendations, we held off on some until we were better able to scale our operations.
Following the first commercial acquisition last October and with the addition of some new talent to our organization, we've been able to focus on a variety of expense initiatives that make more sense now for us in the long term.
Two months ago, we initiated a regulatory process to close two of our branches Frisco, Texas and Colorado Springs. The closing dates for those are now set and they're August the 23 and September the 20 respectively. Neither of these will result in any material loss of business and both will provide increased level of savings for our company.
Further we've made the decisions to close our Fort Worth branch, although the timing has not been formally established, the regulatory filing we expect to do the regulatory filing today to begin our 90-day regulatory notice process and while we still believe strongly in the Fort Worth market and will continue to serve our customers there, it's more efficient for us to do that on the Dallas market where we can build -- until we can build more scale on Fort Worth.
We believe these moves in the Dallas Fort Worth market will consolidate our resources into a single location giving us greater continuity to deliver on the model our commercial banking model and do it more efficiently. We’ve also closely reviewed the Colorado market after the acquisition of First Commercial and we believe that our resources are better utilized by concentrating our efforts in the Denver market.
The Dallas Fort Worth and the Denver markets both continue to represents strong growth opportunities for our company both now and in the future and these moves will help us better deliver the services in these markets.
Given the additional real estate that we now control via the First Commercial acquisitions, several weeks ago we began negotiations here in Oklahoma City to reduce some of the higher cost office space that we currently lease in the market. This is going to allow us to take advantage of the new lower cost space, which we acquired in the First Commercial acquisition.
We're also reviewing consolidation of certain operating functions which are duplicative in various of our markets. Some of these savings will be implemented in the third quarter. Some of the initiatives will be implemented in the third quarter, but the savings won’t be evident until the fourth quarter of this year.
Our goal is to show measurable improvement in the efficiency ratio by the end of the fourth quarter of this year. We’re making good progress on our efficiency as we continue to improve the operations of the company.
I want to move on the Slide 4 now, yesterday our Board did approve a cash dividend of $0.08 per share payable on August 12 to shareholders of record on July 29.
Our Board also authorized back in May and we reported such, our fourth consecutive share repurchase program for up to another 5% of our outstanding common stock, which will commence upon the completion of the existing share repurchase program.
Our capital ratios as you can see are well above regulatory standards, giving us protection against potential of an extended economic slowdown as well as positioning us to take advantage of growth and opportunities that might arise in the future.
Joe’s going to get into more details on the second quarter results, but I want to address some key credit-related issues that I think are important to highlight, then I’ll come back again with some comments before we open it up to Q&A at the end.
I’m going to move on to Slide Number 5, following the disappointing performance we experienced in the first quarter, I’m pleased to report good credit performance progress in the second quarter and it’s reflective of what I said in the quarter -- call last time, the poor credit performance we experienced in the first quarter was not a reflection of the quality of the entire portfolio but somewhat isolated, the instances related to the general economic slowdown as well as lower energy pricing.
We took quick and aggressive action when we determined that we had identified certain credit issues resulting in the large provision that we cited for you during the first quarter.
I also addressed in the last call a management change and restructure of the Commercial Bank that we made back in the fourth quarter of 2015 and I’m very pleased with the way the new commercial team that we put in place last year has managed credit process over the last several quarters.
I believe we have an excellent team in place to drive this business model into the future. We’re experiencing modest stabilization and the economy in all of our markets and we're also seeing more favorable energy pricing, which should bode well for us in the future.
In the second quarter, we did experience an improvement in our potential problem loans as they decreased by $4.1 million and ended the quarter at $64.4 million or 3.5% of our portfolio loans and this is down from $68.5 million in potential problems loans at the end of the first quarter.
We continue to focus on aggressive identification and management of problem credits, so the remediation plans can be put in place and managed appropriately.
All of these potential problem loans continue to pay as agreed. We're current -- the borrowers are current with us and they’re cooperative as they work through various issues. We do not anticipate any losses in this problem loan portfolio at this time.
Non-performing loans stood at $22.3 million at the end of the quarter virtually unchanged from the prior quarter. We did incur net charge-offs of only $302,000 for the quarter or seven tenths of 1% annualized of our average portfolio loans and these were all primarily charge-offs in the consumer loan portfolio.
As a result, the loan-loss provision driven by our consistent and methodology and process required only a $10,000 provision, resulting in an ending reserve position of 1.48% of our portfolio loans. When you combine this with our overall purchase discount on acquired loans, the reserves position stands at 1.87% at quarter end.
Overall, I believe our portfolio showed good improvement during the quarter and I would expect continued improvement as we look forward to the balance of 2016.
I’m going to focus on the energy portfolio now. I’m sure you interested in where we stand on that. That’s outlined starting on Slide 6. Our total funded energy portfolio directly -- the balances reduce lightly from $57 million to $56.7 million. The energy segment now represents only 3.1% of our overall funded credit portfolio.
The portfolio breakdown includes 57% based on production and reserve-based credits and 43% based on energy service providers. This is virtually unchanged over the last quarter including specific allocation and our loss reserve on this energy portfolio now stands at 6%, which is up from 3.9% at the end of the year.
We have reserve based credits consisting of $56.6 million in committed facilities and $32.4 million in funded balances. Ten credits in that reserve portfolio have facilities in excess of $1 million and seven have funded balances in excess of $1 million.
The reserve composition on our reserve based portfolio is basically 80% oil and 20% gas. We have five reserve based credit with funded balances of $15.7 million that remain criticized. These include non-performing -- one non-performing reserve based credit in the amount of $5.4 million where we continue to have an allocated reserve position of about $2.8 million as specific reserves. This credit was downgraded and placed on non-accrual during the third quarter of 2015.
It does remain current on its interest payment. The borrowers cooperated with us and they continue to seek capital. They’ve been somewhat successful on that, but not enough to offset all their situation. We do not have any participations purchased in this segment of the portfolio.
On Slide 7, I outlined the services-based portfolio, which consists of $32.7 million in committed facilities and -- to reclaim $4.3 million in funded balances. Five credits of committed lines and funded balances in excess of $1 million.
I have identified in the past and continue to have three credits, which we've discussed that make up 75% of the funded balances. These credits are participations purchased and they are considered shared national credits.
One of these service-based credits was downgraded during the Shared National Credit Review and reported us following the end of the first quarter and it was reported during our last earnings call. This one credit with funded balances of $6.8 million was criticized, but it was not however downgraded to a potential problem loan status.
We now have eight direct energy related credits with funded balances of $24.7 million or 43.6% of the energy funded portfolio that were criticized and this includes the $5.4 million non-accrual that I mentioned.
Based on continuous and thorough review of our portfolio, we believe we're appropriately reserved at this time on the energy portfolio.
We're fortunate to have a relatively small portfolio extended directly to the energy sector at this time, but we do remain committed to our customers in this industry. We know this is a cycle and it's going to turn eventually when supply and demand become more balanced, but we don’t look for that to happen significantly between now and the end of the year.
I remain confident in our ability to identify and manage credit problems both energy and non-energy related as we've successfully demonstrated over the last three years.
With those opening comments, I am going to close out and turn it over to Joe before I come back for some closing comments. Joe?
Thanks Mark. Good morning, everyone.
I'll cover some of the financial highlights for the second quarter of 2016, primarily compared to the first quarter of 2016. With the acquisition of First Commercial Bancshares in the fourth quarter of 2015, linked quarters will be more comparative.
Starting on Page 8, our total assets increased to just over $2.4 billion. Total loans at June 30 of this year were $1.2 billion, which was an increase as Mark noted of $40 million for an annualized rate of just under 90% over March 31.
Deposits at quarter end were $1.9 billion and equity capital stood at $282 million or 11.7% of total assets. Equity capital has decreased $13.7 million from yearend 2015, primarily as a result of our stock repurchase program.
Again as Mark noted, our net income for the second quarter of 2016 was $5.4 million or $0.28 diluted earnings per share, which was up substantially from the first quarter and up from the $4.2 million or $0.22 per share reported for the same period a year ago, due in part to the First Commercial Bancshares' acquisition and our organic growth over the past year.
Our return on average assets for the second quarter of this year was 91 basis points and our return on average equity was 7.7%. The efficiency ratio for the second quarter of this year was 65.7% and that calculation excludes the 263,000 negative provision for unfunded loan commitments, which is classified as a contract expense.
We're pleased with the improvement in the efficiency ratio. Our loan-to-deposit ratio is 95.7%. As noted, loans increased $40 million during the quarter and our net interest margin was 3.48%, down slightly from the previous quarter due to lower loan discount accretion. Our capital ratios remain steady as we continue to execute on our stock repurchase program.
During the second quarter, we've repurchased approximately 533,000 shares or our common stock. For the first six months of this year, we've repurchased just over 1.3 million shares. Since August of 2014, we began our repurchase program. We've repurchased almost 2.5 million shares for a total of $39.8 million.
At June 30, our tangible book value per share stands at $14.20, which is slightly below what it was at the same period a year ago at $14.29, again as a result of our share repurchase program.
Our non-performing loans to portfolio loans were down slightly to 1.23%. As noted, our net charge-offs were seven basis points and our loan-loss reserve to total loans -- portfolio loans is 1.48%. Including the purchase discount as Mark noted again the loan-loss reserve and the loan purchase discount combined is 1.87% of portfolio loans.
Moving to Slide 9, I'll comment on the earnings components for the second quarter compared to the first quarter. Our net interest income was $19.7 million down slightly from the first quarter and as I mentioned due to lower discount accretion. The loan provision again in the second quarter was a modest $10,000.
Again as previously mentioned, our overall credit quality improved while our non-performing ratio stayed fairly steady for the quarter. Non-interest income for the second quarter was $3.9 million, up $456,000 from the first quarter. The contributors to the increase were the gain on sale of mortgages, which was up $321,000 and other income was up approximately $90,000 due primarily to interest rate swap fees for the quarter.
One item to note is our service charges and fees. The next line item we include our mortgage servicing revenues. In the second quarter of this year, we had a write-down of $214,000 of our mortgage servicing asset and in the first quarter of this year we had a write-down of $277,000.
These write-down adjustments on the value of our mortgage servicing asset were due to the increase in prepayment fees resulting from the declines in the 10-year interest rates for treasuries and other factors affecting the prepayment fees. Going forward we will adjust that amount that is being capitalized in our mortgage servicing assets.
So for example for comparable quarters with the same mortgage volume as we had in the second quarter of this year, could result in lower gains on the sale of mortgage loans by approximately $100,000. However, that would lower what we might have to adjust on our valuation going forward depending on rates.
Non-interest expense for the second quarter was $15.3 million, which was down $728,000. The largest item in this period is just the change in the provision for unfunded loan commitments.
In the first quarter of this year, we incurred an expense of $215,000 and in the second quarter of this year due to fundings on that portfolio, we had to release or a negative provision of $263,000. This change from quarter-to-quarter caused a varied swing of $478,000.
The remaining improvement from the first quarter to second quarter in our non-interest expense was due to decreases in consulting and professional fees, marketing, donations, meals, promotional expenses and postage. We’ve emphasized diligence in our expenditure of our operations and how we invest our expensed dollars.
Our net income for the second quarter of $5.4 million again was $0.28 per share. We’re pleased to see the improvement as Mark noted in our pretax pre-provision income to $8 million up from $7.5 million in the first quarter. And these pretax pre-provision numbers exclude the provision in the first quarter or a negative provision for the unfunded loan commitments as I previously described as it has been very similar to our loan provision -- loan loss provision.
Moving on to Page 10, we show the components of our loan portfolio by type and by segment. Total loans at June 30 was $1.82 billion, an increase of $370 million over a year ago and as previously mentioned, up $40 million into the first quarter.
The increase for over a year ago includes five loans for the First Commercial Bancshares’ acquisition of $202.4 million. The increases in the second quarter were in the residential real estate area of $21.7 million, commercial and development of $19.3 million and C&I loans of $14.7 million and these sectors were partially reduced in terms of portfolio by pay downs in non-owner occupied commercial real estate of $16.2 million.
The loan growth in the second quarter of this year came primarily from Oklahoma at $26.9 million and Texas at $17 million, partially reduced by a slight decline in Kansas. Colorado was relatively flat for the quarter, but they had some loans that were expected to close in mid to late June and it will now be closed in the third quarter. Overall our pipeline continues to remain good.
Moving on to Slide 11, our non-performing loans by type. At June 30 of this year, non-performing loans totaled $22.3 million, which was a $13.4 million increase over a year ago due largely to the energy credit previously described combined with acquired loans. The $22.3 million of non-performing loans at June 30 of this year is flat with the previous quarter.
On the right side of this slide or Page 11 are graphs of non-performing loans by geography. Our largest non-performing loans are in Texas, Arizona, and Oklahoma.
Our Texas non-performing loan is driven by a $5.4 million energy loan that’s been previously discussed. The non-performing loans in Arizona are healthcare loans that we previously -- in previous quarters described that are now in repayment pursuant to an approved bankruptcy plan approved earlier this year and our Oklahoma loans are driven by a few real estate credits.
Moving on to Slide 12, we show the trend in our loan-loss reserve compared to the non-performing loans plus the potential problem loans. This ratio was virtually flat with previous quarter at 31% coverage. We feel that our loan-loss reserve is appropriate to the credit quality of our overall loan portfolio.
Moving to Slide 13, we show the trend in the overall credit risk profile. The credit risk profile has improved well over the last three years and there was a slight improvement from the previous quarter due to the improvement in the potential problem loans.
Page 14, we show the composition of our deposit base. We have 69% of our deposit base represented in non-interest bearing and low cost DDA, interest bearing demand, money market and savings. We’ve seen an increase in our cost of deposits during this year including the second quarter due to the increase in the fed rate back in late December and an increased competition for deposits particularly in the second quarter.
On Slide 15, we show the trend in the net interest margin and our cost of funds. Our net interest margin was down slightly again over the previous quarter as mentioned due to lower loan discount accretion. Also we’ve seen our cost of funds creep up due to increased pricing in the market.
Non-interest income trends are shown on Slide 16 and which are up over the previous quarter again due to the gains with the sale of mortgage and interest rate swap revenue included in other income. Our service charges and fees were stable in the second quarter.
Non-interest expense improved in the second quarter from the first quarter and on Page 17, we show the trend in non-interest expense. Personnel costs were up slightly due to merit increases implemented in the second quarter which were more than offset by reductions in the -- including the provision for unfunded loan commitment and then we further had a negative provision of 263 for that unfunded loan commitment compared to an expense in the first quarter as I previous described.
We also had decreases in other G&A expenses driven by the professional and consulting fees, marketing and promotion.
Moving on to Slide 18, our capital ratios remain strong. We continue to execute our third repurchase program since August of 2014. Earlier this year as we previously mentioned, our Board approved another 5% share repurchase program, the fourth program which will become effective on the completion of program number three.
We have approximately 269,000 shares remaining under the third repurchase program. Again since August of 2016, we have repurchased approximately 2.5 million shares of our common stock for a total of $39.8 million.
I will close my remarks by saying that we’re very pleased with the improvement in our results for the second quarter, but we realize we have more work to do to move up to a level of top profitability performance. As Mark noted, we're putting additional certain actions in place to gain further efficiencies in our operations and workflow.
I will now turn it back to Mark for his final comments.
Thank you, Joe. There is additional financial information that begins on Slide 20 of your PowerPoint presentation. I am not going to cover that. You can go over that at your own leisure.
I am going to start on 19 and I just want to review some of the priorities that we have and focus points for the balance of 2016. Of course, maintaining strong credit quality and conservative balance sheet management in the light of the downturn in the energy sector and the uncertain economic conditions are the highest priorities for us.
I am pleased with the demonstrated improvement and stabilization of our credit portfolio during the second quarter and I remain optimistic that the opportunity for continued improvement in the future.
We do expect continued growth trends in our commercial banking sector as well as our lending and fee-based businesses. We have experienced 10 consecutive quarters of loan growth and I would expect to see continue upper single digit loan growth for the balance of 2016.
I am also confident we'll begin to see the value of our Colorado franchise become a greater part of our company as our new management team there in Colorado is now fully integrated into our company and our pipeline there is strong and we expect to see positive loan growth over the next two quarters in Colorado.
We continue to be aware of uncertainties of our national, economic and political situations, the continued slowness in the energy patch and the historically low interest rate environment, competitive nature of our business, making difficult for both our industry as well as many of our clients.
And unfortunately, we're more impacted by international events that most of us would like to admit. We will continue to approximately assess, measure and mange the risk points that we see for our company.
We also continue to focus our attention on deposit growth, commensurate with our expected loan growth recognized as one of the more critical aspects of our business. Core deposit growth is critical to our ongoing ability to expand our franchise.
Expanded products and growth in our fee-based income categories remain an important focus for us during 2016 as we grow our mortgage, our consumer products and our delivery channels and we expand our commercial treasury products.
We also continue to make active use of interest rate swap products, which benefits our clients as well as helps us effectively manage the interest rate sensitivity risk on our own balance sheet.
We had an excellent quarter in the mortgage production business and our Texas team became fully integrated into our operations. Our new platform is working appropriately and our -- the TRID regulatory issues are basically behind us at this point.
Unfortunately our good mortgage production was offset somewhat by the falling rate environment, which caused us to have to write down some of our mortgage servicing rights as Joe described. Now that being said, I am very pleased with the excellent progress we made in the mortgage group and particularly our expansion in the Texas markets.
We continue to assess and manage our talent and we added some new experienced bankers into our company in Austin and Dallas in this last quarter and we also strengthened our credit analysis team. Excess capital is a strong suite as Joe pointed out. We'll continue to see opportunities to prudently leverage our excess capital and ways that will add long-term value for all of our shareholders.
We continue to work on improvements in operating efficiency. I mentioned the improved efficiency ratio this quarter and I also recognize the further need to improve this number.
Early in this quarter, we began a diligent effort on the part of our Executive Management Team and our Board to improve our operating performance. I am confident in our ability to show measurable improvements by the end of the fourth quarter of this year.
We've been investing in new markets admittedly so, in systems, in talent and our focus has been on building a great company and we'll vigorously manage our expense base and work to drive on improved efficiency ratio. This quarter we achieved 65.7%, which I expect to see continue to improve over the next couple of quarters.
While it's important to invest in the future as we have been, it's also appropriate to focus on the job at hand with the team we built. We've made important and beneficial investments and structural changes to this company. Our focus is now more toward expense management and efficient revenue growth with the engine that we have built.
We'll continue to assess the strategic value of our stock repurchase and dividend programs, which Joe outlined and we'll enhance them as appropriate and provide the best return to our shareholders.
I am confident in this Management Team and the leadership we've built throughout the company. We acknowledge the headwinds of the energy sector as well as generate economic and political uncertainties in the economic environment which we operate. We will aggressively manage this company so that the outcomes achieve the greatest benefit for our shareholders, while providing best-in-class service and products to our clients.
I do want to acknowledge however the critical importance the role each of our employees play in this company and their tireless efforts to service our clients and we're working to make this a great company and I thank them for their superb effort.
I look forward to the challenging but rewarding balance of 2016 and that concludes our comments and we'll be happy to answer questions at this time.
[Operator instructions] The first question comes from Joe Fenech of Hovde Group. Please go ahead.
Good morning, guys.
Good morning, Joe.
Good morning, Joe.
First on the provision, after the blip higher last quarter, you're back to nearly a zero provision this quarter. How should we be thinking about run rate provision here? It seems like you're feeling better about energy and credit generally but especially if loan growth is pretty healthy, how should we think about provisioning going forward?
Yeah, I appreciate the question because certainly after the first quarter, we had a couple things in the quarter. We had a very nice improvement on our impaired credit that allowed us to have a released quite a bit several $100,000. We were able to have that absorb the need for our loan growth in the quarter plus we had a little bit of deterioration on another impaired credit that absorbed that. So that’s why we ended up with a modest level.
If I look at the loan growth and like Mark indicated, we think we’re going to be in the higher single digits. We’ve also experienced a reduction despite the first quarter in our average net charge-offs.
So as we look at the model and the history depending on loan growth. We think that the range would probably be in the $200,000 to $500,000 range and I hate to get that broad, but it will be driven by loan growth but again, I would say hopefully more toward the modest end of that.
No, that's very helpful, Joe, thanks. And how about, guys, just an update market by market on some of the newer markets you are in? Dallas, Fort Worth, Austin, Denver. Can you talk about the specific progress in loan growth efficiency and how you think about profitability measurement in each of these markets?
And then secondarily onto that, just to be clear, I'm assuming we shouldn't think about the closing of the branch in Fort Worth as a market exit. Just wondering if you're pulling back from lending at all in that market or is this just strictly a branch closure as an efficiency exercise?
Let me address the Fort Worth one. It is definitely not a pullback from the market. We entered into that market a year and half ago I guess and the location we were in was not ideal for us. We do believe that we are better served efficiently wise to operate out of one facility for right now until we can build better scale.
We've got little over $40 some million in loans of the Fort Worth market which we want to continue to manage appropriately. We've designated a couple of bankers to focus in on that market and we will do so, but just from an efficiency standpoint and our location, it really wasn’t -- it really wasn’t an opportunistic place to be for right now from a location standpoint.
So we're going to pullback continue to manage the Fort Worth market and Dallas Fort Worth for us is a critically important market. It's been our fastest growing market. We're going to continue to be there and support our client base there. So that is certainly not an issue. It really is an efficiency and expense management issue for us.
I'll go through from Colorado we did make the decision to close Colorado Springs. Our banker team out there evaluated that after they came aboard and we determined that we really needed to focus our attention in the Denver market where we already had a base of business and three branch locations.
So we’re very pleased with the progress so far. We hired a group of bankers who joined us at the beginning of the year. We saw some modest loan accumulation in the first six months of the year, but we have an excellent pipeline there right now.
We had a couple of loans in Denver that we anticipated closing in June, but for a variety of different reasons on the customer side we got delayed until the third quarter. So I think we'll see some good balance improvement in Denver and growth in that market in the balance of the year. So we do like Denver.
I mentioned Kansas was fairly flat. We had some pay downs and we had some advances in Kansas, but generally a fairly flat market. Kansas continues to represent a really strong deposit market for us. Hutchinson has been a very stable market from a deposit standpoint and we're very pleased to have the core deposit base there and Kansas tends to be more focused in the healthcare and smaller medical practices and we continue to see good opportunities in that market.
Oklahoma City and Tulsa both have continued to be good markets even though we’ve seen probably more economic deterioration in Tulsa and Oklahoma City than we've seen in Dallas resulting from the energy business, but good markets still and employment remains relatively low in both Oklahoma City and Tulsa.
We saw growth in both of those markets. We've added some new bankers in both of our markets over the last six months and both of those markets continue to do well for us. Stillwater of course is a tremendous deposit base, great relationship with Oklahoma State University there and just a really strong basic -- strong deposit base for us and Stillwater it really helps propel the company from that standpoint.
If I move into Texas, San Antonio and Austin have been very good markets for us. We've seen excellent growth in both of those markets over the last year. We are making a change in Austin. We've been in a location that’s very difficult to get to, low visibility and we made a decision about a year ago to close that office and open a new one in Austin.
We were essentially under construction with a new facility that will open in September in Austin the domain area and we’ll be closing simultaneously our current location and moving our team over there in Austin, but San Antonio and Austin both showing good growth for us.
Dallas, I mentioned earlier, Dallas has been the strongest growth market for us, would expect that to continue. We've put together a very strong team in Dallas. The closure of Fort Worth is not an indication at all of a pullback in that market.
We will continue to focus on that market and we'll look for other opportunities to build out our facilities there, but for right now closing that location is the best opportunity for us. So that's a quick rundown of the market. I hope that answered your question.
Yes, thanks, Mark. And then on the efficiency initiatives, Joe, are you guys thinking about this as you model it out that this will allow you to take some costs out of this quarterly run rate? Or is this just in light of whatever other investments you're making just to allow you to run in place here? How do we think about the absolute level of quarterly expenses?
It's definitely our goal to drive the efficiency ratio well down below 65%. Some of the initiatives that we talked about in closing certain branches as Mark noted like in the Fort Worth case there's a 90-day regulatory notice.
So some of these efficiencies won’t come in - play until the fourth quarter of this year and we’ll continue to look at different opportunities like we said in terms of our overall operations and see where we can become more efficient. But it's clearly our goal to drive the efficiency ratio down below 65% and our goal be to get in the lower 60's.
Okay. And last one for me and I'll hop off. I know you guys have another 5% buyback out there. The stock has run a bit here. Can you talk about your appetite for continued share repurchases? Does anything change in that respect given the current level of the stock?
Well you can see how active we've been over the last couple of quarters given the different levels of stock price, candidly going forward at this level, I would expect we’ll continue to be active in it, but I think probably at a more modest pace.
Good. Thank you, guys.
Our next question comes from Brady Gailey of KBW. Please go ahead.
Hey, good morning, guys.
So, following up on Joe's question about all of the initiatives you all have going on, on the expense side whether it's your consolidated and operational functions or closing branches, getting out of Colorado Springs.
So it sounds like sub 65% efficiency ratio, I have you guys at 65% efficiency ratio as of this quarter. So, maybe back to Joe's question, do you think that expenses will actually go down from here or do you think that they just go sideways as revenue grows?
Let me put it in perspective, if you take a look at this quarter, you saw a lower number and again we try to communicate that that included a contract experience for our unfunded committee of 263. So if you add that to 15.3 for the quarter it would end up about a little over 15.5 and 15.6.
I think that's probably a relatively good run rate for now. We will have some efficiencies that should come about in the fourth quarter by the closure of the branches that we just communicated. And what we intend to do as we work with our Management Team internally and with the Board in the next quarter we will have a broader communication relative to certain actions it will be taking and we’ll communicate at that time more specifics with respect to dollar savings and where we think we can drive down the efficiency ratio to.
Okay. And then...
Okay and then we also all saw after the close on Friday, Clover filed the 13D. It talks about changes in the Board, it talks about potentially selling the company. Can you maybe just give us an update on that and Clover says they gave already had conversations with you and they'll continue to have conversations. Are those conversations still mostly friendly at this point?
I’ll take that. This is Mark. We do strive to maintain good constructive ongoing communication with all of our shareholders and I think you know that we have consistently met with our shareholders. We value their opinion. We look for them to help us as they see opportunities where we can enhance shareholder value.
In that regard, we have had constructive conversations with Clover over the past although we’ve not had any conversations with them since November of last year.
Our conversations in the past have been very constructive and positive and we look forward to any discussion with them in the future as we learn more about their views of our company and suggestions for long-term shareholder value and we do that with any shareholder. So that’s the best I can tell you about that at this point.
And then, future M&A, you recently did the Colorado deal that's on the books. How do you think about bank M&A from here? Is that still a top priority for you guys?
Well it’s certainly -- everyone in this company wants to continue to grow the company, but as I said in the call our focus right now is really on now that we’ve built up a little bit of scale with that acquisition to really focused on the expense management of the company, to get our efficiency ratio driven down.
We have invested a good deal over the course of last couple of years in systems, infrastructure, people management. I am very happy with the team that we have across our footprint. We’ve got a good engine now.
I do think that the focus for us right now is on expense management and driving the revenue engine that we’ve built at this point. Certainly M&A is not out of the picture certainly. If an opportunity would arise it would give us an opportunity to make a tremendous transaction we’d certainly consider that, but that’s not the priority for us at this point.
Okay. Great. Thanks guys.
Our next question comes from Matt Olney of Stephens Inc. Please go ahead.
Hi, thanks, good morning guys.
Good morning Matt.
Can you talk more about what you're seeing in your footprint with respect to any signs of contagion from lower energy prices?
I would say minimal right now. We’ve seen and I think we mentioned this last quarter, we have seen -- we downgraded a couple of real estate credits last quarter as a result of them having high influence of energy tenants if you will in the facilities, but we haven’t seen that in the last quarter. We haven’t seen much deterioration.
Our pipeline remains pretty good across our footprint and even talking with our energy customers. I wouldn’t say there is optimism. but I certainly would say the era of pessimism has gone out of the window where people are beginning to think maybe things are going to stabilize at least at this juncture.
I don’t think anybody is expecting $60 or $65 oil, but I do think that at least our customer base, which tends to be independent producers are saying hey you know what, at this $45 range and a little higher if it can stabilize, we’re in good shape and then as it drags into the other markets whether it’s real estate or general business, I would say we’re seeing stabilization. I wouldn’t be pessimistic at this point about that.
Okay, that's helpful, Mark. And then within just the energy portfolio, it looks like there wasn't a whole lot of migration either way in the second quarter versus the first quarter. How should we be thinking about that portfolio the back half of the year in terms of the overall levels of classified and criticized energy loans?
I think pretty stable and flat. I don’t see us doing a lot of new energy deals, although we certainly have some in our pipeline that we’re looking at but I wouldn’t expect any strong growth in that particular business although again we’ve got a few borrowers that have unused lines that are looking and could very well advance on those to take advantage of what they see as opportunities, but generally speaking I don’t see any further deterioration.
And maybe even if we continue to see stabilized pricing, we’ll go into some further re-determinations at the end of the year and we may see some opportunities for even some upgrades in some of these customers that remain with stable flow of product. So I feel reasonably good about our energy portfolio today.
Yeah, I agree Mark. I know that our credit team continues to look at that and different stress factors and we sit down and discuss it thoroughly and we feel that we’re again appropriately reserved in that portfolio and feel like that our cooperation with our teams working with our borrowers are producing hopefully good communication and ultimately positive results, but given the improvement and stabilization in prices I would agree the outlook was kind of expected to be stable in that portfolio.
Thank you, guys.
Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks good morning.
Good morning, Gary.
Just one last question for me in terms of the loan trends. The period end numbers were well better than the average on a sequential basis. Can you remind us were there any paydowns like right at the end of the first quarter that impacted that period end number? Or were there some changing trends over the course of 2Q?
We had some paydowns in the second quarter. They were not nearly at the level we saw in the first quarter. Probably we’ll see a couple of paydowns in the third quarter that we already known about where deals are being refinanced out to longer term opportunities but the paydown rate in the second quarter wasn’t nearly as much as we had seen in the first quarter.
Gary, if you remember we had modest growth in the first quarter and some of those paydowns came later in the quarter and then also the loan growth in the second quarter came towards the second half of the second quarter.
So just the timing of when paydowns occurred late first, early second, but more or late first because that’s when a lot of those paydowns occurred and that’s why the averages were little modest. I think on average to average we were up only 2% while the end of period end of period was up about 9%.
Okay. That’s helpful. Thank you.
Our next question comes from John Rodis of FIG Partners. Please go ahead.
Good morning, guys.
Good morning, John.
Most of my questions were asked and answered but, Joe, maybe -- I'm not sure if you covered this yet but the margin, do you think you can hold it here in the high 340s or do you expect some added compression?
I think we’ll stay in the mid 340s if you will. We began to see as I mentioned just a slight pressure on our overall cost of funds. Quality loans continue to be competitive. We’re working with our lenders to try to get the pricing up where we can, but again quality loans throughout market is a lot, the types of loans we’re doing are usually pretty competitively priced. So my goal -- expectation we’d see it to be probably in the mid 340s, 345, 347 yes.
Okay. Thanks guys.
Our next question comes from Daniel Cardenas of Raymond James. Please go ahead.
Good morning guys.
Just a couple questions. On the loan growth that you saw this quarter, could you maybe give a little bit of color as to the size of the average loan? Were these kind of a number of just maybe larger loans or was it a pretty granular growth quarter?
Well, one of the things that we mentioned on the comments was the mortgage operation. We had a really nice quarter in the residential mortgage business. I think we might have talked about this on the call maybe last time or the time before, but we hired a team down in Texas last year and that team has a very strong pipeline into the medical areas where they have -- we’ve developed a product specific to the medical community and a lot of our growth in the second quarter was related to really good mortgage production from that standpoint that we hold in our portfolio, they are generally ARMS and I can’t tell you the size, but I wouldn’t eventually guess exactly what the size of those portfolios -- we had a $400,000 to $500,000 right I think…
We did roughly 95 mortgage loans in the second quarter in 25 million total in that range. So -- but nice growth in the mortgage portfolio and hopefully we'll continue to see that. We also had some growth in our commercial construction. We had some advances.
We have a fair number of commercial construction real estate loans. We had good advances on those during the quarter and then we had a number of just general C&I type business. So it wasn’t particularly focused.
We had low drop in our general real estate bucket. We're trying to manage that overall real estate and real estate construction bucket appropriately so and try and emphasize a little bit more the C&I sector, but these decent growth of kind of across the footprint.
Okay. And then, any markets in your footprint that maybe you think you have a better competitive advantage on the pricing side versus some of the bigger markets?
Yeah, I would say all our markets are really comparative. It doesn’t matter really what size it is any more. All the banks seem to be really comparative. I think going back again, I think certainly growth opportunities in Dallas, Fort Worth market. We've got a really good team there and would expect to see good growth there and the Denver market I mentioned I am looking forward to the balance of this year.
I think we’ll have good growth there and pretty stable everywhere. The South Texas and North Texas clearly are continuing to be very dynamic markets for us. We’ll see good growth there, but frankly Oklahoma City and Tulsa are showing signs of good life and we’ll see good opportunities there. We had some nice growth in Tulsa in the second quarter. So like all of our markets.
Excellent, excellent. Okay and then just as you look at some of the growth in the construction portfolio, what was your concentration, your construction concentration as a percentage of total risk-based capital?
Well, it’s well below regulatory standards, regulatory standards are 300% of capital. So, well 100% of regulatory capital. So we're well below that. I can’t tell you right off the top of my head exactly what that concentration numbers. We manage that by bucket by every type of construction. So we have that today. Most of our deals are generally I would say if you look at overall concentrations it's probably less than 65%.
All right, great. Thanks guys.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Funke for any closing remarks.
Okay. We’ll thank you. Thank you very much. I want to thank everybody who joined us on the call today. Appreciate you, I know that you could listen on lots of different calls and chose to listen ours this morning. So, I do appreciate your continued interest in our company and I want to again thank the many loyal employees and our Board at Southwest Bancorp and Bank SMB who are helping us to build a great company and we do appreciate that. So thanks and that concludes our call this morning.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.