Southwest Bancorp's (OKSB) CEO Mark Funke on Q3 2016 Results - Earnings Call Transcript

| About: Southwest Bancorp, (OKSB)

Southwest Bancorp, Inc. (NASDAQ:OKSB)

Q3 2016 Results Conference Call

October 19, 2016 11:00 AM ET

Executives

Rusty LaForge - EVP & General Counsel

Mark Funke - President & CEO

Joe Shockley - EVP & CFO

Analysts

Matt Olney - Stephens Inc.

John Rodis - FIG Partners

Brady Gailey - KBW

Operator

Good morning and welcome to the Southwest Bancorp Incorporated Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode today. [Operator Instructions] After today's presentations, there will be an opportunity to ask questions. [Operator Instructions] Please note the event is being recorded.

Now I'd like to turn the conference over to Mr. Rusty LaForge, General Counsel. Please go ahead.

Rusty LaForge

Thank you and good morning, everyone. Welcome to Southwest Bancorp Inc.’s third quarter 2016 earnings call.

At this time, if you've 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'll be happy to answer and address questions you have as time permits.

With that, I'll turn it over to Mark.

Mark Funke

Good morning, thank you Rusty. This is Mark Funke, I'm President and CEO of Southwest Bancorp, and as Rusty mentioned, Joe is here with me, he'll pick up by later on in the call. I want to thank you for your continued interest in our company and joining us for the call today. Hopefully, as Rusty mentioned you all have our PowerPoint presentation and you also received the copy of our earnings release statement.

I'm going to begin my presentation starting on Slide number 5 of the PowerPoint presentation. I'm pleased to announce today that Southwest Bancorp reported third quarter earnings of $4.3 million or $0.23 per fully diluted share, this compares to $4.1 million or $0.22 per fully diluted share for the third quarter of 2015. This represents a solid quarter for us given the numerous initiatives we focused on and completed during the quarter, which we'll discuss in detail during this call. We continued to see positive loan production during the quarter with funded loans ending up at $1.88 billion or up about $59 million for the quarter, about 12.9% annualized. And new loan commitments booked for the quarter totaled $197.9 million, and while we funded $98.2 million, we also experienced several payoffs and pay downs that were anticipated.

Loan growth during the third quarter will be offset somewhat in the fourth quarter due to some participations that we will be selling along with some expected payoffs, loan growth included increases in our residential mortgage portfolio along with commercial real estate, as well as loan to general C&I businesses. We did experience some small declines in our energy portfolio, the new production was primarily in Oklahoma, Colorado and Texas; and the Kansas market remained basically flat for the quarter. Colorado experienced good growth although we don't yet break out the Colorado segment in our reports, our Colorado based loans now stand at $64.9 million; up from about $47 million at June 30. We'll begin breaking out Colorado in our report separately in 2017.

In addition to several new customer funding's in the Denver market area we also booked two new construction loans in the Denver market but no funding to taking place on those credits at the end of the quarter. We're making good progress in that market with our team and were pleased with the efforts so far in the Denver market.

Our net interest margin did decline for the quarter from 3.48% to 3.42% but it remains well above the 3.34% that we experienced at the end of the third quarter of 2015. Our pretax pre-provision income was $8.3 million for the third quarter, that was up about 3.9% when you compare it to the second quarter, which was $8 million. It also represents an increase of 29.1% when compared to the $6.5 million to the same quarter, a pretax pre-provision earnings that we had last year.

We discussed efforts to improve our efficiency ratio during the last call - last quarterly call but while our actual ratio remained at 66% similar to the second quarter; we made some notable progress in this area but the ratio remained flat due to several certain one-time restructuring charges. During the third quarter, we focused on what we considered larger expense categories where we could quickly make an impact; those were facility and personnel cost. We did close three branches including Frisco and Fort Worth Texas, as well as Colorado Springs; we didn't exit these markets because any customer-related issues, we wanted to focus our attention and markets where we can better service those clients. These operations were consolidated into our Denver and our Dallas banking groups respectively with minimal impact on business.

We also significantly reduced our lease cost at our corporate headquarters here in Oklahoma City by taking advantage of space we acquired during last October's acquisition of First Commercial Bank. Additionally, we relocated two branches to new locations to take better advantage of market opportunities, this occurred in Oklahoma City and Austin. The net result of all these facility changes was approximately $340,000 in one-time charges, but overall lease costs going forward will be about $360,000 less annually. We still have some opportunities during the first quarter of next year to further reduce our lease costs and we will endeavor to do that.

We made several staffing and restructure decisions during the quarter which eliminated approximately 22 positions, it's about 5% of our total workforce and well, we did hire some new talent during the quarter and we'll continue too in the future, the net savings in personnel cost will approximate about $2.1 million annually. We did experience one-time costs as a result of these personnel changes for the quarter of about $109,000.

We will remain focused on improving expense management and operating efficiencies; our special board committee that we formed early in the second quarter will continue to oversee this process. Our goal is to continue to show measurable improvement in efficiency ratio by the end of the fourth quarter of this year, we're making good progress as we continue to improve the operations of our company. Had we not had the one-time charges for restructuring, our efficiency ratio would have been at 63.8%, well below 68.2% which was what it was a year ago.

I'm not going to move on the Slide 4; yesterday our board did approve a cash dividend of $0.08 per share payable on November 15, shareholders of record at November 1. We continue to operate under the share repurchase program that was authorized by our board, we did we repurchased 61,639 shares during the quarter. Our capital ratios as you can see remain well above industry and regulatory standards with common equity Tier 1 capital of 11.95%, giving us protection against potential extended economic slowdown, as well as positioned us to take advantage of growth opportunities that might arise in the future. I know Joe is going to get into more details on the third quarter results but I do want to act go over some credit-related information and talk a little bit about that, and where we ended up for the quarter and then cover some Q&A at the end.

We'll go on the Slide 5; we have experienced modest stabilization in the economy and growth in most of our markets. We're also seeing some favorable energy pricing which should bode well for us in the future. In the third quarter we experienced a reduction in our potential problem loans as they decreased by $18.9 million and ended the quarter at $45.5 million or 2.4% of our total funded portfolio. The potential problem loans declined by 29% during the quarter, these borrowers are cooperative and they - as they work through their various credit issues and we do not anticipate losses in that portfolio at this time.

Non-performing loans for the $24.5 million at the end of the quarter, an increase of $2.2 million from the second quarter. The $2.2 million increase in non-performance was primarily driven by one identified potential problem loan that was moved to non-accrual status totaling $6.4 million. This is a real estate secured loan whose primary intent to oil and gas firm, we anticipate that this property will likely be sold sometime in the next couple of quarters, we downgraded also one energy service related company to non-accrual status totaling $948,000.

Offsetting these downgrades, we experienced some really good improvement in our non-performing category also as we received pay downs and payoffs of over $5.3 million during the quarter. We incurred net charge-offs of only $137,000 for the quarter of 0.03% annualized of our average portfolio loans. As a result, including normally reserves for the loan - growth in our loan production, the loan loss reserve which is driven by our consistent methodology and process, required a $1.7 million provision; resulting in an ending reserve at 1.52% of our portfolio loans. And when you combine this with our overall purchase discount on acquired loans, the reserve position stands at 1.17% at quarter end.

Overall, I believe our portfolio should good improvement during the quarter as we reduced potential problem loans, and I would expect continued improvement as we look forward to the next several quarters. I'm going to focus on the energy portfolio for a bit here on Slide 6 and 7. Our energy-related portfolio reduced slightly from $56.7 million to $53.4 million during the quarter, and our commitments dropped similarly from $89.5 to $83.2 million. The energy segment now represents only 2.8% of our overall funded portfolio, and that's down from 3.1% last quarter. The portfolio breakdown includes 59% based on reserve base credits, as well as 41% on energy services providers, and that's similar to where it was last quarter. Including specific allocations, our loss reserve on the total energy portfolio now stands at 6%, and that's up from 3.9% at the end of 2015.

We have one non-performing reserve based credit in the portfolio and the amount of $5.3 million where we continue to have $2.7 million in allocated reserves, this credit was downgraded and placed on non-accrual during the third quarter of 2015, the borrower does remain current and is working to raise capital at this time.

On Slide 7 we show the services based portfolio which consists of about $30 million in committed facilities and $21.6 million in funded balances. As I've identified in the past, we continue to have three borrowers in this portfolio which make up almost 80% of the funded balances in this segment. These credits are participations purchased under considered shared national credits; one of these credits $3.3 million was downgraded during the shared national credit review back in August.

So overall, we have 12 direct energy-related borrowers with $30.9 million in commitments and funded balances of $27.8 million that are criticized, that equates to about 37.1% of our total commitments on the energy side inclusive the non-accruals. Based on a continuous and thorough review of our portfolio were - we do believe we're appropriately reserve at this time on the energy portfolio, we're fortunate to have a relatively small portfolio extended directly to the energy sector but we do remain committed to our customers as well as this industry. We know it's a cycle and it will turnaround eventually once supply and demand are more balanced but we don't really look for that to happen significantly between now and the end of the year.

While we have seen better pricing we have not been able to take that into account from a grading perspective as we are still working on cash flow and engineering numbers from historically lower numbers and previous quarters. As we obtain our redeterminations in the fourth quarter, we may see some further improvement in the portfolio assuming pricing remains at a similar level. I do remain confident our ability to identify and manage credit problems with energy and non-related as we successfully demonstrated this over the last three years.

With those opening comments, I'm going to turn over to Joe and then come back to you with some closing comments at the end, so takeover Joe.

Joe Shockley

Thanks, Mark. Good morning everyone. At June 30 - actually I'm starting on Page 8. At June 30 our total - September 30, excuse me, our total asset were $2.5 billion, an increase of $65.8 million over the previous quarter and up $408 million over a year ago, due in part to the fourth quarter acquisition of First Commercial Bank shares combined with our organic long growth.

Total loans as September 30 this year were $1.88 billion, an increase of $59 million over June 30 this year, and up $101 million from the year ago. As our yearend 2015, as Mark noted we had solid loan production in third quarter. Deposits at quarter end were $1.95 billion, an increase of $45 million over the previous quarter ended up $64 million from year end 2015. Our equity capital at the end of the third quarter this year was $284 million, up $1.5 million over June 30, and down $12 million from December 31, 2015 due to the share repurchase program.

During the first nine months of this year, we have repurchased $1.4 million shares for a total of $22.1 million. We believe it that the share repurchase program is a good tool to help leverage our capital. We have currently 269,000 shares available for repurchase under the program third repurchase program currently in existence. Earlier this year the board approved a fourth repurchase program of 5% of shares outstanding that will go into effect at the completion of the third repurchase program. Our tangible equity capital of September 30 was $267.8 million which is a decrease of $11.9 million from year-end 2015, again due to the share repurchase program. Our tangible book value of September 30 was $14.33 which is down from the 1$4.49 for share a year ago.

Since August of 2014 we began our share repurchase program, we have repurchased little over 2.5 million common shares for a total of $40.8 million. Our capital position remains strong and above the well-capitalized ratios set by the regulators. As Mark noted, net income for the third quarter was $4.3 million or $0.23 per diluted share. Earnings for the quarter included a $1.7 million loan-loss provision and a restructuring charges of $439,000 for branch closures and personnel reductions. I will provide more details on the segments in the income statement on the following slides.

Our net interest margin is - again, as Mark noted for the third quarter was 3.42% which is down from 3.48% in the previous quarter. While loan income is up, the income on our securities portfolio was down, primarily due to the accelerated premium amortization, and also we're seeing slightly higher deposit costs. The efficiency ratio for the third quarter was 66% but again as Mark noted, excluding the restructuring charges, the efficiency ratio would have been 63.8%.

Moving to Page 9, there is a fair amount of noise in the third quarter and I will attempt to provide sufficient detail in each category of each of the items that have been affected by that particular category. My comments will compare the third quarter results to the previous quarter. Looking at net interest income for the third quarter, totaled $19.8 million, up $110,000 from the previous quarter. Loan growth of $59 million provided strong interest income on loans by $510,000 which was partially reduced by decline in the interest income on investment securities, due primarily again as to the accelerated premium and amortization as a result of the increased prepayment speeds on mortgages.

The investment income on our securities portfolio was down quarter-to-quarter by $243,000. We also saw an increase on our funding cost which increased two basis points. For the third quarter we did have some acquired loans paid-off which had accelerated - which provided acceleration discount accretion above the normal level that we experienced, approximating $389,000. Again, that would contribute about six basis points to the NIM [ph], our net interest margin.

With the decrease in our securities income combined with the increases and our funding costs; I would expect our net interest margin to be in at 336 to 338 range on a normalized basis. For the third quarter our loan-loss provision was $1.7 million compared to minimal provision in the second quarter. This amount was driven by the loan growth of about $59 million, combined with the changes in non-performing loans. The loan growth required about $730,000 to be added to the loan-loss reserve and the changes in the non-performing loans added about $845,000 in the net charge-offs but reserves was about $138,000.

Looking at non-interest income for the third quarter totaled $4.6 million, up $684,000 from the previous quarter. Service charges and fees were up $125,000 despite an $88,000 write-down on a mortgage servicing rights due to accelerated prepayment speeds and net valuation asset. The gain on the sale of mortgages was up $52,000 which was bolstered by another strong quarter of mortgage production. The gain on our sale of securities was down compared to the previous quarter as we did not make any sales or initiate any changes in the securities investment portfolio.

Our other income was up strong, $667,000, due primarily to the increased interest rate swap fee income during the quarter which totaled $930,000 in the third quarter compared to $182,000 in the previous quarter. The increase in swap fee income, was partially reduced by loss of about $88,000 that was classified as a contract other income as it related to loss on disposition, primarily of tenant improvements on the branch closures.

Looking at non-interest expense for the third quarter totaled $16.2 million, an increase of $888,000. Now the primary drivers of this increase or the restructuring charges that went through the non-interest expense of about $351,000 and then - and that excluded that tenant improvement write-off which was listed as a counter non-interest income. If you look at the change in the provision for unfunded commitments, it was $409,000 as this quarter we had an expense of $146,000 versus a credit in the previous quarter of $263,000; again this was driven by our loan growth and commitments that Mark had alluded to earlier.

Also we had stronger mortgage commission of about $100,000 and part of that is due to the timing of when those commissions were booked. And also we had consulting expense related to our swap income of the total of about $100,000. These are partially reduced by gain on the sale of other real estate of $73,000 and that excludes the $161,000 gain on the sale of the branch condo that was netted against the branch closures. Looking at the regulations that requires us to put a close branch facility, and other real estate of the sale of that was gain in other real estate. I'll provide additional information on the charges in the future savings from the branch closures and personnel reductions in comments just a few minutes.

As previously noted, the net income for the quarter was $4.3 million or $0.23 diluted earnings per share. Looking at the details and providing a little more color on the savings of our branch closures, base planning initiatives and personnel reductions. In our comments in the prior earnings call the second quarter, we mentioned our management team is working with special projects committee of the board to initiate certain actions that would improve our efficiency ratio and position us to achieve an efficiency ratio in the low 60% in 2017.

During the third quarter, we initiated three branch closures and reviewed several space planning options to reduce our lease cost. We also conducted a review of staffing in certain operations in our various markets and initiated certain position eliminations. As Mark noted, the branch closures were in Colorado Springs, Frisco Texas and Fort Worth, Texas. The space planning improvements were primarily in Oklahoma branches and offices, and part of that was able to leverage off of the first commercial facilities in the Oklahoma City market. The restructuring charges that were mentioned were $439,000 and again, this amount nets the gain on the sale of the branch condo that I previously mentioned.

Now looking at that facility savings in the fourth quarter estimated to be about $66,000 as some of the lease rates do not adjust until towards the beginning of 2017. The net facility savings for 2017 is estimated to be about $350,000. The net savings for 2017 does net out other initiatives that we are doing to better position our branch locations in a few markets. In addition to the $350,000 we have another space planning initiative that could add approximately $150,000 to the savings for next year.

The personnel reductions were primarily occurred in mid-August with a few reductions in early October. The annualized salaries, benefits and incentives for those 22 positions that we eliminated approximated $2.1 million. As noted, we began to achieve a portion of those savings in the third quarter but these tough decisions combined with our facility savings will allow us to achieve an efficiency ratio in the low 60s in 2017.

Moving on to Page 10, at quarter end September 30 of this year, loans totaled $1.88 billion that was previously mentioned was an increase of $330 million over a year ago. Again that includes couple of hundred million from the First Commercial acquisition. This page also shows the loans by type and loans by segment. The two largest segments of our loan portfolio are C&I and non-owner occupied. C&I includes the traditional C&I, healthcare and energy. It comprises 30% or $566 million of our total loan portfolio. The non-owner occupied portion represents 30% and totals $573 million. Owner occupied represents 17% of the loan portfolio or $321 million and residential real estate represents 12% or about $216 million where C&D at 10% or $185 million of the total loan portfolio.

Our largest growth from a year ago has been in C&I related loans. Loans by segments show that Oklahoma represents $1.1 billion of our loans which Mark mentioned includes about $65 million of loans in our Colorado market. Texas has $606 million of loans and Kansas about $157 million. Oklahoma's growth again from a year ago was due in part to the First Commercial Bank shares acquisitions, and our largest organic growth has been in the Texas market.

Moving on to Page 11, we showed non-performing loans by type and by geography. The components that comprise our non-performing loans are energy of $5.3 million, healthcare/C&I of $5.2 million, and owner occupied at $6.7 million. Residential real estate is about $3 million. Half of the loans in Oklahoma, $6.8 million in Texas and $5 million in Arizona.

Looking at Page 12, it shows our loan-loss reserve compared to our non-performing loans plus potential problem loans. Our ratio has remained at about 30% or above that September 30 of this year is almost 41%.

On Page 13, reflects our credit risk profile. As Mark also previously mentioned, we had good reductions during the third quarter in our potential problem loans, and a slight increase in our non-performing assets. Our ratio of non-performing assets to total loans is approximately 1%.

On Page 14 we show a strong deposit base where we have 68% of our deposit base represented in non-interest bearing demand, interest-bearing demand, money market and savings. As I have previously mentioned, we have seen deposit pricing become more competitive, and the incremental cost of our deposits is increasing as our costs of deposits by a couple of basis points.

On page 15 we show a trend in our net interest margin or cost of funds, it reflects the pressure on net interest margin and the slight increase in our cost of funds.

On Page 16 we show the trends and our components of our non-interest income where slight gain in our service charges and fees, another good quarter for mortgage gains on sales with an increase from the prior quarter and the strong growth in other non-interest income bolstered by our strong swap fee income in the third quarter.

Looking at Page 17 we show the trends in our non-interest expense. These categories have already been addressed as to the causes of the increase in this quarter, but primarily again they were branch closure related, restructuring charges, personnel reductions and the change from quarter-to-quarter and the provision for the unfunded long commitment.

On Page 18 shows the graph of our various capital levels and all are well above levels - well about well capitalized level set by the regulators. As we begin to position our company for 2017, our focus will be on our current markets. We'll continue to build customer relationships and grow our revenues while managing our expense base and leveraging off of our strong capital position and resources. We certainly recognize that our most valuable asset is our employees.

At this time I will turn it over back to Mark for his final comments.

Mark Funke

Okay, thanks, Joe. If you're following along on the PowerPoint presentation there is a lot of information that begins on Slide 20. I'm not going to cover that, you can review that at your own time. I'm going to cover beginning Slide 19, I want to review some of the continuing priorities and focus points for the balance of 2016 and as we move into the 2017.

Of course maintaining a strong credit quality and conservative balance sheet remains our most important objective given the continued slowness in the energy sector, although we're seeing some improvement there and uncertain economic regulatory and political conditions. I am very pleased that we showed positive improvement in our potential problem loan category during the quarter, and well we did see some increase in our NPLs, a significant number of non-accruals were worked out and improved, and I do remain optimistic about the opportunity for continued improvement in credit quality in the future.

We do expect continued growth trends in our commercial banking sector as well, as our fee-based businesses. We experienced - we have experienced 11 consecutive quarters of loan growth, and I would expect that to continue with good long production in the fourth quarter but this could be offset by some participation sold, some anticipated pay downs, and hopefully some problem loan resolutions during the fourth quarter, so that could temper our loan growth somewhat.

I'm confident we will continue to see the value of our Colorado franchise become a greater part of our company as our new management team is now fully integrated into our company and our pipeline there is improving. We did experience good growth in the third quarter and expect to see positive growth there in the future. Our Texas markets remain solid and continued a good growth experience there, we're excited about our newly relocated office in the Austin market, we believe up the higher visibility and improved location will provide better growth opportunities for us there in that market. And as energy prices stabilize a little bit we should see benefits in our Oklahoma and Kansas markets as well. So positive comments there.

We continue to be aware of the uncertainties given our economic and political situations in this country. The continued slowness in the energy patch, our historically low interest rate and uncertain interest rate environment, as well as the competitive nature of our business make it difficult for both, our industry as well as many of our clients. Unfortunately, we're more impacted by international political and regulatory events and we'd like to admit, we will continue to appropriately assess measure and manage the risk points for our company going forward. We'll focus our attention on deposit growth, we'll continue to do that, commensurate with our expected long growth; we do recognize that this is one of the more critical aspects of our business, core deposit growth is critical to our ongoing ability to expand our franchise. We have become more focused on deposit growth and pricing over the last several quarters, and we experienced a nice deposit growth during the last quarter.

Expanded products and growth in our fee-based income categories will remain a continued focus for us in 2016 as we grow our mortgage in our retail product offerings and our delivery channels with an excellent quarter as Joe mentioned in our production business, unfortunately our good mortgage production was somewhat offset by the continued low interest rate environment which caused us to write down some of our mortgage servicing rights as Joe described. That being said, I'm pleased with the progress that we've made in our mortgage group.

We continue to expand our commercial treasury service products, that's a key point for our company and in the third quarter we implemented a high-end conceit [ph] service level to better serve our commercial treasury products customers which is gone over very well so far. We continue to make active use of our back-to-back interest rate swaps which benefits our clients, as well as helps us effectively manage our own interest rate sensitivity risk on our balance sheet. We did experience some positive fee income from swaps in the third quarter as many of our clients are now considering options in the light of possible rate hikes in 2017. We continue to assess and manage our talent, and we will add new experience bankers to our company when we find those appropriate opportunities.

Excess capital is a strong suit as Joe pointed out, and we continue to seek opportunities to prudently leverage that capital in ways that will add long-term value for our shareholders. We continue to work on improvements in our operating efficiency as we've talked about, I mentioned the previous efficiency ratio or the improved efficiency ratio for this quarter, and I also recognized the further need to improve that number. During the second quarter we begin a diligent effort on the part of the executive management team as well as our board to identify opportunities where we can improve our operating performance and during the third quarter, as we've discussed today, we began implementing adjustments in facility and personnel costs that will become more evident in the fourth quarter run rate.

We've been investing in our markets, in systems, and in talent and we focused on building a great company, we're vigorously focused on the management of expense base, and we'll continue working to drive improved efficiency ratio going forward. As Joe mentioned, had we not had these one-time charges we would have pushed our efficiency ratio down to 63.8% which is a good improvement over where we've been. I'm confident in our ability to show additional improvements of the operation efficiencies over the next several 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 that we built. We've made important beneficial investments and structural changes to this company, our current efforts are appropriately focused toward expense management, as well as efficient revenue growth.

We'll continue to assess the strategic value of our stock repurchase in dividend programs, which Joe outlined; and we'll enhance them as appropriate to provide the best overall return for our shareholders. I'm very confident in this management team and the leadership we built in the company. We acknowledge the headwinds of the energy sector as well as a general economic and political uncertainties in the environment which we operate and we'll aggressively manage this companies so the outcomes achieved provide the greatest benefit for our shareholders while providing best-in-class service for our customers.

I want to acknowledge however, the critical importance that each of our employees play in this company and the tireless effort that they make to serving our clients, and we are working to make this a great company and I thank them for their superb efforts. I look forward to a challenging but rewarding balance of 2016 and on into 2017 and that concludes our comments. We will be happy to answer any questions that you might have at this time.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Olney of Stephens Inc. Please go ahead.

Matt Olney

Hey, thanks. Good morning guys. Hey, I want to one start on credit quality, and first on the potential problem loans, we saw a nice drop there, can you just go within that drop of the potential problem loans, how much was the sold versus refinanced verses just upgrade internally? And then secondly, with the loan-loss provision expense that was elevated in 3Q, perhaps you've addressed this, I just missed in the prepared remarks, but was there a specific provision allocated in 3Q to our credit or is there more detail behind that? Thanks.

Joe Shockley

We had a provision on the large amount of tool that we did downgrade. We did have a specific allocated provision for that particular credit but if you look at the potential problem loans, I would say roughly about half of those loans included upgrades and the rest of them were pay offs or pay downs in those particular loans. So a combination of a couple of things and credits that improved and some that we resolved then paid off.

Mark Funke

Matt, I would just comment like in one pay-off for example, the borrower is able to get a tenant into that facility. There has been a period of lease payments and so forth like that, so it allowed our credit team to be able to upgrade that at an appropriate time to see that kind of improvement there, the new tenant and improved revenue; so fairly large credit in there.

Joe Shockley

That's correct.

Matt Olney

What was the amount of that specific impairment in 3Q?

Mark Funke

On the large real estate loan that we downgraded, it was $1.7 million.

Matt Olney

That was the impairment?

Mark Funke

Yes.

Matt Olney

Okay. And then on the net interest margin; Joe, I believe you gave us a range of 336 to 338 going forward?

Joe Shockley

Yes.

Matt Olney

That's obviously down from what we see last quarter. Can you give us an idea of what has changed since then?

Joe Shockley

Well, we're seeing - the loans we're putting on still continue to be very competitively priced. That combined with the deposit cost. As we continue to have these accelerated discount accretion, that's going to begin to taper off and so we'll have a little bit less to that and that's why I mentioned, we still have a normal level of discount accretion but a little bit of that is going to be running off. So as our projections would indicate that that's probably - the NIM is going to drop a little bit below the 340 range, and so I'm estimating in the 338 range or so.

Matt Olney

Okay, that's helpful. And then last question for me on the expense side; you gave us lots of details as far as kind of opportunities, kind of manage these expenses. I don't fully understand how much of these expenses could be reinvested elsewhere versus dropping down the bottom line?

Joe Shockley

Well, our intent is to primarily have this drop to the bottom line. If we go back and look, I would tell you and I think last quarter, somebody asked and I gave a range in the $15.5 million range or so, I think non-interest expense on a pro forma basis we've talked about here would probably be in the $15.1 million range beginning 2017, maybe $15.2 million in the fourth quarter. Like I said, some of the effects go into effect into the space planning until the beginning of the year.

Matt Olney

Great. Thank you.

Operator

Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Unidentified Analyst

Good morning, guys. It's actually Riley [ph] on for Gary. Just a quick sort of housekeeping item. On the restructuring charges, are those fully wrapped up in Q3, or is there going to be some carry over we'd see into Q4?

Mark Funke

No. Good question. Thanks for asking. Those had all been identified and absorbed in the third quarter.

Unidentified Analyst

All right, great. And you mentioned that this sort of restructuring is going to get you to that low sufficiency level in 2017? Does that mean you're sort of done evaluating the footprint at this time, or is it something you guys are still going to look at over the next few quarters?

Mark Funke

No, this is a continuous process, we formed a Board Committee back in the second quarter that has got a continuous review process of the management team and our efforts to continue to provide improved efficiency. We are going through our budget process currently and we're looking at each one of our markets very diligently for expanse in those markets, personnel cost and so on. So I'm hopeful we'll continue to see improvement from an efficiency standpoint. So we're not finished with that. That's a continuous process.

Unidentified Analyst

All right, perfect. Thanks, guys. I'll step back.

Operator

Our next question comes from John Rodis of FIG Partners. Please go ahead.

John Rodis

Good morning, guys. Joe, just first off, back to your comment on expenses, you said $15.1 million to $15.2 million.

Joe Shockley

Right.

John Rodis

When we go into 2017, would you expect to grow off of that base a little bit, or is it relatively flat, or how should we sort of look at it for next year?

Joe Shockley

I would have a very modest growth, probably 2%. Usually to the extent we consider any type of increases and we look at that beginning in the second quarter, about April or so. We're trying to negotiate contracts and leases and keep them as flat as possible, but I know in some instances, our base is going to have probably 2% to 3% type growth, but we're going to do what we can to keep those as low as we can and really review those to see if there's any we can either eliminate. I think that it would be a modest growth level beginning in the second quarter.

John Rodis

Okay. And then Joe, I think you said the one credit, there was a $1.7 million impairment. Did that drive the provision and without debt? How should we think about the provisioning, I guess.

Joe Shockley

Well, it certainly had an impact on the provision. We also took $137,000 worth of charge-offs, we had a growth in the loan portfolio which drove part of the provisions, so it's a combination of a number of things that go into that. Some of our non-performing assets I mentioned, we had a $5.3 million I think pay down in the number of non-performing assets that impacted the reserves. So it's a combination of we had some things going in and we had some things going out. It did happen to be a similar number to the number on the one note that it was not driven specifically by that.

Mark Funke

I think, John, it was just somewhat coincidental, if you will. I had the same observation and went back through it and that's why I tried to go back and provide those components of loan growth versus change in non-performing loans versus charge offs above the level that we might have had reserves set for those.

John Rodis

And the $1.7 million impairment, was that the energy loan?

Mark Funke

It's not an energy production loan, it's a real estate project. It's a building here in Oklahoma City where a primary tenant is an energy company. A loan was made several years ago, energy companies had some difficulties, so the building is on the market to be sold. Hopefully that will be a resolution in the next couple of quarters.

Joe Shockley

Yes, the revenue sources were just relying upon that particular energy source - energy company.

John Rodis

Just two other question for me guys. I guess one would be how should we think about the pace of the buyback going forward and then what sort of tax rates sort of continue to trend down around 34.5%? What should we be using going forward?

Joe Shockley

I think that's a good effect to tax rate - just to hit that one real quick. And as you know, we've been active in our buyback program since 2014. As I mentioned last quarter, at this level we'll continue to be active, but candidly probably at a more modest space.

John Rodis

Okay, guys. Fair enough, thank you.

Joe Shockley

You bet, John.

Operator

Our next question comes from Brady Gailey of KBW. Please go ahead.

Brady Gailey

Hey, good morning, guys. Can you just size out how much participations you're thinking about selling in the fourth quarter, just so we can get a sense of how much it will burden 4Q loan growth?

Joe Shockley

I'd probably say in the $10 million to $20 million range, roughly. We're building some relationships with some customers that are certainly larger than we're on a hold and we want to develop some relationships with some banks and market areas like Colorado. So we're probably $10 million to $20 million range in new sales in the fourth quarter.

Brady Gailey

All right, that's helpful. And then on M&A, you've done a deal fairly recently. Seeing this like you're more internally focused now. Can you just give us an update on how you're thinking about doing acquisitions?

Joe Shockley

Well, I think you were right in the concept that we're focused internally right now on growing our own company. I'm very focused on as we talked about the expanse efficiency. We're very focused now that we're on multiple markets and we're focused on trying to grow the Denver market which is new for us; we made some changes in Austin with the new facility in Austin; we've got our San Antonio market rolling well. We're going to really focus on the markets that we're in growth with our current base. If something comes along that gives us an opportunity, we're certainly going to look at it, but that's not what our focus is right now. We're really focused on organic internal growth in the markets that we're in.

Brady Gailey

All right, great. Thank you.

Joe Shockley

You bet. Thank you.

Operator

[Operator Instructions] We have a follow-up question from Matt Olney of Stephens. Please go ahead.

Matt Olney

Thanks. Just a follow-up on the deposits. You guys mentioned that's a challenge for you guys in terms of growing deposits within reasonable deposit cost. Can you give us more detail as to what you're seeing in the markets that kind of drive that challenge and any strategy you guys can share with us? Thanks.

Joe Shockley

Yes, we continue to work closely with our retail division and our commercial bankers and trying to grow our deposits, but we're seeing some other banks particularly within the last quarter that are putting on promoting more aggressive CD programs, they're putting in a high-yield money market account, things of that nature and we just need to reassess our efforts to be able to compete with that and just be able to not only retain, but grow those relationships particularly in Oklahoma and in certain part of Texas.

Matt Olney

And then just a housekeeping question. Do you have the diluted share count for the third quarter?

Joe Shockley

I think it's about 18.8-18.9.

Mark Funke

Yes. We don't have that new earnings release. We'll make sure you get that exact number. I should have that and don't have that right in front of me, Matt.

Matt Olney

That's fine. We'll follow-up with you on the call.

Mark Funke

Yes, okay.

Operator

Our next question comes from John Rodis of FIG Partners. Please go ahead.

John Rodis

Hey, guys. Just one other question on the added swap income during the quarter. How many deals was that related to? Was that just one or two new customers?

Mark Funke

I believe it was three.

Joe Shockley

I think that's right.

Mark Funke

Three transactions that we completed. What were those customers out in Colorado - and it's kind of a two-face; we'll do a second swap with that customer. We've closed a part of the loan with them and then there is a second loan that will close on the fourth quarter that has a swap also. We also have picked up a swap on the transaction out of our Tulsa [ph] market with the transaction there, that was a healthcare-related deal and one other. So I think there were three swaps that were completed in that quarter. We keep pretty aggressive pipeline in terms of our guys talking with potential customers about that and our board views this very carefully each quarter and we can manage that appropriately. But I think there were three transactions completed in the third quarter.

John Rodis

Okay. So all things equal, that number should probably trend down, so I'm doing the fourth quarter mark?

Mark Funke

Yes. It was probably an exceptionable quarter for swapping. That was a very good quarter. I mean our local...

Joe Shockley

Yes, we continue to see opportunities from that standpoint but the third quarter was a good one.

Mark Funke

Yes. It probably was the best quarter we've had in terms of that. I would certainly think it be somewhat more moderate in the fourth quarter.

John Rodis

What was - what were the fees for the - you said there was going to be one more contract for the Colorado relationship in the fourth quarter. Were those fees already booked into the third quarter, or were they be booked in the fourth quarter?

Joe Shockley

No, no, no. It was a two-part transaction. So a part of that was done in the third quarter. We did a swap on part of it, we'll close the second part of it in the fourth quarter and there will be a swap on that in the fourth quarter.

Mark Funke

Yes. And it maybe late fourth quarter or early first quarter.

Joe Shockley

It's a secondary transaction but it was not included in the third quarter.

John Rodis

Okay. Thanks, guys.

Joe Shockley

You bet, John.

Operator

There will be no further questions. I would like to turn the conference back to Mark Funke for closing remarks.

Mark Funke

Okay, thank you very much. I do appreciate it. I know everyone on the call has an opportunity to sit on a lot of different calls and you chose to sit in on ours and we very much appreciate that. Thank you for doing so and also wanted to acknowledge once again our employees and our board; our employees do a great job taking care of our customers and our clients every day, they move the bank forward; and our boards, they are good oversight, so we appreciate all of them. And thank you for listening and we'll talk to you next quarter.

Operator

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

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