Southwest Bancorp's (OKSB) CEO Mark Funke on Q1 2016 Results - Earnings Call Transcript

| About: Southwest Bancorp, (OKSB)

Southwest Bancorp, Inc. (NASDAQ:OKSB)

Q1 2016 Earnings Conference Call

April 20, 2016 11:00 AM ET

Executives

Rusty LaForge - Executive Vice President and General Counsel

Mark Funke - President and Chief Executive Officer

Joe Shockley - Executive Vice President and Chief Financial Officer

Analysts

Joseph Fenech - Hovde Group LLC

Matt Olney - Stephens, Inc.

John Rodis - FIG Partners LLC

Gary Tenner - D.A. Davidson & Co.

Daniel Cardenas - Raymond James & Associates, Inc.

Operator

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

I would now like to turn the conference call over to Mr. Rusty LaForge, General Counsel. Mr. LaForge, the floor is yours sir.

Rusty LaForge

Thank you and good morning, everyone. Welcome to Southwest Bancorp Inc.’s first quarter 2016 earnings call. At this time, if you have logged into our webcast, please refer to the slide presentation available online, including our Safe Harbor statement on Slide 2. For those joining by phone, please note that the Safe Harbor statement and presentation are available on our website oksb.com.

I am joined today by Southwest President and CEO, Mark Funke and CFO, Joe Shockley. After the presentation, we’ll be happy to answer and address questions you have as time permits.

With that, I’ll turn it over to Mark.

Mark Funke

Good morning, everyone. I am Mark Funke, President and CEO of Southwest Bancorp and with me is Joe Shockley our CFO, and Rusty LaForge is our General Counsel and he opened up the call. I want to thank you all for joining us today and for your continued interest in our Company.

I am hopeful that you all have access to the PowerPoint presentation that Rusty mentioned and I'm going to start my presentation on Slide 3. I’m announcing today that Southwest Bancorp reported first quarter earnings of $1.9 million or $0.10 per fully diluted share and this compares to $4.5 million or $0.24 per fully diluted share for the first quarter of 2015 and $4.6 million or $0.23 per fully diluted share for the fourth quarter of 2015.

While we did not achieve the level of earnings we would have expected for the first quarter primarily due to the larger than normal provision for loan losses, we are encouraged by other favorable events that occurred in the quarter and the prospect for positive results during the balance of the year.

We continue to see positive loan production during the quarter in light of the ending balances ending roughly flat at $1.78 billion compared to year-end 2015. New loan fundings for the quarter came in at about $108.8 million compared to $40.9 million compared to the first quarter of 2015 and $84.9 million compared to the fourth quarter of 2015.

New production was comprised approximately of 20 new funded relationships between $1 million and $10 million. These fundings were offset by anticipated pay downs we received on a few larger real estate projects, including senior and student housing projects and one healthcare property in Houston. The new production was geographically dispersed across all of our markets but large pay downs primarily occurred in Texas.

Our net interest margin did show some improvement moving up to 3.54% from 3.48% in the prior quarter and our pre-tax pre-provision income was $7.3 million in the first quarter compared to $6.6 million in the fourth quarter and $5.4 million in the first quarter of 2015.

I’m going to move on now to Slide number 4. Our fourth quarter acquisition has been fully integrated and our new team in Colorado has demonstrated positive results during their short tenure with our Company. Our Board approved cash dividend of $0.08 per share will be payable on May 13 to shareholders of record on May 29.

Our Board also authorized, back in February of this year, a third consecutive share repurchase program for up to 5% of the outstanding common stock, which commenced upon the completion of the existing share repurchase program.

Our capital ratios remain well above regulatory standards giving us protection against potential of an extended economic slowdown as well as positioning us to take advantage of acquisition opportunities should those things arise in the future. Joe’s going to get into more details on the first quarter results, but I want to address some key credit related issues that we think are important to highlight. And then I’ll have some closing comments before we end up taking questions.

I’m going to move onto Slide number 5. We experienced an increase in potential problem loans in the first quarter by $29.3 million ending the quarter at $68.4 million in our potential problem loan category or 3.8% of our total portfolio loans. This is up from $39.2 million or 2.2% of the portfolio loans at year-end 2015. We are focused on aggressive identification of problem credits so remediation plans can be put in place effectively.

The downgrades included two energy reserve-based credits totaling $6.6 million due to engineering shortfalls identified in our recent re-determination process. We also had two real estate credits that totaled $8.7 million that are indirectly related to the energy sector due to the tenant base. We had a $10 million C&I loan that was previously mentioned in our recent 10-K as a borrowing relationship that was comprised of multiple affiliated funds and the borrower was under SEC investigation.

We also had a $2.3 million loan, which represents the unguaranteed portion of a USDA guaranteed hospital loan and $1.6 million associated with a dental clinic. All of these loans continue to pay as agreed they are current and the borrowers are cooperative and working through various issues, we do not anticipate any losses on these credits. However, we do believe that these credits exhibit weakness in their credit profiles and we chose to appropriately downgrade them to a potential problem loan status.

We also experienced a modest increase in our nonperforming loans during the quarter of $1.9 million, which included two acquired loans that totaled $2.2 million another $1.7 million that actually resulted from the resolution of our problem Arizona loans plus the net effect of several smaller charge-offs and collections.

Now while not having a significant material impact on our actual numbers immediately. I am pleased to report that our two problem Arizona hospital loans and other ORE that we talked about for over two years having a nonperforming book balance today of $8.2 million including the other real estate, we have finally reached a court approved reorganization plan which has been agreed to by all parties.

The hospitals are now in fact generating positive cash flow. The $1.7 million increase in our nonperforming loan status related to this particular credit mentioned earlier included a reversal of certain payments we received previously plus new exit financing associated with the reorganization. However, in the process we did gain significant new collateral as part of the reorganization plan.

The approved program begins a payment structure that will start reducing our debt immediately. Now assuming the hospitals continue to generate positive cash flow as they have been and payments are made we could consider an upgrade in this credit from the nonperforming status by year-end. This is been a very long and complicated process, but we believe we have reached a very positive resolution.

During the quarter, we made a provision to our loan loss reserve of $4.4 million. This large provision was directed by our model which we have used consistently. This was larger than expected and follows seven of the last eight quarters where we had negative provisions. The provision was driven by a combination of factors including the ongoing slowness in the energy sector as well as specific deterioration particularly in three general business credits.

We increased our overall loss reserve to 1.53% of the portfolio loans from 1.47% at the end of 2015, and we incurred net charge-offs of $3.3 million for the quarter. The charge-offs were centered in three credits, the largest of which totaled $2 million to an engineering and construction firm, $600,000 to an institutional contractor, and $800,000 to a specialty wholesale company.

Overall, it was a disappointing quarter for our team related to credit quality as reflected in the increases in both our nonperforming and potential problem loans. While I do not believe these instances reflect the overall quality of our credit portfolio, it has caused us to reassess some of our credit processes and implement additional process controls and also make some personal adjustments.

Now, I want to focus on our direct energy portfolio as outlined on Slide 6, our funded balances reduced from $63.4 million to $57 million. The Energy segment now represents 3.2% of our overall funded credit portfolio. The portfolio breakdown includes 56% in production-based reserve credits and 44% to the energy services sector.

Including specific allocations, our loss reserve on the energy portfolio stands at 6.22% from 3.9% at year-end. We have $58.7 million in committed credit facilities and $31.9 million funded balances for reserve-based credits. As I mentioned in the past, 10 credits have committed facilities in excess of $1 million and seven actually have funded balances in excess of $1 million. The reserve composition on these credits is 80% oil and 20% gas.

We have four reserve-based credits with funded balances of $12.9 million that are criticized. This includes one nonperforming reserve-based credit and the amount of $5.4 million where we have allocated a $2.8 million specific reserve, which was an increase this quarter of $1.6 million based on the most recent redetermination.

This credit was downgraded and placed on non-accrual in the third quarter of 2015. It does remain current and the borrowers cooperating with us and they are seeking capital. They have raised some capital, but not sufficient. We do not have any participations purchased in this segment of the energy portfolio.

Moving on now to Slide 7, the services based portfolio consists of $33.8 million in committed credit facilities and $25 million in funded balances. Six credits have committed lines funded balances in excess of $1 million and three credits that we’ve discussed in the past make up 78.6% of the funded balances in this segment of the portfolio.

All of these are participations purchased and considered shared national credits. We have received the results of the most recent shared national credit exam; none of these credits were considered potential problem loans. One of these service-based credits was downgraded during the recent shared national credit review and the report was received after the end of the quarter. This one credit with a funded balance of $6.8 million was downgraded to criticized. It was not however downgraded to a potential problem loan status.

Including the one credit, we have recently been made aware of in the shared national credit review process, we now have a total of eight energy credits with funded balances of $22 million or 38.7% of our funded energy portfolio that are considered criticized. This includes the one credit that I mentioned a moment ago that is $5.4 million which is on nonperforming status.

Last quarter, I said we would run several scenarios assuming certain pricing factors, apply them to our portfolio. We would then estimate the total reserve increases that could be if those credits played out and those borrowers could not - if those scenarios played out and those borrowers could not bring additional support to the credit.

We ran three scenarios, first at $30 oil and $1.80 gas flat for the life of the reserves. Second, we ran $35 oil and $1.95 gas flat for the life of the reserves. And third, we did a NYMEX shift pricing which began with the front month price for oil at $25.77, and $1.48 gas which we escalated at 3%, and then we capped at $60 for oil and $4 for gas.

After looking at those three scenarios, the worst case is the first scenario which you might assume at $30 flat pricing. This scenario would calculate that we could require additional of approximately $4 million to $5 million allocation to our reserve position over time. This calculation excludes any other value the guarantor the borrower could offer it simply looks at the reserve base relative to the debt outstanding.

While all of these pricing scenarios are hypothetical, it does give us an idea of what could be required under various pricing scenarios. We do have sufficient capital to manage through any of these scenarios. That being said based on the redeterminations we have received in the last quarter and a thorough review of our portfolio. We believe we are appropriately reserved in our energy portfolio at this time.

We are fortunate to have a relatively small portfolio extended directly to the energy sector at this time, but remain committed to our customers in this industry and we do know this cycle will likely turn once the supply and demand become more balanced, but we don't look for that to happen to any significant level in 2016.

While our bank has been focused in the energy sector for only about three years, we entered with experienced bankers and we chose to do business with customers and companies with long track records and good property sets and limited leverage. I remain confident in our ability to identify and manage credit problems both energy and non-energy related as we have successfully demonstrated over the last three years.

Now with those opening comments, I am going to turn it over to Joe for a few more details on the financials and then I will come back with a couple comments before we go into questions.

Joe Shockley

Thanks Mark. Good morning, everyone. I'll provide some highlights to our first quarter financial results and then provide more color on the following slides.

Starting out on Page 8, our total assets at quarter end March 31, 2016 were $2.361 billion, a slight increase over year-end 2015. Our total loans were $1.782 billion, up $2.5 million over December 31. As Mark noted, we had good loan production in the first quarter of the year, but the net growth limited due to anticipated payoffs.

Our deposits were approximately $1.9 billion, up $11 million from year-end 2015 and our equity capital ended the year $286 million, which was lower than at year-end due to our repurchase program. During the first quarter of the year, we repurchased 803,546 common shares for total of $12.7 million. We believe the share repurchase program is a good way to continue to leverage our capital position.

Our tangible equity of March 31 was $269.5 million compared $279.7 million at December 31, 2015. Tangible book value per share is $13.97, which is pretty much the same as it was at year-end due to the execution of our repurchase program. We are currently in our third share repurchase program since August 2014 and we have repurchased a total of 1,925,000 shares for total of $31.4 million. Our capital ratios remain strong and well above the well-capitalized ratio levels established by the regulators.

Net income for the first quarter as Mark noted was $1.9 million, well below what we expected however as a result of the $4.4 million loan loss provision and earnings per diluted share was $0.10 a share. I'll provide more color on the quarters income statement components in the following slides. And encouraging ratio is our net interest margin which improved to 3.54%. We did have some additional accelerated accretion during the quarter, which helped our net interest margin by about five basis points.

However, we had about the same amount of additional accelerated accretion in the previous quarter 2015. The efficiency ratio for the quarter was 68.4%, but that included $212,000 expense in noninterest expense for unfunded commitment reserves related to the first quarter’s loan production not yet funded. The loan to deposit ratio remains in the mid-90s and our loan-loss reserve to total loans was 1.53%, but combined with our purchase discount our loans to combined ratio was 1.96%.

Our net charge-offs to total loans for the quarter was 75 basis points annualized. Our loan-loss reserve to nonperforming loan remains above 120%.

Moving on to Page 9, our net interest income for the first quarter of this year was $19.8 million, an increase of $320,000 over the previous quarter due to higher average loans outstanding as our average loan yields remained at about 4.5% consistent with the prior quarter. The provision for loan losses as noted was $4.4 million.

Our noninterest income for the quarter was $3.4 million, down $764,000 from the previous quarter. The previous quarter included $517,000 of fees on interest rate swap transactions. We did not have any swap transactions in the first quarter of this year.

Also during the first quarter of this year we had a valuation adjustment to our mortgage servicing asset of $288,000 due to the change in the prepayments fees. As we have seen the 10-year rate, which drives those valuations, has declined about 49 basis points from year-end. We also saw a slight decline in service charges and fees due to seasonality, offset by a gain on securities due to a slight restructuring of our investment portfolio.

On the noninterest expense side; noninterest expenses totaled $16 million, which was down $1.1 million from the fourth quarter of 2015. The previous quarter results included $1.4 million of deal and acquisition cost. And in the first quarter of this year, we incurred the $212,000 that I mentioned a minute ago are the provision for unfunded commitments again related to the loan production in the first quarter and that was compared to a slight negative provision in the previous quarter.

Now looking forward I would advise you that our salary merit increases went into effect on April 1 of this year. Our average merit increase was about 2% of base salary, which equates to about $50,000 a month or $150,000 per quarter. The effective tax rate for the first quarter was about 35.2% compared to 36% for the previous quarter. I do expect the effective tax rate to remain consistent for the first quarter of this year.

The first quarter’s net income of $1.9 million or $0.10 earnings-per-share which is certainly less than we expected to be able to report. However, the encouraging amount to report is the pre-tax pre-provision amount of $7.3 million, which is 10% over the previous quarter and up 35% over a year-ago.

Now the $7.3 million is just a straight calculation of our pre-tax pre-provision. If you adjust it for the one-time securities gains, but also the valuation adjustment of $288,000 and the unfunded provision, again, while it’s a noninterest expense is a provision number $212,000. The adjusted pre-tax pre-provision would be about $7.6 million.

On Slide 10, we show the loan portfolio by type and by market. The growth in Oklahoma from a year ago has been in part due to the First Commercial acquisition in October of 2015. Our total loans from a year-ago have increased $344 million and of that amount First Commercial represented about $202 million of loans acquired. Texas continues to be a strong market for loan growth for us and we are very encouraged by the pipeline in our Colorado market.

On Slide 11, it shows the nonperforming loans by type and by geography. Mark mentioned in his comments earlier what drove the increase in the nonperforming loans. As you can see energy increased to $5.4 million compared to there were no energy credits in nonperforming loans a year-ago. The increase in the residential real estate is due to an Oklahoma residence owned by a borrower employed in the energy industry.

Looking at the geographic location, our energy credit is in the Texas market and the increase in Arizona results from the completed plan of reorganization that occurred during the quarter that Mark commented on in his remarks.

Moving along to Slide 12, we show the increase in criticized assets. We have an increase of $1.9 million in nonperforming loans from the previous quarter and an increase of $29.3 million potential problem loans and an increase of $2.4 million in special mention loans. Our other real estate is flat at $2.3 million compared to year-end 2015. Mark has already commented on the types of loans that drove these increases.

One encouraging note, as Mark previously commented on our longest nonperforming loans, the hospital loans in Arizona, were recently confirmed by the bankruptcy court, and we have begun receiving payments in the first quarter. We also have sold the other real estate under an option purchase arrangement. We began to receive auction payments in the second quarter on the other real estate.

The bankruptcy court approved plan that affirms a $14 million note balance and the borrower has an incentive if it pays us off early. This would provide us a substantial recovery if this were to occur. Otherwise, it will be recovery over a period of years. The borrower has new management and has been performing well over the past few months.

Moving on to Slide 13, which shows our loan loss reserve compared to our nonperforming loans plus potential problem loans. Certainly this ratio has decreased from 43.9% down to 29.9% as a result of the increases in our potential problem loans. As previously noted, we believe we are appropriately secured on the real estate and healthcare loans and the other loans are still performing. We will continue to monitor these loans very closely and stay in touch with the respected borrowers.

On Slide 14, we show the sharp increase in our potential problem loans, but as mentioned we are - believe we are appropriately secured.

On the next page, the composition of our deposit base. We have 70% of our deposit base and lower cost deposits, and it also shows our cost of deposits. As we have mentioned in previous quarters, we expected to see an increase in our deposit cost as we grow our loans and earning assets combined with the mid-December 25 basis point rate increased by the Federal Reserve. Our deposit cost increased about three basis points from the previous quarter.

On Slide 16, we show the trend in our net interest margin and the cost of funds, and as previously noted, our net interest margin for the first quarter was 3.54%, up from 3.48% reported in the fourth quarter of 2015. Also noted, our cost of deposits increased slightly to 40 basis points.

Moving on to Slide 17, where we show the trend in noninterest income. The first quarter of this year noninterest income was down from the previous quarter due to previously mentioned interest rate swap income in the fourth quarter where there was none in the first quarter, and then combined with the valuation adjustment on our mortgage servicing asset of $288,000 again due to the accelerated prepayments fees.

On Slide 18, we show our noninterest expense and the decrease is primarily from the $1.4 million of deal and acquisition costs incurred in the fourth quarter of 2015, partially reduced by the $212,000 of the provision for unfunded commitments due to the loan production in the first quarter of this year.

On Slide 19, we continue to leverage our capital with our growth and our share repurchase program, but our capital ratio has remained well above the well-capitalized level set by the regulators. As I turn it over to Mark, I do want to say that we certainly - our first quarter results, again, we’re less than what we expected to report, but I am encouraged by our improvement in our pre-tax, pre-provision income which is up 10% over the prior quarter and 35% over a year ago.

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

Mark Funke

Thank you, Joe. There is additional financial information in the PowerPoint that begins on Slide 21, which you can review on your own, but I am going to start on Slide 20 and I am going to cover the priorities and focus points for 2016 for a couple of minutes. Maintaining strong credit quality and conservative balance sheet management in light of the downturn in the energy sector are the highest priority for us.

We acknowledge the unanticipated provision expense this quarter and the charge-offs that had to be taken on certain credits. We have taken appropriate actions as a result to enhance our credit underwriting process and also made necessary personnel adjustments to strengthen the management and our markets.

I mentioned to you last quarter the significant changes I made regarding market management naming three regional presidents who are now providing much closer management of our markets. The restructure of our commercial bank senior management team will help create more growth opportunities, more efficient management of our markets. We expect to continue our growth trends in the commercial banking sector in both lending and the fee-based income.

We are all too well aware of the negative economic impacts this energy slowdown will have on our geographic region if it sustained for multiple quarters. We continue to appropriately assess, measure, and manage all of our risk points. We also continue to focus on deposit and deposit acquisition and growth commensurate with the anticipated loan growth we see for the balance of the year.

Expanded products and growth in our fee-based income categories remain an important focus for 2016, as we grow our mortgage and our consumer products and delivery channels and expand our commercial treasury products.

We have entered into an important vendor partnership over the last few months focused on a very advanced treasury management product for hospitals, medical billing companies and other healthcare-related entities. We’ve had meetings with clients and prospects in several of our major markets. These are long sales cycles, but the initial reviews are excellent, and I believe we can build a strong product niche in this area creating new and consistent fee-based income and strong customer relationships.

We’ll continue to add talent in our markets and then into our business lines into the operating infrastructure of our Company is necessary and appropriate. Excess capital that we have is a strong suit for our Company and we will seek out opportunities to prudently acquire institutions or assets that have the capacity to add long-term value to our shareholders.

We will remain patiently aggressive in this process, but we remain interested in growth. We continue to work on improvements in operating efficiencies, but we are investing in new markets in systems and in talent with a continued focus on building a great Company. We will appropriately manage our expense base and we will work to drive an improved efficiency ratio.

This quarter we achieved an efficiency ratio of 68% and I expect that to improve over the next couple of quarters. We’ll continue to assess the strategic value of our stock repurchase and our dividend programs and enhance them as appropriate to provide the best return for our shareholders. I am confident in this management team and the leadership we built throughout the Company. We acknowledge the headwinds of the energy sector as well as the general economic uncertainties and our political environment, which we operate under.

While I am disappointed in the quarterly earnings and the credit quality indicators, I am encouraged by the actions we have taken, the lessons learned and the prospects I see for this Company moving forward. I believe we have established appropriate reserves based on the known risks present in our balance sheet given the current environment.

I am also confident in our ability to continue to take advantage of the fully integrated First Commercial Bank acquisition that has allowed us to expand our presence in Oklahoma City and build our presence along the front range in Colorado. I look forward to a challenging, but rewarding balance of 2016 for our employees and our shareholders.

And that concludes our prepared comments. We will be happy to answer any questions at this time.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator instruction] The first question we have comes from Joe Fenech of Hovde Group. Please go ahead.

Joseph Fenech

Good morning guys.

Mark Funke

Good morning Joe.

Joe Shockley

Hi, Joe.

Joseph Fenech

Mark, how would you compare what you're seeing in the general economy in Oklahoma relative to what you're seeing in Texas. I apologize if you address this earlier I hopped on late, but the banks that have reported so far we are really not hearing much in the way of contagion in the Texas economy. Would you say that's also the case in Oklahoma are you starting to see some stress there?

Mark Funke

Well, certainly I think Texas is bigger and more diversified than the Oklahoma economy certainly and there is probably a higher concentration of energy companies in the Oklahoma City and Tulsa markets and there may be from a concentration perspective in the Dallas market, so the growth we've seen in the last couple of quarters - well we've seen growth in Oklahoma, certainly has also come in Texas probably in a broader sense we see companies continue to expand and new opportunities in Texas more so than we see in Oklahoma.

So I do think the Texas economy is definitely more robust than what Oklahoma's is, but I still see that there's value in the Oklahoma economy, but the Oklahoma City and Tulsa should continue to show expected job growth through the balance of this year. Well, we have seen layoffs in both of those market areas. There is also a good job growth activity coming in the area of aerospace and technology, healthcare in some other areas. So, well Texas clearly is a standout positively so Oklahoma, we are seeing some impact from the energy sector negatively, but not far off the cliff kind of impact.

Joseph Fenech

Okay. And then in terms of the provision, we've now seen I guess the extremes of zero and negative provisions from you all now a big one-time provision. So I’m kind of at a loss for how to think about the pace of provisioning from here. Can you give us a sense based on what you know today for how you are kind of thinking about that going forward?

Mark Funke

That would be hard to project exactly I think that the provisions going forward will probably be more normalized than what this particular quarter was. We had some anomalies this quarter that we did not expect, but I do believe that as we've done a very thorough review of the portfolio that the provision should be much more normalized going forward.

Joe Shockley

Yes, this is Joe Shockley. I would say as we look at the quarter and set aside some of these - what we think anomalies that have occurred, depending on loan growth I think you could see probably in the $500,000 range to $1 million range, so again depending on loan growth.

Joseph Fenech

Okay. In terms of - Mark, the new initiatives in the new markets, can you just give us maybe a few senses on each one market-by-market the progress you are seeing whether it's in Denver, San Antonio, Austin, Dallas, if you could just go one-by-one give us just a quick update on each that would be helpful?

Mark Funke

Yes, I will. Colorado being the newest market that we have. We entered into the Colorado market in the fourth quarter of last year. I think I mentioned previously the hiring of a team of bankers in Colorado, experienced seasoned bankers, three of them they came aboard. We’re seeing good progress from those individuals, it does take a while to move clients as people join the organization, but we’ve seen good activity and some nice fundings in Colorado in the first quarter and we expect to see that continue. I think all of us are very excited about the prospects for our growth opportunities in Colorado.

The Denver market, it seems to be a very dynamic market with a lot of high-tech positive things going on, good healthcare concentrations, which is something we’re good at and positive from that side. So Colorado is a plus for us.

The Kansas market is stable. Kansas is not been a high-growth market for us. It continues to be a good deposit market for us. We have several locations there with very good strong core deposit base, but not significant loan growth in the Kansas market for us, but the economy there it's not impacted heavily by the energy sector maybe some modest impact, but Kansas is fairly flat from that standpoint.

Oklahoma City and Tulsa have historically been really good markets for us. We continue to see growth opportunities in both Oklahoma City and Tulsa. Although, I think they’re certainly slower than what they were say 12 months ago and we’re cautious about the economies in the two major key cities.

We have a significant deposit concentration in Stillwater Oklahoma, which continues to be a Stalwart for our Company from a deposit standpoint, something that’s very important. But the impacts in the Stillwater market are not negated by the energy sector from that perspective. So I don’t see a lot of robust growth in Oklahoma, but I see it to be a generally stable with somewhat of an upswing during the course of the balance of the year and reasonably good credit quality.

Texas across our markets, if you go into the Dallas market I think we’ve assembled an excellent team in Dallas, a strong core commercial banking and healthcare team. We’ve added a treasury banker in that market over the course of the last quarter and we've also - I feel confident we made some changes in our Fort Worth market and I think we will see some good continued growth in Dallas. Dallas is just a dynamic market and while you hear a lot of talk about the energy sector it just doesn't feel like it's impacting Dallas in a highly negative way.

The Austin market, we’ve made some changes in the Austin market in the last couple of quarters with new leadership in the Austin market. We are in the process of working towards an additional branch - new branch location, relocation in Austin. And we've hired a new banker in Austin in the last quarter and I do feel very confident about prospects in Austin. Austin again is another highly dynamic market that doesn't seem to be impacted severely by the energy sector.

The San Antonio market is a market that we've seen over the last year exhibit very strong growth for our Company. We put new leadership in that market a couple of years ago, very dynamic leadership in that market. We opened a new commercial banking facility in San Antonio about a year ago and have seen excellent growth in the San Antonio market with very key customers. So that’s kind of how I look at our system across our footprint today.

Joseph Fenech

Okay. And then last one from me guys. You’ve talked about the three credits that make up the bulk of the services portfolio. And now that one was lowered to criticize status, I think you said post quarter end. Which of the three was that and can you kind of give us a brief update on the status how you’re feeling about the other two?

Mark Funke

Yes, I’ve talked about those three credits. There was a pipeline inspection company. There was also had a wastewater disposal unit associated with it. That was the credit. That was the downgrade portion of the three, the other two past from a shared national credit perspective.

And the indication from the downgrade is really - it’s certainly not that they cannot meet debt service, because the numbers can meet debt service. Their projections that their actual numbers were about 30% below what their projections were when they went into the initial phase of this year, and the leverage ticked up a little bit.

And what we’re seeing from a shared national credit perspective is the operating leverage is the key component to what the regulators are looking at the operating leverage on this Company did go up, but not enough or to get downgraded all the way to a potential problem loan, but that was the credit. It still has sustained positive cash flow well in excess of debt service, but certainly lower than it was last year and lower than what the Company had given us in terms of projections.

Joseph Fenech

Okay. Thank you, guys.

Joe Shockley

You bet. Thank you.

Operator

Next we have Matt Olney of Stephens.

Matt Olney

Hi, thanks. Good morning, guys.

Mark Funke

Good morning Matt.

Joe Shockley

Good morning Matt.

Matt Olney

Mark you just mentioned in Joe's response the underwriting criteria for energy lending, how it has changed over the last few months. And that did prompt, it sounds like a downgraded in the quarter. I am curious did you get to apply these new guidelines to the entire energy portfolio or just a rolling process that could take a few more months?

Mark Funke

Are you talking about where we talked about the hypothetical reserve situation?

Matt Olney

No Mark, I’m talking about the new risk rates from the regulators as they’re looking at leverage a lot more closely now than they were previously?

Mark Funke

Well, certainly we do take operating leverage into account when we are looking at degrading on our energy credits, but what really is driving the energy credits are two things. It’s the cash flow generated by the borrower and able to service the debt on the particular credit in conjunction with the engineering and that valuation over the PW10 that we expect to or the PW9 that we expect on the reserve base.

So to the extent that you’ve got a borrower. Those are really the two main categories. It’s the cash flow they’re generating versus the collateral valuation that we have on our reserves and that’s what we’re really generating.

Matt Olney

Okay.

Mark Funke

And as you mentioned on the operating leverage on the service companies is something we do continue to look at and we do monitor that on a regular basis. We get good financials on all of our service-based companies on a quarterly basis. And as I said, the two larger - two of the large credits in that that make up that 78% were not downgraded at all in [SNC] review.

Matt Olney

Mark, I think you mentioned in the prepared remarks that you're reassessing the credit portion of the bank and it could include both personnel and policies. Is that reassessments still ongoing? When should that be complete? Are there any themes or any types of loans that you're reviewing that’s a common theme? Any other commentary about that would be helpful? Thanks.

Mark Funke

Well, part of the changes that I mentioned were the announcement that we made of the regional presidents. We believe that was important to have a much stronger view, what I'll call locally at our market levels by experienced seasoned bankers. And when we announced the change, recently we eliminated the position of our Chief Banking Officer named three regional presidents that now cover our South Texas region, the North Texas region and then also the Oklahoma, Kansas, Colorado segment.

And the three individuals that we put in those positions are strong, general commercial bankers with excellent experience and we feel very positive about their oversight over those particular markets. We’ve also gone through and looked at a variety of different credit processes establishing Senior Credit Officer's in our key markets and looking at as any bank would or should looking at their general funding process, how loans get done, made and so on.

So that's always a continuous review here, but the big change was the regional presidents that we named, and we also named a new Market President for the Fort Worth market in the first quarter and from that standpoint.

Matt Olney

So it sounds like those items are mostly complete.

Mark Funke

Yes, certainly the big items are complete, but we are never complete in terms of continuous review process.

Matt Olney

Okay. And then lastly, Joe, as far as the margin outlook, lots of moving parts there. I may have missed in your prepared remarks, but what should we be expecting to the margin in the next few quarters?

Joe Shockley

Well, as I mentioned, we were pleased to be able to report a margin slightly in excess of 3.5%, but we had about - I’d five basis points of additional accelerated accretion beyond the normalized. So I’d say maybe a little bit above 347 to 348 range.

Matt Olney

Okay, thank you.

Mark Funke

You bet.

Operator

The next question we have comes from John Rodis of FIG Partners. Please go ahead.

John Rodis

Good morning guys.

Mark Funke

Good morning John.

Joe Shockley

Good morning John.

John Rodis

Few of my questions were asked and answered, but maybe a relatively simple one just on the buyback with all the different announcements and stuffs. How many shares are left under the buyback plan now?

Mark Funke

We’ve focused on the number that we purchased. We will have to get you the number on what that I believe remaining. We’ve been focusing on what it was in the quarter.

John Rodis

Looks like its 800,000 or 900,000 shares, does it sound about right?

Joe Shockley

I would say a little bit less than that probably in the range of 700 to 750.

John Rodis

Okay.

Mark Funke

We will get the number before we get off the call.

John Rodis

Okay.

Joe Shockley

But certainly we would - but I mean we would bidding how things are, but we would certainly depending on how fast we use that up we would visit with the Board about whether or not to implement another one, but under the current one there is probably about 700,750.

John Rodis

And just everything that obviously everything that's going on the higher provision this quarter, is there any reason to believe you won't be back in the market once the restrictions lift after this quarter?

Joe Shockley

No, we would continue to execute under the buyback program.

John Rodis

Okay, makes sense. Thanks guys.

Joe Shockley

Okay, thanks. You bet.

Operator

We have Gary Tenner of D.A. Davidson.

Gary Tenner

Hi guys, good morning.

Joe Shockley

Good morning Gary.

Mark Funke

Hi Gary.

Gary Tenner

Just had a question kind of on the loan growth I’ll again if you address this I apologize. I know the production was about $108 million kind of flat on period basis balance wise though, so was there any pay down activity that was notable from the Colorado franchise. And the second part would be I know typically you’ve kind of triangulate around how single-digit kind of target for growth on the loan side to get that for the rest of this year, obviously you have to be a higher annualized pace. So what’s the current thinking on growth?

Mark Funke

I still think mid - up or single-digits for loan growth for the balance of the year would be a respectable number for us. The pay downs were somewhat anticipated, as I said we had a couple of credits that we knew when we made them back last year that they were relatively short-term situations where we knew the borrower were seeking longer-term financing and this was more of a bridge type opportunity for us to enter into a relationship and those we actually thought may payoff at year-end, but they did not pay off until the first quarter.

We had a couple of other deals, so we had a very large senior housing project that did evolved over a long period of time with us and that the borrowing opportunity came available for them to seek very long-term fixed rate financing which was beyond what we were capable of doing.

We had a hospital deal down in Houston that had been on our books for a long time, that was really what I call somewhat out of our market and as a result of that that loan paid off as well. We had a student housing project that paid off and things of that nature. I would not classify these as lost relationship per say these were transactional deals that had been on the books that paid off accordingly.

Joe Shockley

Yes. Gary, the pipeline from our bankers look still strong and in the production we had in the first quarter, we had a fair amount of the production that will be funded over time, does necessitating the provision for no unfunded increase. So we are still encouraged that we can get to kind of a good upper single-digit number, but certainly recognizing the headwinds that Mark noted in our market, but certainly encouraged by some recent energy pricing.

Gary Tenner

Great, thank you.

Joe Shockley

You bet.

Operator

The next question we have comes from Daniel Cardenas of Raymond James.

Daniel Cardenas

Hi, good morning guys.

Mark Funke

Good morning Daniel.

Joe Shockley

Good morning Daniel.

Daniel Cardenas

On the deposit sides what are your thoughts regarding deposit growth, should we expect that to match loan growth and then maybe as I look at your loan to deposit ratio that's around 94%, 95% to mean where is your comfort level with that ratio?

Joe Shockley

Well, candidly we would hope that deposit level would grow; we think we got more capacity for broker and wholesale funding if needed. We are working with our bankers; we’ve gotten good growth in our consumer base during the quarter, but we also saw a couple of energy companies that have drawn down. Some of their levels of liquidity, not totally unexpected, so - yes, we think that the deposit growth can be there, but acknowledging that a portion of that would have to come from the wholesale funding of deposits.

We would also be looking to match up any growth in our mortgage activity with the Federal Home Loan Bank and probably see that funding. So we got very, very strong liquidity and funding sources, but I would say that the core deposit growth based upon what we expect would probably be somewhat more modest then what we would expect in our total loan funding.

Daniel Cardenas

Okay. And then your loan to deposit ratio it kind of expended to kind of who were around that that may pop?

Joe Shockley

Yes, could pop up a little bit, but certainly our intend to keep it below 100%, but I would say maybe in the 95% to 97% range.

Daniel Cardenas

Right. And then just looking at your operating expenses for the quarter, expect to see personnel expenses increase a bit, but I mean do you think that you can maintain those operating expenses in that $15.8 million, $16 million range throughout the rest of this year?

Joe Shockley

I do, as noted the provision for unfunded commitments hit noninterest expense and that was $212,000 and so we think that we’ll continue to focus, hopefully we’ll have some legal and consulting costs that we may have incurred in the first quarter to moderate a little bit. So I think that that range is a reasonable range going forward.

Daniel Cardenas

Right and then expectations for the fee income side, is that buildable given typically the soft first quarter?

Joe Shockley

Yes, I think that there is some seasonality that we’ve experienced in the first quarter of the year, particularly in our mortgage activity. And we do have some opportunities on the swap income side, so hopefully it will be something there, but I do expect that to improve in the second quarter to a modest extent.

Daniel Cardenas

Okay. Great. That’s all I have right now. Thank you, guys.

Mark Funke

All right. Thank you.

Operator

Well at this time, we have no further questions. We will then conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Mark Funke, President and CEO for any closing remarks, sir.

Mark Funke

Yes, thank you. Thank you all for joining us on the call today. We do appreciate your continued interest in our Company. And I also want to thank our many loyal employees of bankers and be in Southwest Bancorp, and also our Board who all are helping to make this a great Company and we do appreciate their efforts. Thank you for joining us.

Operator

And we thank you sir and also to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Thank you, take care, and have a great day everyone.

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