Southwest Bancorp Inc. Reports Second Quarter 2011 Results Future Interest and Dividend Deferrals

STILLWATER, Okla., July 25, 2011 (GLOBE NEWSWIRE) -- Southwest Bancorp, Inc. (Nasdaq:OKSB) (Nasdaq:OKSBP), ("Southwest"), today reported a net loss available to common shareholders of $4.0 million, or $0.21 per diluted share for the second quarter of 2011, compared to net income available to common shareholders of $3.4 million, or $0.19 per diluted share for the second quarter of 2010, and $1.4 million, or $0.07 per diluted share for the first quarter of 2011. The net loss available to common shareholders for the six months ended June 30, 2011 was $2.6 million, or $0.13 per diluted share, compared to net income available to common shareholders for the six months ended June 30, 2010 of $6.7 million, or $0.41 per diluted share.

Second Quarter 2011 Results:

Rick Green, Southwest Bancorp's President and Chief Executive Officer, stated, "This was a challenging quarter for Southwest and Stillwater National Bank. We recorded a net loss year-to-date and for the second quarter of 2011, mainly as a result of new appraisals received on collateral dependent commercial real estate loans from states outside of our home markets of Oklahoma, Texas, and Kansas. Those effects were partially offset by our settlement of certain tax matters, described later in this release, as well as our stable net interest margins and expense control.

"We continue to focus on the resolution of problem assets. Nonperforming assets increased to $190.1 million and 8.66% of noncovered portfolio loans and other real estate from $176.5 million and 7.74% of noncovered portfolio loans and other real estate at March 31, 2011 and from $144.8 million and 6.11% of noncovered portfolio loans and other real estate at December 31, 2010. Our noncovered nonperforming assets were up from year-end, primarily due to an increase in nonperforming loans. The dollar amount of other real estate was up from year-end as well; however, the composition has changed as our resolution process continues. In the first six months of 2011 we placed $104.9 million on nonaccrual, but returned $8.4 million to accrual status, charged-off $35.5 million, wrote down $1.7 million on other real estate, transferred $13.3 million from nonperforming loans to other real estate, and received $3.5 million in resolutions and payments on nonperforming loans and $10.8 million from sales of other real estate. At quarter-end our potential problem loans were $291.2 million, up $58.0 million, or 25%, from year-end, and $49.0 million, or 20%, from June 30, 2010. We believe that levels of nonperforming loans and potential problem loans are likely to fluctuate up and down as the process continues.

"Our noncovered loans decreased by $173.2 million, or 7%, from year-end and $307.7 million, or 12%, from June 30, 2010. This decrease allowed us to reduce our commercial real estate mortgage and construction concentration to $1.6 billion, or 75%, of noncovered loans at June 30, 2011. Our healthcare credits at quarter-end totaled $670.6 million, or 31%, of noncovered loans, including $407.3 million of healthcare related commercial real estate mortgage and construction loans. Nonperforming healthcare assets at quarter-end were $20.6 million, or 11%, of total nonperforming assets. Approximately 81% of our nonperforming assets are in the more stable markets of Oklahoma, Texas, and Kansas.

"At June 30, 2011, the allowance for loan losses was 2.53% of noncovered portfolio loans, compared to 2.80% at year-end 2010 and 2.71% at June 30, 2010.

"The economy has not yet recovered, but we continue to be encouraged by the performance of the economies of our principal markets in Oklahoma, Texas, and Kansas and continue to make loans in each of our markets with an emphasis on healthcare lending and carefully controlled real estate collateralized credits.

"Lending and Credit Reorganization. Earlier this year we made significant organizational changes designed to improve our lending and credit functions. We continue to implement those changes. On July 11, following a thorough executive search process, we announced the Board of Directors' appointment of John Danielson as Executive Vice President and Chief Banking Officer, and Priscilla Barnes as Executive Vice President and Chief Credit Officer, each reporting to me.

"As Chief Banking Officer, John is responsible for the lending, deposit, and treasury services of Southwest's banking subsidiaries, Stillwater National Bank and Bank of Kansas, and for their banking offices in Oklahoma, Texas, and Kansas.  John previously served as President of SNB-San Antonio, a division of Stillwater National. He has 25 years of banking industry experience. Before joining Southwest in 2006, John served as a regional banking manager for Compass Bank and Bank of America.

"As Chief Credit Officer, Priscilla is responsible for credit functions, including lending policy, credit analysis, credit approvals, risk rating accuracy, training, and workouts. She formerly served as interim Chief Credit Officer. Priscilla has over 31 years of banking industry experience and is a former Federal Reserve Bank examiner. She has been with Southwest since 2005.

"Regulatory Capital. As of June 30, 2011, Southwest exceeded all applicable regulatory capital requirements. Southwest and each of its banking subsidiaries met the criteria for regulatory classification as "well-capitalized". Southwest's total regulatory capital was $474.0 million, for a total risk-based capital ratio of 20.20%, and Tier 1 capital was $444.1 million, for a Tier 1 risk-based capital ratio of 18.93%. Southwest's capital exceeded the minimum to be classified as "well-capitalized" by $239.3 million. Stillwater National Bank, Southwest's principal banking subsidiary, had total regulatory capital of $393.8 million, for a total risk-based capital ratio of 18.50%, and Tier 1 capital of $351.8 million, for a Tier 1 risk-based capital ratio of 16.53%. Stillwater National Bank exceeded the minimum to be classified as "well-capitalized" by $127.7 million. Designation as a well-capitalized institution under regulations does not constitute a recommendation or endorsement by Federal bank regulators.  Stillwater National Bank's leverage and total risk-based capital ratios also substantially exceeded the individual minimum ratios agreed to with the Comptroller of the Currency of 8.50% and 12.50%.

"Increased Core Funding Percentage. At June 30, 2011, total core funding, which includes all non-brokered time deposits and sweep repurchase agreements, comprised 90% of total funding, compared to 87% at March 31, 2011 and 86% at December 31, 2010. Wholesale funding, including FHLB borrowings, federal funds purchased, and brokered deposits, accounted for 10% of total funding compared to 13% at March 31, 2011 and 14% at December 31, 2010. Please see Table 6 for details on these non-GAAP financial measures.

"Future Interest and Dividend Deferrals. In July, we determined to defer future payments of interest on our debentures and dividends on related trust preferred securities and to defer payments of dividends on our Series A Preferred Securities issued under the U.S. Treasury Department's Capital Purchase Program. The terms of our debentures and trust preferred securities allow us to increase or decrease the deferral period without default or penalty. However, we plan to resume payments of dividends and debenture interest as soon as we achieve sufficient improvement in earnings and asset quality levels. We have taken important steps to help us achieve those goals. For further information, please see "Subsequent Event-Deferral of Interest and Dividend Payments" later in this release.

Please review the following discussion and the attached financial tables for important additional information regarding our financial condition and performance."

Financial Overview

Condition: Total assets were $2.7 billion and total loans were $2.2 billion at June 30, 2011, a decrease of 6% and 7%, respectively, from December 31, 2010.

At June 30, 2011 the allowance for loan losses was $54.6 million, a decrease of 19% and 16% from June 30, 2010 and December 31, 2010, respectively, and represented 2.53% of noncovered portfolio loans versus 2.71% and 2.80% at June 30, 2010 and December 31, 2010, respectively. The methodology used to determine the appropriate amount of the allowance for loan losses at a particular time includes consideration of risk factors related to Southwest and to our markets including regular assessments of national and local economic conditions and trends. Provisions for loan losses are recorded in the amount necessary to maintain the allowance at the level management deems appropriate. 

Excluding assets subject to loss sharing agreements with the FDIC ("covered assets"), nonperforming assets, consisting of nonaccrual loans, loans past due by 90 days or more and still accruing, and other real estate, were $190.1 million and 8.66% of noncovered portfolio loans and other real estate as of June 30, 2011, up $45.3 million from December 31, 2010. A breakdown of noncovered portfolio loans and noncovered nonperforming assets at June 30, 2011 by type is shown in the following table:

Excluding covered loans, nonaccrual loans were $151.1 million as of June 30, 2011, an increase of $44.6 million, or 42%, from December 31, 2010, and an increase of $39.3 million, or 35%, from June 30, 2010. These loans are carried at their estimated collectible amounts and no longer accrue interest. Noncovered loans 90 days or more past due were less than $0.1 million as of June 30, 2011. These loans are deemed to have sufficient collateral and are in the process of collection. 

Impaired loans, which include nonaccrual and restructured loans, are evaluated on an individual basis using the discounted present value of expected cash flows, the fair value of collateral, or the market value of the loan, and a specific allowance is recorded to reflect the appropriate net realizable value. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Charge-offs against the allowance for impaired loans are made when and to the extent amounts are deemed uncollectible.  Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and considered in the determination of the allowance for loan losses. Southwest is not aware of any significant time lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measure of an impairment. 

Performing loans that have been restructured to provide a reduction or deferral of interest or principal due to a weakening in the financial position of the borrower were $3.2 million and $2.2 million at June 30, 2011 and December 31, 2010, respectively.

Excluding covered loans, performing loans considered potential problem loans, which are not included in the past due or nonaccrual categories but for which known information about possible credit problems cause management to be uncertain as to the continued ability of the borrowers to comply with the present loan repayment terms in future periods, amounted to $291.2 million at June 30, 2011, an increase of $58.0 million from December 31, 2010 and $49.0 million from June 30, 2010. Potential problem loans are subject to continuing management attention and are considered by management in determining the level of the allowance for loan losses. 

Year-to-date Results:

Summary: The net loss available to common shareholders was $2.6 million as of June 30, 2011, compared to net income available to common shareholders of $6.7 million as of June 30, 2010. The $9.3 million decrease in our net income available to common shareholders from 2010 is the result of a $12.9 million increase in the provision for loan losses, a $3.5 million decrease in net interest income, and a $1.3 million decrease in noninterest income, offset in part by a $7.6 million decrease in income tax expense and a $0.8 million decrease in noninterest expense.

On June 28, 2011, Southwest entered into a settlement agreement with the Oklahoma State Tax Commission (the "Commission") with respect to certain claims by the Commission. Southwest had previously recorded reserves against these claims. As a result of the settlement agreement, Southwest paid the sum of $4.8 million to the Commission and recorded a gain of $2.6 million, net of tax effect, upon reversal of excess reserves. The year-to-date calculated effective tax rate is 79.93%; however, when the effect of the reversal of the excess tax reserves in the second quarter is excluded, the effective tax rate year-to-date is 43.60%.  

Net Interest Income: Net interest income totaled $50.4 million for the first six months of 2011, compared to $53.9 million for the first six months of 2010, a decrease of $3.5 million, or 6%. Year-to-date net interest margin was 3.78%, compared to 3.62% in 2010. Included in 2011 year-to-date net interest income was a net reduction of $0.1 million resulting from interest reversals on nonaccrual loans offset by the year-to-date adjustments of the discount accretion on loans and the loss share receivable. Included in 2010 year-to-date net interest income was $0.8 million of net recoveries from the resolution of nonperforming loans, additional discount accretion on loans and loss share receivable, offset in part by interest reversals on nonaccrual loans. The net effects of these adjustments on net interest margin were a 1 basis point decrease and a 5 basis point increase, respectively.   

Provision for Loan Losses and Net Charge Offs: The provision for loan losses totaled $29.2 million for the first six months of 2011, compared to $16.3 million for the first six months of 2010. Net charge-offs totaled $39.8 million, or 3.49% (annualized) of average portfolio loans year-to-date as of June 30, 2011, compared to $11.7 million, or 0.91% (annualized) of average portfolio loans for the same period in the prior year.

A significant reason for the increase in the year-to-date provision was an unanticipated decline in collateral value of collateral dependent commercial real estate loans in markets other than our primary markets of Oklahoma, Texas, and Kansas. As of June 30, 2011, eleven relationships accounted for $32.5 million in charge-offs, of which $20.6 million were on four out of market relationships. At June 30, 2011, total out of market commercial real estate and construction loans was $158.4 million, of which $75.9 million were internally rated substandard or doubtful.

Noninterest Income: Noninterest income totaled $6.9 million for the first six months of 2011, compared to $8.1 million for the first six months of 2010. The decrease in noninterest income was primarily the result of a $0.8 million decline in gain on sale of loans, mainly from declined student loan sales, and a $0.3 million decline in other noninterest income.

Noninterest Expense: Noninterest expense totaled $30.6 million for the first six months of 2011, compared to $31.4 million for the first six months of 2010.  The decrease consists of a $2.4 million decrease in other general and administrative expense, primarily from the settlement of Oklahoma state tax claims for less than the amount accrued, a $0.9 million decrease in FDIC and other insurance expense, and a $0.7 million decrease in personnel expense, primarily as a result of a decrease in the profit sharing contribution, offset in part by a $2.3 million increase in other real estate expense and a $1.1 million increase in provision for unfunded loan commitments.

Second Quarter Results:

Summary: For the second quarter of 2011, Southwest incurred a net loss available to common shareholders of $4.0 million, compared to net income available to common shareholders of $3.4 million in the second quarter of 2010 and $1.4 million in the first quarter of 2011. The decrease from the second quarter of 2010 was the result of a $12.4 million increase in the provision for loan losses, a $2.1 million decrease in net interest income, and a $0.4 million decrease in noninterest income, offset in part by a $6.3 million decrease in income taxes and a $1.2 million decrease in noninterest expense. The decrease from the first quarter of 2011 was the result of an $11.1 million increase in the provision for loan losses and a $0.4 million decrease in net interest income, offset in part by a $5.1 million decrease in income taxes, a $0.6 million decrease in noninterest expense, and a $0.4 million increase in noninterest income. 

For the second quarter of 2011, the calculated effective tax rate is 54.53%; however, when the reversal of the excess tax reserves is excluded, the effective tax rate for the second quarter is 41.46%. 

Net Interest Income: Net interest income totaled $25.0 million for the second quarter of 2011, compared to $27.1 million for the second quarter of 2010, a decrease of $2.1 million, or 8%, and $25.4 million for the first quarter of 2011, a decrease of $0.4 million, or 2%.  Net interest margin was 3.79% for the second quarter of 2011, compared to 3.65% for the second quarter of 2010 and 3.78% for the first quarter of 2011.  Included in the second quarter of 2011 net interest margin was a net reduction of $0.2 million resulting from interest reversal on nonaccrual loans offset by the quarterly adjustment of the discount accretion on loans and the loss share receivable. Included in the second quarter 2010 net interest margin was a net recovery of $0.5 million from the quarterly adjustment of the discount accretion on loans and loss share receivable. Included in the first quarter of 2011 net interest margin was a net recovery of $0.1 million from the quarterly adjustment of the discount accretion on loans and the loss share receivable offset by interest reversals on nonaccrual loans. The net effects of these adjustments on net interest margin were a 3 basis point decrease, a 6 basis point increase, and a 1 basis point increase for each quarter, respectively.     

Provision for Loan Losses and Net Charge-Offs: The provision for loan losses totaled $20.1 million for the second quarter of 2011, compared to $7.8 million for the second quarter of 2010 and $9.1 million for the first quarter of 2011.  Net charge-offs totaled $26.9 million, or 4.76% (annualized) of average portfolio loans for the second quarter of 2011, compared to $5.9 million, or 0.92% (annualized) of average portfolio loans for the second quarter of 2010 and $13.0 million, or 2.25% (annualized) of average portfolio loans for the first quarter of 2011.

A significant reason for the increased provision for the second quarter was an unanticipated decline in collateral value of collateral dependent commercial real estate loans in markets other than our primary markets of Oklahoma, Texas, and Kansas. For the second quarter of 2011, eight relationships accounted for $23.0 million in charge-offs, of which $13.6 million were on three out of market relationships.   

Noninterest Income: Noninterest income totaled $3.6 million for the second quarter of 2011, compared to $4.0 million for the second quarter of 2010 and $3.2 million for the first quarter of 2011.  The decrease in noninterest income from the second quarter of 2010 was primarily the result of a $0.4 million decrease in other noninterest income. The increase from the first quarter of 2011 was primarily the result of a $0.4 million increase in service charges and fees. 

Noninterest Expense: Noninterest expense totaled $15.0 million for the second quarter of 2011, compared to $16.1 million for the second quarter of 2010 and $15.6 million for the first quarter of 2011.  The decrease from second quarter 2010 consisted of a $2.4 million decrease in other general and administrative expense, primarily from the settlement of Oklahoma state tax claims for less than the amount accrued, a $0.7 million decrease in personnel expense, primarily as a result of a decrease in the profit sharing contribution, and a $0.6 million decrease in FDIC and other insurance expense, offset in part by a $2.0 million increase in other real estate expense and a $0.6 million increase in provision for unfunded loan commitments. The decrease from first quarter 2011 consisted of a $2.0 million decrease in other general and administrative expense, a $0.5 million decrease in personnel expense, and a $0.3 million decrease in FDIC and other insurance expense, offset in part by a $2.2 million increase in other real estate expense. 

Southwest Bancorp and Subsidiaries

Southwest is the bank holding company for Stillwater National Bank and Trust Company ("Stillwater National") and Bank of Kansas. Through its subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services from offices in Oklahoma, Texas, and Kansas, and on the Internet, through SNB DirectBanker®. We were organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. At June 30, 2011 we had total assets of $2.7 billion, deposits of $2.1 billion, and shareholders' equity of $376.9 million.

Our area of expertise focuses on the special financial needs of healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. We established a strategic focus on healthcare lending in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of June 30, 2011, approximately $670.6 million, or 31%, of our noncovered loans were loans to individuals and businesses in the healthcare industry. 

We also focus on commercial real estate mortgage and construction credits. We do not focus on one-to-four family residential development loans or "spec" residential property credits. Additionally, subprime residential lending has never been a part of our business strategy, and our exposure to subprime mortgage loans and subprime lenders is minimal. One-to-four family mortgages account for less than 5% of total noncovered loans. As of June 30, 2011 approximately $1.6 billion, or 75%, of our noncovered loans were commercial real estate mortgage and construction loans, including $407.3 million of loans to individuals and businesses in the healthcare industry. 

We operate six offices in Texas, eleven offices in Oklahoma, and eight offices in Kansas. At June 30, 2011 our Texas segment accounted for $911.1 million, or 41% of total portfolio loans, followed by $834.2 million, or 38%, from our Oklahoma segment, $260.4 million, or 12%, from our Kansas segment, and $196.5 million, or 9%, from our other states segment. 

Southwest's common stock is traded on the NASDAQ Global Select Market under the symbol OKSB. Southwest's public trust preferred securities are traded on the NASDAQ Global Select Market under the symbol OKSBP.

The Southwest Bancorp, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=8074

Subsequent Event-Deferral of Interest and Dividend Payments

In July 2011, Southwest Bancorp, Inc. ("Southwest") determined to suspend payments of interest on its three issues of outstanding debentures effective August 1, 2011, and dividends on the related trust preferred securities.

The terms of the debentures allow Southwest to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. These terms also allow Southwest to resume payments at the end of any deferral period, or to extend the deferral up to the maximum 20 quarters in total. No deferral can extend past the maturity date of the debenture.

We plan to resume payments of dividends and debenture interest as soon as we achieve sufficient improvement in earnings and asset quality levels. We are taking important steps to help us achieve those goals. These included:

• Capital Levels. Capital levels for Southwest and each of its bank subsidiaries well exceed all applicable capital standards. We increased and maintained our capital ratios by (a) sale of capital securities, including public securities offerings in mid-2008 and 2010, and the sale of preferred securities to the Treasury Department in late 2008, (b) net quarterly earnings, and (c) intentional reduction of our loan portfolio. 
   
• Earnings. We had a net loss this quarter and year-to-date, but this follows a long-record of successive quarterly earnings. Our interest margins and net interest income are solid, and we remain one of the most efficient banking organizations in terms of operating expense control.  
   
• Asset Quality. Our problem assets and potential problem assets are too high. The keys to improvement in our net income are improvement in asset quality and reduction in loan loss provision expense. To that end this year we have (a) substantially reorganized our lending and credit functions to increase their independence and improve oversight; (b) installed a new Chief Credit Officer in the second quarter reporting directly to the CEO with authority over the entire credit and work-out functions; (c) began staffing up credit and work-out areas with experienced bankers; (d) increased our emphasis on timely and accurate loan grading and consistency among our third party loan review firm, our internal credit function, and federal regulators' grading guidelines; and (e) begun a special review of larger problem credits.

Interest will continue to accrue on the debentures, and dividends will continue to accrue on the related trust preferred securities while we work toward resuming payments. 

Southwest's trust preferred securities were issued by the following subsidiary trusts: Southwest Capital Trust II, which trades on the NASDAQ Global Select Market under the symbol "OKSBP"; OKSB Statutory Trust I; and SBI Capital Trust II. At June 30, 2011, $82.0 million of debentures were outstanding.

In addition, Southwest has determined to defer payment of dividends on its Series A Preferred Securities issued under the U.S. Treasury Department's Capital Purchase Program, effective for the next dividend payment, due August 15, 2011. Dividends on the Preferred Securities may not be paid while interest on Southwest's debentures has been deferred, but will continue to accrue. At June 30, 2011, $70.0 million of Preferred Securities were outstanding.

The deferrals on interest and dividends are intended to preserve liquidity at the holding company level, which may be used to inject funds in its bank subsidiaries or for other corporate purposes. Because the interest on the debentures, the dividends on the related trust preferred securities, and the dividends on the Preferred Securities will continue to accrue, these deferrals are not expected to have any significant effect on the net income or net income available to common shareholders of Southwest. During the year ended December 31, 2010, total interest expense on the debentures, which is deductible for income tax purposes, totaled $5.1 million, and dividends on the Preferred Securities, which are not deductible for income tax purposes, totaled $3.5 million.

Forward-Looking Statements

This earnings release includes forward-looking statements that are subject to risks and uncertainties. These forward-looking statements include: statements of Southwest's goals, intentions, and expectations; estimates of risks and of future costs and benefits; expectations regarding future financial performance of Southwest and its operating segments; assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs; liquidity, contractual obligations, off-balance sheet risk, and interest rate risk; estimates of value of acquired assets, deposits, and other liabilities; and statements of Southwest's ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties, because they are based upon: the amount and timing of future changes in interest rates, market behavior, and other economic conditions; future laws and regulations and accounting principles; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Southwest's past growth and performance do not necessarily indicate our future results.

Southwest is required under generally accepted accounting principles to evaluate subsequent events and their impact, if any, on its financial statements as of June 30, 2011 through the date its financial statements are filed with the Securities and Exchange Commission. The June 30, 2011 financial statements included in this release will be adjusted if necessary to properly reflect the impact of subsequent events on estimates used to prepare those statements.