SOUTHWEST CAPITAL TRUST II OKSBP
December 08, 2012 - 2:06pm EST by
backinthetetons34
2012 2013
Price: 25.50 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 35 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Community Bank

Description

At the current price of $25.50, Southwest Capital Trust II ("OKSBP") represents an opportunity to obtain $2.625 annually for a 10.29% yield.  The issue can be called in September 2013 (and anytime thereafter) at $25, which would still provide a 5.76% return [((0.65625*3)+25) / 25.50) - 1] over approximately 9 months.  This is a really simple idea, so I have omitted an in-depth fundamental assessment of the guarantor OKSB, as well as a discussion of the regulatory capital changes (perhaps) ahead.  ("Under the Dodd-Frank act, as well as the international Basel III agreement, banks must terminate trust preferred stocks starting in 2013 and have them off the books by 2015. Trust preferred securities were considered in calculating Tier 1 bank capital by the regulators. Tier 1 capital is a measure of financial strength. It consists of common stocks, disclosed reserves, retained earnings and nonredeemable noncumulative preferred stocks".  http://www.fa-mag.com/news/preferred-stock-market-going-through-changes-11418.html)

Background - from most recent Form 10-Q:

General

Southwest is a bank holding company headquartered in Stillwater, Oklahoma which provides commercial and consumer banking services through its banking subsidiaries, Stillwater National and Bank of Kansas. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”). As such, Southwest is subject to supervision and regulation by the Federal Reserve. Stillwater National is a national bank subject to supervision and regulation by the OCC. Bank of Kansas, headquartered in South Hutchinson, Kansas, is a state chartered commercial bank and is subject to supervision and regulation by the FDIC and Kansas banking authorities. The deposit accounts of Southwest’s banking subsidiaries are insured by the FDIC to the maximum permitted by law.

Products and Services

Southwest offers a wide variety of commercial and consumer lending and deposit services. Southwest has developed internet banking services, called SNB DirectBanker®, for consumer and commercial customers, a highly automated lockbox, imaging, and information service for commercial customers called “SNB Digital Lockbox,” and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds (“Sweep Agreements”). The commercial loans offered by Southwest include (i) commercial real estate loans, (ii) working capital and other commercial loans, (iii) construction loans, and (iv) loans to small businesses. Consumer lending services include (i) student loans, (ii) residential real estate loans and mortgage banking services, and (iii) personal lines of credit and other installment loans. Southwest also offers deposit and personal banking services, including (i) commercial deposit services such as SNB Digital Lockbox, commercial checking, money market, and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking accounts, NOW accounts, savings accounts, and automatic teller machine (“ATM”) access. Personal brokerage and credit cards are offered through relationships with independent institutions and Bank of Kansas.

Strategic Focus

Southwest’s banking philosophy is to provide a high level of customer service, a wide range of financial services, and products responsive to customer needs. This philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customer needs for speed, efficiency, and information. These include Southwest’s Sweep Agreements, SNB Digital Lockbox, and SNB DirectBanker® and other internet banking products, which complement Southwest’s more traditional banking products. Southwest also emphasizes the marketing of personal banking, investment, and other financial services to highly educated, professional and business persons in its markets. Southwest seeks to build close relationships with businesses, professionals and their principals and to serve their banking needs throughout their business development and professional lives.

For a number of years, Southwest’s strategic focus has included expansion in carefully selected geographic markets based upon a tested business model developed in connection with its expansion into Oklahoma City in 1982. This geographic expansion has been based on identification of markets with concentrations of customers in Southwest’s traditional areas of expertise: healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate lending, and makes use of traditional and specialized financial services. Specialized services include integrated document imaging and cash management services designed to help our customers in the healthcare industry and other record-intensive enterprises operate more efficiently. Southwest’s strategic focus also includes careful expansion of our community banking operations.

 
 
Issue Detail - from most recent Form 10-K: 
  
In July 2008, Southwest’s subsidiary, Southwest Capital Trust II, sold to investors in a public offering $34.5 million of 10.50% trust preferred securities (the “OKSBP Trust Preferred”). In addition to these trust preferred securities, Southwest Capital Trust II sold $1.1 million of trust common equity to Southwest. The aggregated proceeds of $35.6 million were used to purchase an equal amount of 10.50% subordinated debentures of Southwest (the “OKSBP Subordinated Debentures”).

In July 2011, 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.

Interest will continue to accrue on the debentures, and dividends will continue to accrue on the related trust preferred securities. As of December 31, 2011, $2.9 million was accrued for interest on the debentures.

 
The underlying subordinated debentures mature 9/15/2038.  Note that when dividends were resumed in May/June 2012, a total of $2.73 was paid to holders.  Quarterly dividends are $0.65625.
 
CRE Problems at OKSB - from most recent Form 10-K:

Under the terms of the January 27, 2010 Formal Agreement with the OCC, Stillwater National submits quarterly reports describing the actions needed to achieve full compliance with the Formal Agreement, the actions taken to comply, and the results and status of these actions relating to the following items:

 

   

Establishing and ensuring compliance with a plan to reduce credit risk and improve loan portfolio management;

 

   

Eliminating credit weaknesses in nonperforming and potential problem loans;

 

   

On-going review and grading of the Stillwater National’s loan portfolio;

 

   

Improving Stillwater National’s position regarding nonperforming and potential problem loans and other real estate owned;

 

   

Improving loan portfolio concentration risk management; and

 

   

Establishing and operating a loan workout department.

On January 27, 2010, Stillwater National informally agreed with the OCC, its primary federal regulator, to maintain a ratio of total capital to risk weighted assets of at least 12.5% and a Tier 1 leverage ratio of at least 8.5%.

 


We have entered into formal and informal agreements with the OCC and have made informal commitments to the Federal Reserve that may adversely affect our operations. Failure to comply with these agreements and commitments could subject us, Stillwater National, and our directors to additional enforcement actions and could damage our reputation.

Our agreements and commitments with the OCC and Federal Reserve relate primarily to our concentrations in commercial real estate lending and our high levels of nonperforming and potential nonperforming loans, most of which are commercial real estate loans. Although we are committed to compliance with our agreements and commitments and are taking aggressive actions to comply with them, we may not be able to reduce our commercial real estate loan concentrations or problem and potential problem assets enough to fulfill expectations of the banking regulators. The agreement with the OCC does not require that Stillwater National maintain any specific capital ratios; however, Stillwater National has informally agreed to maintain at least a Tier I leverage ratio of 8.5% and a total capital ratio of 12.5%. At December 31, 2011, Stillwater National’s capital ratios significantly exceeded these levels and the regulatory minimums for well-capitalized status. An inability to sufficiently reduce our commercial real estate loan concentrations and problem and potential problem assets or a decrease in capital ratios below the levels to which Stillwater National has informally committed could lead to a need to raise additional capital upon terms which may not be favorable to our existing securities holders and additional regulatory restrictions which could further limit our operations.

 
 
Drastic Times Call For Drastic Measures - from most recent Form 10-Q:

Southwest began 2011 with continued high levels of nonperforming and potential problem assets. In the spring of 2011, Southwest reorganized and took actions intended to strengthen the credit, loan review and workout functions. During the year, Southwest had success in resolving some credits, but downgrades and new problem assets, mainly driven by real estate appraisal decreases with respect to collateral dependent loans, kept the total levels of unresolved credits unsatisfactorily high. The levels significantly affected Southwest’s earnings.

Faced with those facts, management and the Board of Directors considered alternatives for bringing nonperforming and potential problem assets to healthier levels. The Board of Directors carefully considered the potential costs and benefits of various alternatives to Southwest and the shareholders, in consultation with financial and legal advisors and management. Management and the Board of Directors concluded that a sale of assets in the near-term was in the best interests of Southwest’s shareholders.

Based on this determination, Southwest sold nonperforming loans, potential problem loans, and other real estate with a carrying value before transfer to assets held for sale, of approximately $300.3 million; and sold related other loans with a carrying value before transfer to assets held for sale of $1.3 million.

Loans were transferred to loans held for sale at fair values. The actual sale price reflected a bulk sale discount, which resulted in charge-offs of $88.6 million at the time of transfer. The sales completed in the fourth quarter of 2011 resulted in net proceeds to Southwest of approximately $187.0 million. The results for the year ended December 31, 2011 include a provision for loan losses of $74.9 million and a fair value adjustment in other real estate expenses of $23.6 million in connection with the fourth quarter sales. The provision expense was calculated in accordance with Southwest’s standard methodology and was based on the amount needed to replenish the allowance for loan losses back to the required level for the remaining loan portfolio.

As of September 30, 2011, the assets sold were loans with an aggregate fair value of $229.5 million and other real estate properties with an aggregate fair value of $67.3 million.

 
 
Formal Agreement No Longer Applies - from most recent Form 10-Q:
 
NOTE 9: REGULATORY AGREEMENTS

Effective May 17, 2012, Stillwater National is no longer subject to the written formal agreement (the “Agreement”) that was entered into on January 27, 2010 with the Office of the Comptroller of the Currency (“OCC”). The Agreement primarily related to levels of commercial real estate lending and problem assets, and included a requirement for Stillwater National to submit written plans to the OCC and to take required actions related to improving credit risk management.

Further, Stillwater National is no longer subject to the informal Individual Minimum Capital Agreement also entered into on January 27, 2010, which required Stillwater National to maintain a ratio of total capital to risk weighted assets of at least 12.5% and a Tier 1 leverage ratio of at least 8.5%. At September 30, 2012, Stillwater National had a total risk based capital ratio of 18.46% and a leverage ratio of 12.59%, and remained well capitalized for regulatory purposes. The general regulatory minimums to be well-capitalized are a total risk based capital ratio of 10.00%, a Tier 1 risk based capital ratio of 6.00%, and a leverage ratio of 5.00%.


CAPITAL REQUIREMENTS

Bank holding companies are required to maintain capital ratios set by the Federal Reserve Bank in its Risk-Based Capital Guidelines. At September 30, 2012, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 20.64%, a Tier I risk-based capital ratio of 19.36%, and a leverage ratio of 14.49%. As of September 30, 2012, Stillwater National and Bank of Kansas met the criteria for classification as “well-capitalized” institutions under the prompt corrective action rules of the Federal Deposit Insurance Act.


Turning the Corner and New Hires - from various press release and SEC Filings:
Return to GAAP Profit
October 18, 2012, Stillwater, Oklahoma . . . . Southwest Bancorp, Inc. (NASDAQ Global Select Market—OKSB, OKSBP), (“Southwest”), today reported earnings for the third quarter of 2012 of $5.9 million, compared to a loss of ($9.5) million for the third quarter of 2011. Net income available to common shareholders was $4.3 million, or $0.22 per diluted share for the third quarter of 2012, compared to a net loss available to common shareholders of ($10.6) million, or ($0.54) per diluted share for the third quarter of 2011.
Southwest reported earnings for the nine months ended September 30, 2012 of $15.2 million, compared to a loss of ($10.0) million for the nine months ended September 30, 2011. Net income available to common shareholders for the nine months ended September 30, 2012 totaled $11.5 million or $0.59 per diluted share compared to a net loss available to common shareholders of ($13.2) million or ($0.68) per diluted share for the nine months ended September 30, 2011.
Mark W. Funke
Mr. Green went on to say, “As previously announced, on October 1, 2012 Mark W. Funke became Southwest’s President and Chief Executive Officer. Mr. Funke previously served as market president for Bank of Oklahoma – Oklahoma City.”
“These actions are designed to allow Southwest to continue to pursue our strategy of independent operation for the benefit of all of our shareholders.”
Mark Funke, new President and Chief Executive Officer, stated “I am excited to join this organization and expect to lead Southwest on a path of conservative growth. We will continue to have an emphasis on solid underwriting and taking advantage of opportunities for growth and increasing shareholder value.”
 
Mark Funke is  a personal acquaintance of mine and a respected banker in Oklahoma City and the state of Oklahoma.  He brings what I believe to be a strong client list to OKSB and significant market experience, after a long career at BOKF.  See Bloomberg bio http://investing.businessweek.com/research/stocks/people/person.asp?personId=323271&ticker=BOKF&previousCapId=2464002&previousTitle=Liberty%20Broadband%20Interactive%20Television%2C%20Inc.
 
 
Joe T. Shockley, Jr.

Stillwater, Okla. (November 16, 2012) – Southwest Bancorp, Inc., and its subsidiaries Stillwater National Bank and Trust Company (SNB) and Bank of Kansas, announced Joe T. Shockley, Jr. has been named Chief Financial Officer and Russell W. Teubner has been named Chairman of the Board of Directors for Southwest and SNB. Shockley, who will begin work on December 1, is replacing Randy Waldrup who served as interim CFO. Teubner will assume his role as Chairman on January 1, 2013, replacing Robert Rodgers, who is stepping down as Chairman effective December 31, 2012 after serving 13 years as Chairman.

“We are very pleased to add Joe Shockley to our management team at Southwest Bancorp,” said Mark W. Funke, Southwest Bancorp President and CEO. “Joe fills the critically important role of Chief Financial Officer for our company and his background and knowledge of the banking industry along with his familiarity with our markets made him the ideal candidate for this important role. He will add valuable knowledge to our company and assist us in moving forward in a positive way.

Shockley previously served as Executive Vice President and Chief Financial Officer at BancFirst Corporation. His hiring comes at an exciting time for Southwest Bancorp as the organization has experienced successful changes in 2012 which include: the hiring of Mark Funke as CEO, having the Office of the Comptroller of the Currency release SNB from its formal agreement, resuming paying dividends on Trust Preferred Securities and repaying the government for Capital Purchase Program funds.

“I look forward to joining CEO Mark Funke and his management team,” said Shockley. “Over the past 16 years I have been fortunate to be a part of one of the finest banks in the country. I intend to leverage my experiences in helping build a stronger bank for customers and shareholders. I commend the board and the management team for the steps they have taken over the past year to move the company forward, including the hiring of Mark Funke as CEO. I think the future is bright and I am excited to become a part of it.”

 
While I do not personally know Joe Shockley, Jr., discovery of his hire was the point where my confidence in OKSB was solidified.  There is no bank balance sheet or operations in the country, other than perhaps Cullen/Frost Bankers, Inc. (NYSE:CFR), that I trust as much as BancFirst Corporation (Nasdaq:BANF).  On a personal note, I shifted my entire personal deposit relationship to BANF in roughly October 2011 (from a BNP Paribas sub) when stress in the global banking sector was significant.  As a result, I no longer hoard cash at home.  VIC members should take a look at both CFR and BANF, as they are wonderful banks that are definitely worth a premium to book and, related ownership does not give me a second of hesitation...Note that BOKF represents a great organization as well and is defintiely worth a look.   
Shockley's hire added substance to use of the phrase "conservative growth" above.  You do not spend 16 years in an extremely conservative, family-dominated (extremely good thing in this instance) organization without being extremely conservative as well.  He would have presumably taken a great look at the OKSB balance sheet, liquidity, probabiliity of not failing, etc. before severing ties with BANF.    
 
 
Misc. Note regarding CPP - from most recent Form 10-Q:

On August 8, 2012, Southwest announced the completion of the repurchase of all $70.0 million of its preferred securities (the “Series B Preferred”) sold to the Department of the Treasury in December 2008. The Series B Preferred was issued under the Treasury’s Capital Purchase Program (“CPP”).

 

All funds for the repurchase were internally generated. Southwest and each of its banking subsidiaries remain well capitalized after the repurchase. Southwest incurred a one-time, non-cash equity charge of approximately $1.2 million in the third quarter of 2012 to reflect accelerated accretion of the remaining discount on the Series B Preferred. Prior to the repurchase, dividends on the repurchased Series B Preferred, which reduced net income available to common shareholders, were approximately $1.1 million per quarter. The Department of the Treasury continues to hold a warrant to purchase 703,753 shares of Southwest’s common stock at an initial per share price of $14.92.

 
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

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