Eyeing Southwest Regional
The banks have been inching higher over the last few weeks as investors are now starting to anticipate the end of the Fed's quantitative easing (QE) program in October, which will likely lead to higher rates. The U.S. economic news has slowly been improving. Today's consumer confidence number was the highest since October 2007. It easily offset the volatile durable goods report, which fell more than expected (excluding record Boeing (BA - Get Report) orders).
Manufacturing seeing signs of green shoots (especially the nonresidential part of the economy as measured by the new highs in the Dodge Momentum Non Residential Index and the Architectural Billings Index). Housing is also improving -- housing starts rose 15.9%, year over year, with the key metric being the 8.3% rise in single family. Existing home sales improved 2.8%, which was partially offset by new home sales, which were an underwhelming 412,000 (annualized rate). Consumer are remaining "choosy" -- buying either autos or houses or soft goods -- although definitely not all three at the same time.
We await lower jobs and higher wages (the JOLTS (Job Openings and Labor Turnover Survey) data were encouraging on both fronts last week). Still, there is an underlying improvement in the economy to supporting close to 3% GDP growth for the second half of the year.
I have written about several financial names in my blog, and another one has caught my attention. Southwest Bancorp (OKSB - Get Report) is a small-cap regional bank with 22 branches in Oklahoma, Texas and Kansas. It has $1.3 billion in assets, $1.3 billion in loans and $1.5 billion in deposits. Historically, the company has focused on consumer lending. However, during the financial crisis, it had to book more than $100 million in mortgage losses. Then the company got religion -- with new management and a new customer focus -- and started doing more commercial and industrial lending, namely in the health care and energy fields.
The new management team included a new CEO, Mark Funke, a long-time veteran in the bank industry who worked at the Bank of Oklahoma for 13 years. He and his team arrived in late 2012. They have worked hard at changing the culture of Southwest and building consistent results with higher capital levels. Their work is beginning to pay off.
Funke has been focused on growing the asset base and synergizing its three regions in order to provide better efficiencies and productivity while selling off its non-core assets for better productivity. Most recently, the company sold assets in its Anthony, Harper and Overland Park locations. This has streamlined the operations and positioned the company for higher regional market share, returns and profitability.
What caught my eye were the most recent second-quarter results, which included impressive quarter-over-quarter loan growth of 4.5% (excluding a one-time impact from selling $28 million in loans in a branch sale) and a 13% quarter-over-quarter rise in its commercial loans segment. Regional strength came from the Oklahoma and Texas markets. This is not surprising given the strong employment trends and growth in these two areas of the country as they were fed by the energy boom.
Asset quality trends also improved with problem loans down 8%, year over year, to 1.54% vs. 2.4% and continued low net charge-offs, which now account for 0.45% of total loans. In addition, core capital trends improved with an industry high tangible equity of 14.3%, up from 13% at the end of March. As a result of the strong capital levels (the company has $100 million in excess capital), management reinstated its dividend and announced that it would buy back 5% of its shares outstanding or 990,000. The buyback alone adds $0.05 to the bottom line.
With $100 million in excess capital there is still room for making further mergers and acquisitions M&A and reinvestments for future growth. Clearly, Funke and his team are showing great results -- the turnaround shows that their strategy is working.
The stock trades at 1.1 tangible book value (TBV), which is a discount to the 1.5x TBV small-cap regional average. As management executes on its new strategy, produces above average loan growth and generates strong capital, the discount should narrow to the group.
The risk clearly is that interest rates may stay low for longer than I think (I had expected 3% on the 10-year note by the end of the year), which would pressure the net interest margin (NIM). But to me, considering the strong regional exposure it has and the improved balance sheet, that would be a great buying opportunity for the long run.