Attached files
file | filename |
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EX-21 - EX-21 - SOUTHWEST BANCORP INC | y83148exv21.htm |
EX-23 - EX-23 - SOUTHWEST BANCORP INC | y83148exv23.htm |
EX-24 - EX-24 - SOUTHWEST BANCORP INC | y83148exv24.htm |
EX-99.B - EX-99.B - SOUTHWEST BANCORP INC | y83148exv99wb.htm |
EX-31.B - EX-31.B - SOUTHWEST BANCORP INC | y83148exv31wb.htm |
EX-32.A - EX-32.A - SOUTHWEST BANCORP INC | y83148exv32wa.htm |
EX-32.B - EX-32.B - SOUTHWEST BANCORP INC | y83148exv32wb.htm |
EX-31.A - EX-31.A - SOUTHWEST BANCORP INC | y83148exv31wa.htm |
EX-99.A - EX-99.A - SOUTHWEST BANCORP INC | y83148exv99wa.htm |
Table of Contents
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2009
Commission File Number 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma | 73-1136584 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
608 South Main Street, Stillwater,Oklahoma (Address of principal executive office) |
74074 (Zip Code) |
Registrants telephone number, including area code: (405) 742-1800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered | |
Common Stock, par value $1.00 per share | The NASDAQ Stock Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o YES þ NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o YES þ NO*
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ YES o NO
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o YES o NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by a check mark if the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer,
large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o YES þ NO
The registrants Common Stock is traded on the NASDAQ Global Select Market under the symbol OKSB.
The aggregate market value of approximately 13,671,233 shares of Common Stock of the registrant
issued and outstanding held by nonaffiliates on June 30, 2009, the last day of the registrants
most recently completed second fiscal quarter, was approximately $133.4 million based on the
closing sales price of $9.76 per share of the registrants Common Stock on that date. Solely for
purposes of this calculation, it is assumed that directors, officers, and 5% stockholders of the
registrant (other than institutional investors) are affiliates.
As of the close of business on March 1, 2010, 14,779,778 shares of the registrants Common Stock
were outstanding.
Documents Incorporated by Reference
Part III: | Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2010 (the Proxy Statement). |
*The registrant is required to file reports pursuant to Section 13 of the Act.
SOUTHWEST BANCORP, INC.
Index | ||||||||
ii | ||||||||
ii | ||||||||
iv | ||||||||
iv | ||||||||
1 | ||||||||
3 | ||||||||
5 | ||||||||
30 | ||||||||
31 | ||||||||
33 | ||||||||
38 | ||||||||
73 | ||||||||
73 | ||||||||
83 | ||||||||
84 | ||||||||
87 | ||||||||
94 | ||||||||
97 | ||||||||
100 | ||||||||
EX-21 | ||||||||
EX-23 | ||||||||
EX-24 | ||||||||
EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32.A | ||||||||
EX-32.B | ||||||||
EX-99.A | ||||||||
EX-99.B |
i
Table of Contents
FORWARD-LOOKING STATEMENTS
Southwest Bancorp, Inc. (Southwest) makes forward-looking statements in this Annual
Report on Form 10-K that are subject to risks and uncertainties. These forward-looking
statements include: statements of Southwests 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 Southwests 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, Southwests past growth and performance do not necessarily indicate its future
results. Please see the discussion of Risk Factors on page 87 and Critical Accounting
Policies on page 28.
SOUTHWEST BANCORP, INC.
Form 10-K Cross Reference Sheet of Material Incorporated by Reference
The following table shows the location in this Annual Report on Form 10-K or the accompanying
Proxy Statement of the information required to be disclosed by the United States Securities and
Exchange Commission (SEC) Form 10-K. Where indicated below, information has been incorporated by
reference in this Report from the Proxy Statement that accompanies it. Other portions of the Proxy
Statement are not included in this Report. This Report is not part of the Proxy Statement.
References are to pages in this report unless otherwise indicated.
Item of Form 10-K | Location | |||
Part I |
||||
Item 1.
|
Business | Forward-Looking Statements on page ii, Southwest Bancorp, Inc. on page iv, About this Report on page iv, and Business on pages 73 through 82. | ||
Item 1A.
|
Risk Factors | Risk Factors on pages 87 through 91. | ||
Item 1B.
|
Unresolved Staff Comments | None. | ||
Item 2.
|
Properties | Properties on pages 94 through 96. | ||
Item 3.
|
Legal Proceedings | Note 18 Commitments and Contingencies on page 66. | ||
Item 4.
|
Submission of Matters to a Vote of Security Holders | Not applicable. No matter was submitted to a vote of security holders during the fourth quarter of 2009. | ||
PART II |
||||
Item 5.
|
Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | Securities Listing, Prices, and Dividends on page 3. | ||
Item 6.
|
Selected Financial Data | Five Year Summary of Selected Financial Data on pages 1 and 2. | ||
Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations | Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 5 through 30. | ||
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk | The section titled Asset/Liability Management Quantitative and Qualitative Disclosures about Market Risk on pages 24 through 26. | ||
Item 8.
|
Financial Statements and Supplementary Data | Pages 33 through 72 |
ii
Table of Contents
Item of Form 10-K | Location | |||
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | Not applicable. During the past two years or any subsequent period there has been no change in or reportable disagreement with the independent registered public accounting firm for Southwest or any of its subsidiaries. | ||
Item 9A.
|
Controls and Procedures | Controls and Procedures on page 30. | ||
Item 9B.
|
Other Information | Not applicable. The registrant reported all items required to be reported in a Form 8-K during the fourth quarter of 2009. | ||
Part III |
||||
Item 10.
|
Directors, Executive Officers and Corporate Governance | The material labeled Election of Directors on pages 3 through 6 , Board Meetings and Committee on pages 6 through 10, Section 16(a) Beneficial Ownership Reporting Compliance on page 29, Code of Ethics on page 33, Shareholder Proposals and Communications on page 33, and Report of the Audit Committee on page 30 of the Proxy Statement is incorporated by reference in this Report. | ||
Item 11.
|
Executive Compensation | The material labeled Director Compensation on page 12, Executive Compensation on pages 24 through 27, Compensation Discussion and Analysis on pages 15 through 22, and Compensation Committee Report on page 23 of the Proxy Statement is incorporated by reference in this Report. | ||
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | The material labeled Common Stock Owned by Directors and Executive Officers on pages 13 and 14 and Owners of More than 5% of Southwests Common Stock on page 14 of the Proxy Statement is incorporated by reference in this Report. Information regarding securities authorized for issuance under equity compensation plans is included under Equity Compensation Plan Information on page 4 of this report. | ||
Item 13.
|
Certain Relationships and Related Transactions and Director Independence | The material labeled Director Independence on pages 10 through 11, and Certain Transactions on pages 28 and 29 of the Proxy Statement is incorporated by reference in this Report. | ||
Item 14.
|
Principal Accountant Fees and Services | The material labeled Relationship with Independent Public Accountants on pages 29 and 30 of the Proxy Statement is incorporated by reference in this Report. | ||
Part IV |
||||
Item 15.
|
Exhibits, Financial Statement Schedules |
iii
Table of Contents
Southwest Bancorp, Inc.
Southwest Bancorp, Inc. (Southwest) is the bank holding company for the 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, and specialized
cash management and other financial services from offices in Oklahoma, Texas, and Kansas, and on
the internet through SNB DirectBanker®.
Southwest focuses on converting its strategic vision into long-term shareholder value. Our vision
includes a commercial banking model and a community banking model focused on more traditional
banking operations in our three-state market.
Southwests banking philosophy has led to the development of a line of deposit, lending, and other
financial products that respond to professional and commercial customers needs for speed,
efficiency, and information and complement more traditional banking products. Southwest has
developed 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. Other specialized
financial 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 maintains close relationships with businesses, professionals, and their principals to
fulfill their banking needs throughout their business development and professional lives.
Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered
in 1894. Southwest became a public company in late 1993 with assets of approximately $434.0
million. At December 31, 2009, Southwest had total assets of $3.1 billion, deposits of $2.6
billion, and shareholders equity of $309.8 million.
Southwests common stock is traded on the NASDAQ Global Select Market under the symbol OKSB.
Southwest Capital Trust IIs public offering of trust preferred securities are traded on the NASDAQ
Global Select Market under the symbol OKSBP.
About This Report
This report comprises the entire 2009 Form 10-K, other than exhibits, as filed with the SEC.
The 2009 annual report to shareholders, including this report, and the annual proxy materials for
the 2010 annual meeting are being distributed together to shareholders. Copies of exhibits and
additional copies of the Form 10-K can be obtained free of charge by writing to Kerby E. Crowell,
Executive Vice President, Chief Financial Officer and Secretary, Southwest Bancorp, Inc., P.O. Box
1988, Stillwater, OK 74076. This report is provided along with the annual proxy statement for
convenience of use and to decrease costs, but is not part of the proxy materials.
The SEC has not approved or disapproved this Report or passed upon its accuracy or adequacy.
iv
Table of Contents
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table presents Southwests selected consolidated financial data for each of the
five years in the period ended December 31, 2009. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements of Southwest, including the
accompanying Notes, presented elsewhere in this report.
For the Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Operations Data |
||||||||||||||||||||
Interest income |
$ | 150,399 | $ | 162,794 | $ | 177,068 | $ | 169,760 | $ | 137,344 | ||||||||||
Interest expense |
51,708 | 73,075 | 84,471 | 76,808 | 52,115 | |||||||||||||||
Net interest income |
98,691 | 89,719 | 92,597 | 92,952 | 85,229 | |||||||||||||||
Provision for loan losses |
39,176 | 18,979 | 8,947 | 12,187 | 16,155 | |||||||||||||||
Gain on sales of loans and securities, net (1) |
5,888 | 3,566 | 4,923 | 3,689 | 4,915 | |||||||||||||||
Noninterest income (2) |
16,048 | 12,572 | 11,510 | 12,973 | 12,368 | |||||||||||||||
Noninterest expense (3) |
60,858 | 62,488 | 65,108 | 56,021 | 51,503 | |||||||||||||||
Income before taxes |
20,593 | 24,390 | 34,975 | 41,406 | 34,854 | |||||||||||||||
Taxes on income |
7,611 | 9,489 | 13,597 | 15,409 | 13,840 | |||||||||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | $ | 25,997 | $ | 21,014 | ||||||||||
Net income available to common shareholders |
$ | 8,837 | $ | 14,658 | $ | 21,378 | $ | 25,997 | $ | 21,014 | ||||||||||
Dividends |
||||||||||||||||||||
Preferred Stock |
$ | 3,500 | $ | 243 | $ | | $ | | $ | | ||||||||||
Common stock |
1,398 | 5,519 | 5,299 | 4,681 | 4,035 | |||||||||||||||
Ratio of total dividends to net income |
37.73 | % | 38.67 | % | 24.79 | % | 18.00 | % | 19.20 | % | ||||||||||
Per Share Data |
||||||||||||||||||||
Basic earnings per common share |
$ | 0.60 | $ | 1.01 | $ | 1.49 | $ | 1.84 | $ | 1.60 | ||||||||||
Diluted earnings per common share |
0.60 | 1.00 | 1.46 | 1.79 | 1.55 | |||||||||||||||
Common stock cash dividends |
0.0952 | 0.3800 | 0.3700 | 0.3300 | 0.3000 | |||||||||||||||
Book value per common share (4) |
16.46 | 16.18 | 15.16 | 13.87 | 12.16 | |||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic, net of unvested restricted stock |
14,625,847 | 14,471,242 | 14,291,041 | 14,151,624 | 13,155,742 | |||||||||||||||
Diluted, net of unvested restricted stock |
14,689,517 | 14,641,521 | 14,606,149 | 14,483,941 | 13,559,885 | |||||||||||||||
Financial Condition Data (4) |
||||||||||||||||||||
Investment securities |
$ | 263,439 | $ | 264,166 | $ | 256,608 | $ | 270,519 | $ | 268,763 | ||||||||||
Noncovered portfolio loans (5) |
2,539,294 | 2,494,506 | 2,145,557 | 1,602,726 | 1,352,433 | |||||||||||||||
Loans held for sale (5) |
43,134 | 56,941 | 66,275 | 188,464 | 383,447 | |||||||||||||||
Total noncovered loans (5) (6) |
2,582,428 | 2,551,447 | 2,211,832 | 1,791,190 | 1,735,880 | |||||||||||||||
Covered portfolio loans (7) |
85,405 | | | | | |||||||||||||||
Interest-earning assets |
2,933,856 | 2,817,496 | 2,478,429 | 2,079,380 | 2,007,248 | |||||||||||||||
Total assets |
3,108,291 | 2,879,762 | 2,564,298 | 2,170,628 | 2,099,639 | |||||||||||||||
Interest-bearing deposits |
2,267,901 | 1,918,181 | 1,801,512 | 1,511,196 | 1,433,265 | |||||||||||||||
Total deposits |
2,592,730 | 2,180,122 | 2,058,579 | 1,765,611 | 1,657,820 | |||||||||||||||
Other borrowings |
103,022 | 295,138 | 218,356 | 138,094 | 204,508 | |||||||||||||||
Subordinated debentures |
81,963 | 81,963 | 46,393 | 46,393 | 46,393 | |||||||||||||||
Total shareholders equity (8) |
309,778 | 302,203 | 217,609 | 197,510 | 170,444 | |||||||||||||||
Common shareholders equity |
242,741 | 235,811 | 217,609 | 197,510 | 170,444 | |||||||||||||||
Mortgage servicing portfolio |
237,459 | 158,143 | 141,680 | 135,904 | 133,470 | |||||||||||||||
Selected Ratios |
||||||||||||||||||||
Return on average assets |
0.43 | % | 0.54 | % | 0.94 | % | 1.18 | % | 1.01 | % | ||||||||||
Return on average total shareholders equity |
4.20 | 6.40 | 10.19 | 13.99 | 13.78 | |||||||||||||||
Return on average common equity |
3.65 | 6.44 | 10.19 | 13.99 | 13.78 | |||||||||||||||
Tangible common equity to tangible assets |
7.61 | 7.96 | 8.23 | 9.05 | 8.11 | |||||||||||||||
Net interest margin |
3.38 | 3.36 | 4.20 | 4.42 | 4.30 | |||||||||||||||
Efficiency ratio (9) |
50.45 | 59.03 | 59.72 | 51.11 | 50.24 | |||||||||||||||
Average assets per employee (10) |
$ | 6,411 | $ | 6,206 | $ | 4,661 | $ | 5,117 | $ | 5,448 |
1
Table of Contents
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Asset Quality Ratios |
||||||||||||||||||||
Allowance for loan losses (4) |
$ | 62,413 | $ | 39,773 | $ | 29,584 | $ | 27,293 | $ | 23,812 | ||||||||||
Allowance for loan losses to noncovered
portfolio loans |
2.46 | % | 1.59 | % | 1.38 | % | 1.70 | % | 1.76 | % | ||||||||||
Noncovered nonperforming loans (4) (11) |
$ | 106,197 | $ | 63,983 | $ | 29,571 | $ | 29,357 | $ | 23,585 | ||||||||||
Noncovered nonperforming loans to noncovered
portfolio loans |
4.18 | % | 2.56 | % | 1.38 | % | 1.83 | % | 1.74 | % | ||||||||||
Allowance for loan losses to noncovered
nonperforming loans |
58.77 | 62.16 | 100.04 | 92.97 | 100.96 | |||||||||||||||
Noncovered nonperforming assets (4) (12) |
$ | 124,629 | $ | 70,075 | $ | 32,250 | $ | 31,230 | $ | 30,715 | ||||||||||
Noncovered nonperforming assets to
noncovered portfolio
loans and noncovered
other real estate |
4.87 | % | 2.80 | % | 1.50 | % | 1.95 | % | 2.26 | % | ||||||||||
Net noncovered loan charge-offs (4) |
$ | 16,754 | $ | 8,790 | $ | 6,656 | $ | 8,706 | $ | 11,334 | ||||||||||
Net noncovered loan charge-offs to average
noncovered portfolio loans |
0.64 | % | 0.37 | % | 0.37 | % | 0.59 | % | 0.87 | % | ||||||||||
Covered nonperforming loans (4) (7) (11) |
$ | 13,458 | | | | | ||||||||||||||
Covered nonperforming loans to covered
portfolio loans |
15.76 | % | | | | | ||||||||||||||
Covered nonperforming assets (4) (7) (12) |
$ | 18,206 | | | | | ||||||||||||||
Covered nonperforming assets to covered
portfolio loans and
covered other real estate |
20.19 | % | | | | | ||||||||||||||
Capital Ratios |
||||||||||||||||||||
Average shareholders equity to average assets |
||||||||||||||||||||
Total |
10.34 | 8.49 | 9.21 | 8.47 | 7.34 | |||||||||||||||
Common |
8.11 | 8.30 | 9.21 | 8.47 | 7.34 | |||||||||||||||
Tier I capital to risk-weighted assets (4) (13) |
13.28 | 13.01 | 9.71 | 12.25 | 12.95 | |||||||||||||||
Total capital to risk-weighted assets (4) (13) |
14.55 | 14.26 | 10.97 | 13.50 | 14.21 | |||||||||||||||
Leverage ratio (4) (13) |
12.42 | 13.06 | 10.23 | 10.91 | 10.24 |
(1) | Gain on sales includes $1.2 million gain due to the redemption of certain VISA USA common shares in 2008 and a $1.9 million gain on a partial disposition of an equity security in 2007. Please see Note 19 to the Consolidated Financial Statements. | |
(2) | Noninterest income in 2009 includes $3.3 million resulting from the gain on acquisition related to the FDIC-assisted acquisition. Please see Note 2 to the Consolidated Financial Statements. | |
(3) | Noninterest expenses in 2007 include $3.3 million resulting from the ATM-related write-off and associated legal fees and $713,000 in litigation and settlement costs related to VISA USA. Please see Note 19 to the Consolidated Financial Statements. | |
(4) | At period end. | |
(5) | Net of unearned discounts but before deduction of allowance for loan losses. | |
(6) | Total loans include loans held for sale. | |
(7) | These loans are covered by the FDIC loss share agreements, including the amount of expected reimbursements from the FDIC, and are shown net of unearned discounts. Please see Note 2 to the Consolidated Financial Statements. | |
(8) | Reflects the issuance of preferred stock in 2008 and the common stock offering and repurchases of common shares in 2005. Please see Capital Resources on page 22 and Note 11 to the Consolidated Financial Statements. | |
(9) | The efficiency ratio = noninterest expenses / (net interest income + total noninterest income) as shown on the Consolidated Statements of Operations. | |
(10) | Ratio = average assets for year divided by the number of full-time equivalent employees at year-end. | |
(11) | Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more, and loans with restructured terms. | |
(12) | Nonperforming assets consist of nonperforming loans and other real estate owned. | |
(13) | 2008 reflects the effects of capital raised through the sale of securities. Please see Notes 9 and 11 to the Consolidated Financial Statements. |
2
Table of Contents
SECURITIES LISTING, PRICES, AND DIVIDENDS
Stock Listing
Common shares of Southwest Bancorp, Inc. are traded on the National Association of Security
Dealers (NASDAQ) Global Select Market under the symbol OKSB.
Trust preferred securities of Southwest Capital Trust II are traded on the NASDAQ Global Select
Market under the symbol OKSBP.
Transfer Agents and Registrars
For Southwest Bancorp, Inc.:
|
For Southwest Capital Trust II: | |
Computershare Investor Services, LLC
|
U.S. Bank Trust National Association | |
2 North LaSalle St.
|
300 East Delaware Avenue | |
Chicago, IL 60602
|
Wilmington, DE 19801 |
Recent Stock Prices, Dividends, and Equity Compensation Plan Information
Shareholders received quarterly cash dividends totaling $2.4 million in 2009 and $5.5 million
in 2008.
The Board of Directors decides whether or not to pay dividends on common stock, and the amount of
any such dividends, each quarter. In making its decision on dividends, the Board considers
operating results, financial condition, capital adequacy, regulatory requirements, shareholder
returns, and other factors. The ability of Southwest to pay dividends depends upon regulatory
approval and cash resources which includes dividend payments from its subsidiaries. For
information regarding the ability of Stillwater National and Bank of Kansas to pay dividends to
Southwest and the restrictions on bank dividends under federal banking laws, see Note 13 Capital
Requirements & Regulatory Matters to the Consolidated Financial Statements on page 61 of this
report, Certain Regulatory Matters on page 27 of this report, and Risk Factors beginning on
page 87 of this report.
Shares issued under the employee stock purchase plan, which commenced on January 1, 1996, totaled
8,158 in 2009 and 6,221 in 2008, while issuances pursuant to the stock option plans were 164,895
and 193,758 in the respective years.
As of March 1, 2010, there were approximately 5,400 holders of record of Southwests common stock.
The following table sets forth the common stock dividends declared for each quarter during 2009 and
2008, and the range of high and low closing trade prices for the common stock for those periods.
2009 | 2008 | |||||||||||||||||||||||
Dividend | Dividend | |||||||||||||||||||||||
High | Low | Declared | High | Low | Declared | |||||||||||||||||||
For the Quarter Ending: |
||||||||||||||||||||||||
March 31 |
$ | 12.51 | $ | 5.48 | $ | 0.0238 | $ | 18.52 | $ | 14.08 | $ | 0.0950 | ||||||||||||
June 30 |
10.50 | 6.47 | 0.0238 | 18.29 | 11.49 | 0.0950 | ||||||||||||||||||
September 30 |
14.70 | 8.71 | 0.0238 | 23.53 | 9.83 | 0.0950 | ||||||||||||||||||
December 31 |
14.00 | 6.12 | 0.0238 | 19.55 | 11.16 | 0.0950 |
3
Table of Contents
The following table compares the cumulative total return on a hypothetical investment of $100
in Southwests common stock at the closing price on December 31, 2004 through December 31, 2009,
with the hypothetical cumulative total return on the NASDAQ Stock Market Index (U.S. Companies) and
the NASDAQ Bank Index for the comparable period.
12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | |||||||||||||||||||||||||||
Southwest |
$ | 100 | $ | 83 | $ | 117 | $ | 78 | $ | 57 | $ | 31 | ||||||||||||||||||||
NASDAQ Bank Index |
100 | 98 | 110 | 87 | 63 | 53 | ||||||||||||||||||||||||||
NASDAQ Stock Market Index (U.S.) |
100 | 102 | 112 | 122 | 59 | 84 | ||||||||||||||||||||||||||
The following table presents disclosure regarding equity compensation plans in existence at
December 31, 2009, consisting of the 1994 stock option plan, the 1999 stock option plan (both
expired but having outstanding options that may still be exercised), and the 2008 stock based award
plan, all of which were approved by the shareholders.
Equity Compensation Plan Information
Number of securities | ||||||||||||
Number of securities | available for future | |||||||||||
to be issued upon | Weighted average | issuance under equity | ||||||||||
exercise of | exercise price of | compensation plans | ||||||||||
outstanding options | outstanding options, | excluding securities | ||||||||||
warrants and rights | warrants and rights | reflected in column (a) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Plans approved by shareholders |
379,324 | $ | 20.98 | 773,600 | ||||||||
Plans not approved by
shareholders |
0 | 0 | 0 | |||||||||
Total |
379,324 | $ | 20.98 | 773,600 |
4
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In 2009, Southwest Bancorp, Inc.s (Southwest) loans, deposits, and assets reached their
highest levels in our history. Southwests shareholders equity increased as a result of current
year results of operations. Southwests net income declined primarily as a result of increased
provision for loan losses.
| Net income available to common shareholders for 2009 was $8.8 million, down from $14.7 million in 2008 and from $21.4 million in 2007. | ||
| Diluted earnings per common share decreased to $0.60 in 2009, compared to $1.00 in 2008 and $1.46 in 2007. | ||
| Total loans grew to $2.67 billion at December 31, 2009, compared to $2.55 billion at December 31, 2008 and $2.21 billion at December 31, 2007. | ||
| Total deposits grew to $2.59 billion at December 31, 2009, compared to $2.18 billion at December 31, 2008 and $2.06 billion at December 31, 2007. | ||
| Total shareholders equity at year-end 2009 increased 3% to $309.8 million, compared to $302.2 million for 2008 and $217.6 million for 2007. | ||
| Total assets at year-end 2009 increased 8%, ending the year at $3.11 billion, compared to $2.88 billion at year-end 2008 and $2.56 billion at year-end 2007. | ||
| Portfolio loans at year-end 2009 increased by $130.2 million, or 5%, to $2.62 billion at December 31, 2009, compared to $2.49 billion at December 31, 2008 and $2.15 billion at December 31, 2007. |
On June 19, 2009, Bank of Kansas entered into a purchase and assumption agreement with loss share
with the Federal Deposit Insurance Corporation (FDIC) to acquire deposits, loans, and certain
other liabilities and assets of First National Bank of Anthony, Anthony, Kansas (FNBA), in an
FDIC-assisted transaction. FNBA was a full service commercial bank that had been placed in
receivership with the FDIC. Bank of Kansas acquired assets with a fair value of approximately
$149.8 million, including $117.1 million of loans, $20.6 million of investment securities, $6.0
million of cash and cash equivalents, $2.9 million in other real estate owned (OREO), and $157.7
million in liabilities, including $135.0 million of deposits and $21.7 million of FHLB advances.
Bank of Kansas recorded a core deposit intangible asset of $2.0 million and received a cash payment
from the FDIC of approximately $11.1 million. Bank of Kansas entered into loss share agreements
with the FDIC and recorded a loss share receivable of $33.1 million. Loans covered under the loss
share agreements, including the amount of expected reimbursement from the FDIC, are reported in
loans and referred to as covered loans. Based upon the acquisition date fair values of the net
assets acquired, no goodwill was recorded. The transaction resulted in a gain on acquisition of
$3.3 million, which is included in noninterest income.
This transaction provides Southwest with five additional banking offices in Kansas. Please see
Note 2 Acquisitions to the Consolidated Financial Statements on page 43 for additional
information related to the details of the transaction.
Southwest Bancorp continues a strategic focus on building long-term shareholder value. As
explained further in this report, the 2009 decrease in our earnings is linked to current economic
conditions that have required increases in our allowance for loan losses. Consistent with our
strategy, in the face of these conditions, we took important steps that we believe will make
Southwest better positioned both now and when the economy improves. These include:
| An emphasis on prudent lending in carefully selected markets in Texas, Oklahoma, and Kansas. We reduced our growth rate in portfolio loans to 5% in 2009, of which 3% is attributable to the FDIC-assisted transaction. At year-end, Texas and Kansas together accounted for over half of portfolio loans. Southwest has had a traditional focus on commercial real estate loans. We will continue to make commercial real estate loans, but have determined to reduce our concentration in them in light of economic conditions. |
5
Table of Contents
| A focus on capital to support lending and other activities. At December 31, 2009, our capital levels substantially exceed all regulatory capital requirements and the amounts necessary to qualify as well capitalized for regulatory purposes. Please see Note 13 Capital Requirements & Regulatory Matters to the consolidated financial statements on page 61. |
Results of Operations
For the year ended December 31, 2009, Southwest reported net income of $13.0 million, a $1.9
million, or 13%, decrease from the $14.9 million earned in 2008. Basic earnings per common share
decreased by 41% to $0.60 per share for 2009 from $1.01 per share for 2008. Diluted earnings per
common share decreased by 40% to $0.60 per share for 2009 from $1.00 per share for 2008.
For the year ended December 31, 2008, Southwest reported net income of $14.9 million, a $6.5
million, or 30%, decrease from the $21.4 million earned in 2007. Basic earnings per common share
decreased by 32% to $1.01 per share for 2008 from $1.49 per share for 2007. Diluted earnings per
common share decreased by 32% to $1.00 per share for 2008 from $1.46 per share for 2007.
For the year ended December 31, 2007, Southwest reported net income of $21.4 million, a $4.6
million, or 18%, decrease from the $26.0 million earned in 2006. Basic earnings per common share
decreased by 19% to $1.49 per share for 2008 from $1.84 per share for 2006. Diluted earnings per
common share decreased by 18% to $1.46 per share for 2008 from $1.79 per share for 2006.
These factors are discussed in more detail in the sections that follow.
6
Table of Contents
Summary of Annual Changes in Selected Consolidated Financial Data
The following table presents selected consolidated financial data for the years 2009, 2008,
and 2007 and the annual changes between those years.
2009 Change | 2008 Change | 2007 Change | ||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2009 | From 2008 | 2008 | From 2007 | 2007 | From 2006 | ||||||||||||||||||
Operations Data |
||||||||||||||||||||||||
Interest income |
$ | 150,399 | $ | (12,395 | ) | $ | 162,794 | $ | (14,274 | ) | $ | 177,068 | $ | 7,308 | ||||||||||
Interest expense |
51,708 | (21,367 | ) | 73,075 | (11,396 | ) | 84,471 | 7,663 | ||||||||||||||||
Net interest income |
98,691 | 8,972 | 89,719 | (2,878 | ) | 92,597 | (355 | ) | ||||||||||||||||
Provision for loan losses |
39,176 | 20,197 | 18,979 | 10,032 | 8,947 | (3,240 | ) | |||||||||||||||||
Gain on sales of loans and securities, net |
5,888 | 2,322 | 3,566 | (1,357 | ) | 4,923 | 1,234 | |||||||||||||||||
Noninterest income |
16,048 | 3,476 | 12,572 | 1,062 | 11,510 | (1,463 | ) | |||||||||||||||||
Noninterest expense |
60,858 | (1,630 | ) | 62,488 | (2,620 | ) | 65,108 | 9,087 | ||||||||||||||||
Income before taxes |
20,593 | (3,797 | ) | 24,390 | (10,585 | ) | 34,975 | (6,431 | ) | |||||||||||||||
Taxes on income |
7,611 | (1,878 | ) | 9,489 | (4,108 | ) | 13,597 | (1,812 | ) | |||||||||||||||
Net income |
$ | 12,982 | $ | (1,919 | ) | $ | 14,901 | $ | (6,477 | ) | $ | 21,378 | $ | (4,619 | ) | |||||||||
Net income available to common shareholders |
$ | 8,837 | $ | (5,821 | ) | $ | 14,658 | $ | (6,720 | ) | $ | 21,378 | $ | (4,619 | ) | |||||||||
Per Share Data |
||||||||||||||||||||||||
Basic earnings per common share |
$ | 0.60 | $ | (0.41 | ) | $ | 1.01 | $ | (0.48 | ) | $ | 1.49 | $ | (0.35 | ) | |||||||||
Diluted earnings per common share |
0.60 | (0.40 | ) | 1.00 | (0.46 | ) | 1.46 | (0.33 | ) | |||||||||||||||
Financial Condition Data Averages |
||||||||||||||||||||||||
Investment securities |
$ | 245,456 | $ | 6,803 | $ | 238,653 | $ | (38,610 | ) | $ | 277,263 | $ | 6,241 | |||||||||||
Total loans |
2,667,771 | 238,642 | 2,429,129 | 506,262 | 1,922,867 | 91,871 | ||||||||||||||||||
Interest-earning assets |
2,919,040 | 247,404 | 2,671,636 | 466,370 | 2,205,266 | 99,906 | ||||||||||||||||||
Total assets |
2,987,470 | 244,571 | 2,742,899 | 463,474 | 2,279,425 | 84,330 | ||||||||||||||||||
Interest-bearing deposits |
2,108,844 | 227,759 | 1,881,085 | 285,719 | 1,595,366 | 97,233 | ||||||||||||||||||
Total deposits |
2,394,028 | 244,173 | 2,149,855 | 310,030 | 1,839,825 | 112,012 | ||||||||||||||||||
Other borrowings |
181,682 | (92,424 | ) | 274,106 | 112,422 | 161,684 | (52,993 | ) | ||||||||||||||||
Subordinated debentures |
81,963 | 17,899 | 64,064 | 17,671 | 46,393 | | ||||||||||||||||||
Total shareholders equity |
308,952 | 76,121 | 232,831 | 22,946 | 209,885 | 24,068 | ||||||||||||||||||
Selected Ratios |
||||||||||||||||||||||||
Return on average assets |
0.43 | % | (0.11 | )% | 0.54 | % | (0.40 | )% | 0.94 | % | (0.24 | )% | ||||||||||||
Return on average total shareholders equity |
4.20 | (2.20 | ) | 6.40 | (3.79 | ) | 10.19 | (3.80 | ) | |||||||||||||||
Return on average common equity |
3.65 | (2.79 | ) | 6.44 | (3.75 | ) | 10.19 | (3.80 | ) | |||||||||||||||
Net interest margin |
3.38 | 0.02 | 3.36 | (0.84 | ) | 4.20 | (0.22 | ) | ||||||||||||||||
Asset Quality Ratios |
||||||||||||||||||||||||
Noncovered |
||||||||||||||||||||||||
Allowance for loan losses to portfolio loans |
2.46 | % | 0.87 | % | 1.59 | % | 0.21 | % | 1.38 | % | (0.32 | )% | ||||||||||||
Nonperforming loans to portfolio loans |
4.18 | 1.62 | 2.56 | 1.18 | 1.38 | (0.45 | ) | |||||||||||||||||
Allowance for loan losses to nonperforming
loans |
58.77 | (3.39 | ) | 62.16 | (37.88 | ) | 100.04 | 7.07 | ||||||||||||||||
Nonperforming assets to portfolio loans and
other real estate owned |
4.87 | 2.07 | 2.80 | 1.30 | 1.50 | (0.45 | ) | |||||||||||||||||
Net loan charge-offs to average portfolio loans |
0.64 | 0.28 | 0.36 | 0.01 | 0.35 | (0.13 | ) | |||||||||||||||||
Covered |
||||||||||||||||||||||||
Nonperforming loans to portfolio loans |
15.76 | 15.76 | | | | | ||||||||||||||||||
Nonperforming assets to portfolio loans and
other real estate owned |
20.19 | 20.19 | | | | |
7
Table of Contents
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans
and investment securities, and interest expense on liabilities, such as deposits and borrowings,
which are used to fund those assets. Net interest income is Southwests largest source of revenue
representing 82% of total revenue in 2009. Net interest margin is net interest income as a
percentage of average earning assets for the period. Net interest income and net interest margin
increase or decrease as a result of changes in the levels of interest rates, the volume and the mix
of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets
funded by noninterest-bearing funding sources.
Net interest income for 2009 was $98.7 million, an increase of $9.0 million, or 10%, from the $89.7
million earned in 2008. The net interest margin was 3.38% for the year ended December 31, 2009, an
increase of two basis points from 2008.
The 2009 increase in net interest income and net interest margin from 2008 is the result of a
one-time recovery of $1.9 million in interest from the successful resolution of a nonperforming
loan. Net interest margin would have been 6 basis points lower without this recovery. Also
included in net interest income is the recognition of discount income of $822,000 due to prepayment
and collection of loans acquired in the FNBA transaction in excess of the recorded value at the
date of the acquisition. This increased net margin by 3 basis points.
For further analysis of asset sensitivity please see tables showing the effects of changes in
interest rates and changes in the volume of interest related assets and liabilities on page 9 of
this report and the discussion of Asset/Liability Management and Quantitative and Qualitative
Disclosures about Market Risk on pages 24 through 26 of this report.
The table on the next page provides information relating to Southwests average consolidated
statements of financial condition and reflects the interest income on interest-earning assets,
interest expense of interest-bearing liabilities, and the average yields earned and rates paid for
the periods indicated. Yields and rates are derived by dividing income or expense reflected in the
Consolidated Statements of Operations by the average daily balance of the related assets or
liabilities, respectively, for the periods presented. Nonaccrual loans have been included in the
average balances of total loans.
The changes in the composition of interest-earning assets and their funding sources reflect market
demand and managements efforts to maximize net interest margin while controlling interest rate,
credit, and other risks.
8
Table of Contents
Consolidated Average Balances, Yields and Rates
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
Balance | Interest | Rate(1) | Balance | Interest | Rate (1) | Balance | Interest | Rate (1) | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Total loans and leases (3) |
$ | 2,667,771 | $ | 141,239 | 5.29 | % | $ | 2,429,129 | $ | 152,719 | 6.29 | % | $ | 1,922,867 | $ | 165,759 | 8.62 | % | ||||||||||||||||||
Investment securities |
245,456 | 9,146 | 3.73 | 238,653 | 9,986 | 4.18 | 277,263 | 11,055 | 3.99 | |||||||||||||||||||||||||||
Other interest-earning assets |
5,813 | 14 | 0.24 | 3,854 | 89 | 2.31 | 5,136 | 254 | 4.95 | |||||||||||||||||||||||||||
Total interest-earning assets |
2,919,040 | 150,399 | 5.15 | 2,671,636 | 162,794 | 6.09 | 2,205,266 | 177,068 | 8.03 | |||||||||||||||||||||||||||
Other assets |
68,430 | 71,263 | 74,159 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 2,987,470 | $ | 2,742,899 | $ | 2,279,425 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 83,813 | $ | 476 | 0.57 | % | $ | 75,950 | $ | 584 | 0.77 | % | $ | 62,038 | $ | 355 | 0.57 | % | ||||||||||||||||||
Money market accounts |
485,383 | 4,954 | 1.02 | 538,148 | 12,620 | 2.35 | 449,266 | 19,664 | 4.38 | |||||||||||||||||||||||||||
Savings accounts |
21,010 | 78 | 0.37 | 13,930 | 69 | 0.50 | 12,274 | 87 | 0.71 | |||||||||||||||||||||||||||
Time deposits |
1,518,638 | 36,811 | 2.42 | 1,253,057 | 47,749 | 3.81 | 1,071,788 | 53,033 | 4.95 | |||||||||||||||||||||||||||
Total interest-bearing deposits |
2,108,844 | 42,319 | 2.01 | 1,881,085 | 61,022 | 3.24 | 1,595,366 | 73,139 | 4.58 | |||||||||||||||||||||||||||
Other borrowings |
181,682 | 4,049 | 2.23 | 274,106 | 7,242 | 2.64 | 161,684 | 7,555 | 4.67 | |||||||||||||||||||||||||||
Subordinated debentures |
81,963 | 5,340 | 6.52 | 64,064 | 4,811 | 7.51 | 46,393 | 3,777 | 8.14 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
2,372,489 | 51,708 | 2.18 | 2,219,255 | 73,075 | 3.29 | 1,803,443 | 84,471 | 4.68 | |||||||||||||||||||||||||||
Noninterest-bearing demand deposits |
285,184 | 268,770 | 244,459 | |||||||||||||||||||||||||||||||||
Other liabilities |
20,845 | 22,043 | 21,638 | |||||||||||||||||||||||||||||||||
Shareholders equity |
308,952 | 232,831 | 209,885 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 2,987,470 | $ | 2,742,899 | $ | 2,279,425 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 98,691 | $ | 89,719 | $ | 92,597 | ||||||||||||||||||||||||||||||
Interest rate spread |
2.97 | % | 2.80 | % | 3.35 | % | ||||||||||||||||||||||||||||||
Net interest margin (2) |
3.38 | % | 3.36 | % | 4.20 | % | ||||||||||||||||||||||||||||||
Ratio of average interest-
earning assets to average
interest-bearing liabilities |
123.04 | % | 120.38 | % | 122.28 | % | ||||||||||||||||||||||||||||||
(1) | Yields, interest rate spreads, and net interest margins are calculated using income recorded in accordance with U.S. generally accepted accounting principles (GAAP) and are not shown on the higher, non-GAAP tax-equivalent basis. | |
(2) | Net interest margin = net interest income / total average interest-earning assets. | |
(3) | Information regarding noncovered and covered loans for the period shown is not readily available. |
The following table analyzes changes in interest income and interest expense of Southwest for
the periods indicated. Information is provided on changes attributable to changes in average
volumes and changes in rates for each category of interest-earning asset and interest-bearing
liability.
9
Table of Contents
Effect of Volume and Rate Changes on Net Interest Income
2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||
Increase | Due to Change | Increase | Due to Change | |||||||||||||||||||||
Or | In Average: | Or | In Average: | |||||||||||||||||||||
(Dollars in thousands) | (Decrease) | Volume | Rate | (Decrease) | Volume | Rate | ||||||||||||||||||
Interest earned on: |
||||||||||||||||||||||||
Loans receivable (1) (2) |
$ | (11,480 | ) | $ | 14,095 | $ | (25,575 | ) | $ | (13,040 | ) | $ | 37,817 | $ | (50,857 | ) | ||||||||
Investment securities |
(840 | ) | 278 | (1,118 | ) | (1,069 | ) | (1,596 | ) | 527 | ||||||||||||||
Other interest-earning assets |
(75 | ) | 31 | (106 | ) | (165 | ) | (53 | ) | (112 | ) | |||||||||||||
Total interest income |
(12,395 | ) | 14,203 | (26,598 | ) | (14,274 | ) | 33,228 | (47,502 | ) | ||||||||||||||
Interest paid on: |
||||||||||||||||||||||||
Interest-bearing demand |
(108 | ) | 56 | (164 | ) | 229 | 90 | 139 | ||||||||||||||||
Money market accounts |
(7,666 | ) | (1,134 | ) | (6,532 | ) | (7,044 | ) | 3,351 | (10,395 | ) | |||||||||||||
Savings accounts |
9 | 29 | (20 | ) | (18 | ) | 11 | (29 | ) | |||||||||||||||
Time deposits |
(10,938 | ) | 8,728 | (19,666 | ) | (5,284 | ) | 8,095 | (13,379 | ) | ||||||||||||||
Other borrowings |
(3,193 | ) | (2,181 | ) | (1,012 | ) | (313 | ) | 3,848 | (4,161 | ) | |||||||||||||
Subordinated debentures |
529 | 1,223 | (694 | ) | 1,034 | 1,346 | (312 | ) | ||||||||||||||||
Total interest expense |
(21,367 | ) | 4,756 | (26,123 | ) | (11,396 | ) | 16,948 | (28,344 | ) | ||||||||||||||
Net interest income |
$ | 8,972 | $ | 9,447 | $ | (475 | ) | $ | (2,878 | ) | $ | 16,280 | $ | (19,158 | ) | |||||||||
(1) | Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material. Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis, because it is not considered material. Changes in rate-volume (changes in rate multiplied by changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. | |
(2) | Information regarding noncovered and covered loans for the period shown is not readily available. |
Net interest income for 2009 was $98.7 million, an increase of $9.0 million, or 10%, from the
$89.7 million earned in 2008. Net interest margin was 3.38% for the year ended December 31, 2009,
an increase of two basis points from 2008.
Net interest income for 2008 was $89.7 million, a decrease of $2.9 million, or 3%, from the $92.6
million earned in 2007. Net interest margin was 3.36% for the year ended December 31, 2008, a
decrease of eighty-four basis points from 2007.
Net interest income for 2007 was $92.6 million, a decrease of $355,000, or less than 1%, from the
$93.0 million earned in 2006. Net interest margin was 4.20% for the year ended December 31, 2007,
a decrease of twenty-two basis points from 2006.
Interest rate spread, which represents the difference between the rate earned on interest-earning
assets and the rates paid on interest-bearing liabilities, was 2.97% for 2009, compared to 2.80%
for 2008 and 3.35% for 2007.
Southwest has seen growth in noninterest-bearing deposit accounts which are an alternative funding
source to interest-bearing deposits and other borrowings. The average balance of
noninterest-bearing deposit accounts increased to $285.2 million in 2009 from $268.8 million in
2008 and $244.5 million in 2007.
Provision and Allowance for Loan Losses
Southwest makes provisions for loan losses in amounts necessary to maintain the allowance for
loan losses at the level Southwest determines is appropriate. The amount of the allowance is based
on careful, continuous review and evaluation of the loan portfolio and ongoing quarterly
assessments of the probable losses inherent in the loan and lease portfolio. The allowance for
loan losses is determined in accordance with regulatory guidelines and generally accepted
accounting principles. See Allowance for Loan Losses in Note 1 to the Consolidated
10
Table of Contents
Financial
Statements on page 38 of this report for a description of Southwests allowance for loan losses
methodology.
Based upon this methodology, management established an allowance of $62.4 million, or 2.46% of
total noncovered portfolio loans, at December 31, 2009, compared to an allowance of $39.8 million,
or 1.59% of total noncovered portfolio loans, at December 31, 2008. This represents an increase in
the allowance of $22.6 million, or 57%, from year-end 2008.
Changes in the amount of the allowance resulted from the application of the methodology, which is
designed to estimate inherent losses on total noncovered portfolio loans, including nonperforming
loans. At December 31, 2009, the allowance on the $105.9 million in noncovered nonaccrual loans
was $13.3 million (12.6%), compared with an allowance on $59.3 million in noncovered nonaccrual
loans at December 31, 2008 of $5.4 million (9.1%), creating an increase in the allowance of $7.9
million, or 147%. At December 31, 2009, the allowance for other noncovered loans was $49.1 million
(2.0%), compared to $34.4 million (1.4%) at December 31, 2008, creating an increase in the
allowance of $14.7 million, or 43%. The increase in the allowance related to these other
noncovered loans mainly resulted from consideration of certain trends and qualitative factors.
These included increases in adjusted loss rates made due to increased net loss ratios, managements
assessment of increased economic risk (particularly with respect to commercial and commercial real
estate loans), asset quality trends, including increased levels of potential problem loans, and
loan concentrations in commercial real estate and construction loans, which together comprised
approximately 72% of our noncovered portfolio loans at December 31, 2009. Based on its analysis
management believes the amount of the allowance is appropriate. Covered portfolio loans of $85.4
million were acquired in the FNBA transaction, but based upon applicable accounting rules no
allowance was established for these loans as of the acquisition date, as these loans were recorded
at fair value which includes an estimate of projected losses. (See Note 2 Acquisitions to the
Consolidated Financial Statements on page 43 of this report.)
The amount of the loan loss provision for a period is based solely upon the amount needed to cause
the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the
period. Noncovered net charge-offs for the year ended December 31, 2009 were $16.8 million, an
increase of $8.0 million (91%) over the $8.8 million recorded for the year ended December 31, 2008.
The provision for loan losses for the year ended December 31, 2009 was $39.2 million, representing
an increase of $20.2 million (106%) over the $19.0 million recorded for the year ended December 31,
2008.
At December 31, 2009, the allowance for loan losses was 58.77% of noncovered nonperforming loans,
compared to 62.16% of noncovered nonperforming loans at December 31, 2008. Noncovered nonaccrual
loans, which comprise the majority of noncovered nonperforming loans, were $105.9 million as of
December 31, 2009, an increase of $46.6 million, or 79%, from December 31, 2008. Noncovered
nonaccrual loans at December 31, 2009 were comprised of 52 relationships and were primarily
concentrated in real estate construction (54%), commercial real estate (27%), and commercial loans
(10%). All noncovered nonaccrual loans are considered impaired and are carried at their estimated
collectible amounts. Noncovered loans 90 days or more past due, another component of noncovered
nonperforming loans, decreased $4.4 million, or 93%, from December 31, 2008. These noncovered
loans are believed to have sufficient collateral and are in the process of being collected and are
not considered impaired. Covered nonperforming loans of $13.5 million were acquired from FNBA and
are subject to protection under the loss share agreements with the FDIC.
Performing loans considered potential problem loans, loans which are not included in the past due,
nonaccrual, or restructured categories, but for which known information about possible credit
problems cause management to be uncertain as to the ability of the borrowers to comply with the
present loan repayment terms, amounted to approximately $267.3 million at December 31, 2009,
compared to $131.5 million at December 31, 2008. Included are $8.9 million of potential problem
loans acquired from FNBA, which are subject to protection under the loss share agreements with the
FDIC. Loans may be monitored by management and reported in potential problem loans for an extended
period of time during which management continues to be uncertain as to the ability of certain
borrowers to comply with the present loan repayment terms. These loans are subject to continued
management attention and are considered by management in determining the level of the allowance for
loan losses.
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Both the dollar amount of the allowance and the percentage of the allowance to noncovered loans
increased during 2009 and 2008. The increases were primarily the result of increased net charge
offs, an increase in the allowance related to impaired loans, as well as increases in other risk
factors including increases in potential problem loans and national and local economic trends.
Management strives to carefully monitor credit quality and to identify loans that may become
nonperforming. At any time, however, there are loans included in the portfolio that will result in
losses to Southwest but that have not been identified as nonperforming or potential problem loans.
Because the loan portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a few of such loans
may cause a significant increase in nonperforming assets, the provision for loan losses, and
charge-offs.
At December 31, 2009, the reserve for unfunded loan commitments was $3.5 million, down from the
$3.7 million reserve as of December 31, 2008. The reserve, which is included in other liabilities
on Southwests statement of financial condition, is computed using a methodology similar to that
used to determine the allowance for loan losses, modified to take into account the probability of a
drawdown on the commitment.
The following table presents a five-year history of the allocation of the allowance for loan losses
along with the percentage of total loans in each category.
Allowance for Loan and Lease Losses
At December 31, | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||
Real estate
mortgage - Commercial |
$ | 26,670 | 47 | % | $ | 13,200 | 44 | % | $ | 10,126 | 34 | % | $ | 9,641 | 34 | % | $ | 8,186 | 32 | % | ||||||||||||||||||||
One to four family
residential |
2,454 | 5 | 1,332 | 4 | 693 | 5 | 492 | 5 | 584 | 5 | ||||||||||||||||||||||||||||||
Real estate construction |
22,241 | 25 | 12,795 | 26 | 5,649 | 33 | 1,790 | 25 | 1,547 | 17 | ||||||||||||||||||||||||||||||
Commercial |
10,052 | 20 | 11,401 | 22 | 10,369 | 23 | 12,321 | 24 | 10,922 | 22 | ||||||||||||||||||||||||||||||
Installment
and consumer - Guaranteed student loans |
| 1 | | 2 | 31 | 3 | 90 | 10 | 189 | 22 | ||||||||||||||||||||||||||||||
Other |
996 | 2 | 1,045 | 2 | 804 | 2 | 536 | 2 | 311 | 2 | ||||||||||||||||||||||||||||||
Unallocated* |
| | | | 1,912 | | 2,423 | | 2,073 | | ||||||||||||||||||||||||||||||
Total |
$ | 62,413 | 100 | % | $ | 39,773 | 100 | % | $ | 29,584 | 100 | % | $ | 27,293 | 100 | % | $ | 23,812 | 100 | % | ||||||||||||||||||||
* | Under current methodology, allowance is allocated among respective loan types. |
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The following table analyzes Southwests allowance for loan losses for the periods indicated.
Analysis of Loans and Leases
For the Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2009* | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Balance at beginning of period |
$ | 39,773 | $ | 29,584 | $ | 27,293 | $ | 23,812 | $ | 18,991 | ||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial real estate |
3,622 | 1,379 | 1,540 | 452 | 2,531 | |||||||||||||||
One-to-four family residential |
1,476 | 746 | 337 | 256 | 341 | |||||||||||||||
Real estate construction |
7,464 | 2,209 | 129 | 445 | 155 | |||||||||||||||
Commercial |
5,223 | 4,552 | 4,663 | 7,606 | 8,639 | |||||||||||||||
Other consumer |
1,128 | 1,056 | 696 | 788 | 724 | |||||||||||||||
Total charge-offs |
18,913 | 9,942 | 7,365 | 9,547 | 12,390 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial real estate |
438 | 8 | 22 | 387 | 15 | |||||||||||||||
One-to-four family residential |
430 | 49 | 10 | 27 | 171 | |||||||||||||||
Real estate construction |
344 | 2 | | | 1 | |||||||||||||||
Commercial |
893 | 962 | 606 | 403 | 706 | |||||||||||||||
Other consumer |
272 | 131 | 71 | 24 | 163 | |||||||||||||||
Total recoveries |
2,377 | 1,152 | 709 | 841 | 1,056 | |||||||||||||||
Net loans charged-off (recovered) |
16,536 | 8,790 | 6,656 | 8,706 | 11,334 | |||||||||||||||
Provision for loan losses |
39,176 | 18,979 | 8,947 | 12,187 | 16,155 | |||||||||||||||
Balance at end of period |
$ | 62,413 | $ | 39,773 | $ | 29,584 | $ | 27,293 | $ | 23,812 | ||||||||||
* There was no significant amount of charge-offs or recoveries to covered loans in 2009. | ||||||||||||||||||||
Ratio of allowance for loan losses to portfolio loans
at end of period |
2.46 | % | 1.59 | % | 1.38 | % | 1.70 | % | 1.76 | % | ||||||||||
Ratio of net charge-offs to average portfolio loans
during the period |
0.64 | % | 0.37 | % | 0.37 | % | 0.59 | % | 0.87 | % |
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The following table shows the amounts of nonperforming assets at the end of the periods
indicated. Please see Note 1 to the Notes to Consolidated Financial Statements on page 38 of this
report for a description of Southwests policy for placing loans on nonaccrual status.
Nonperforming Assets
At December 31, | ||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||
(Dollars in thousands) | Noncovered | Covered | 2008* | 2007* | 2006* | 2005* | ||||||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||||||
Commercial real estate |
$ | 28,351 | $ | 1,847 | $ | 9,881 | $ | 5,274 | $ | 6,118 | $ | 802 | ||||||||||||
One-to-four family residential |
9,387 | 2,243 | 474 | 740 | 484 | 311 | ||||||||||||||||||
Real estate construction |
57,586 | 7,525 | 37,346 | 2,910 | 3,398 | | ||||||||||||||||||
Commercial |
10,404 | 665 | 11,598 | 10,517 | 16,673 | 20,891 | ||||||||||||||||||
Other consumer |
159 | 42 | 11 | 93 | 62 | 95 | ||||||||||||||||||
Total nonaccrual loans |
105,887 | 12,322 | 59,310 | 19,534 | 26,735 | 22,099 | ||||||||||||||||||
Past due 90 days or more: |
||||||||||||||||||||||||
Commercial real estate |
$ | 100 | $ | 542 | $ | 9 | $ | 8,214 | $ | 1,133 | $ | | ||||||||||||
One-to-four family residential |
76 | | 39 | 74 | 310 | 637 | ||||||||||||||||||
Real estate construction |
| 574 | 4,005 | 3 | 556 | 634 | ||||||||||||||||||
Commercial |
18 | | 547 | 1,456 | 534 | 215 | ||||||||||||||||||
Other consumer |
116 | 20 | 73 | 290 | 89 | | ||||||||||||||||||
Total past due 90 days or more |
310 | 1,136 | 4,673 | 10,037 | 2,622 | 1,486 | ||||||||||||||||||
Total nonperforming loans |
106,197 | 13,458 | 63,983 | 29,571 | 29,357 | 23,585 | ||||||||||||||||||
Other real estate owned |
18,432 | 4,748 | 6,092 | 2,679 | 1,873 | 7,130 | ||||||||||||||||||
Total nonperforming assets |
$ | 124,629 | $ | 18,206 | $ | 70,075 | $ | 32,250 | $ | 31,230 | $ | 30,715 | ||||||||||||
* There were no covered loans as of December 31, 2008, 2007, 2006, or 2005. | ||||||||||||||||||||||||
Nonperforming assets to portfolio loans and
other real estate owned |
4.87 | % | 20.19 | % | 2.80 | % | 1.50 | % | 1.95 | % | 2.26 | % | ||||||||||||
Nonperforming loans to portfolio loans |
4.18 | % | 15.76 | % | 2.56 | % | 1.38 | % | 1.83 | % | 1.74 | % | ||||||||||||
Allowance for loan losses to
nonperforming loans |
58.77 | % | | 62.16 | % | 100.04 | % | 92.97 | % | 100.96 | % | |||||||||||||
Government-guaranteed portion of
nonperforming loans |
$ | 277 | $ | 3,853 | $ | 1,072 | $ | 1,337 | $ | 1,629 | $ | 1,602 |
At December 31, 2009, a majority of noncovered nonperforming assets were real estate
construction, commercial real estate, and commercial loans. At December 31, 2009, seven credit
relationships represented 66% of noncovered nonperforming loans and 57% of noncovered nonperforming
assets, while at December 31, 2008, six credit relationships represented 82% of noncovered
nonperforming loans and 75% of noncovered nonperforming assets.
Included in noncovered nonaccrual loans as of December 31, 2009 are five collateral dependent
lending relationships with aggregate principal balances of approximately $59.0 million and related
impairment reserves of $4.9 million which were established based on recent appraisal values
obtained for the respective properties. All five of these lending relationships are in the real
estate industry and include a residential condominium construction project with three loans
outstanding, an office building project with one loan outstanding, a lending relationship
consisting of three loans that includes a residential land development and two retail commercial
real estate buildings for lease, and two residential land development lending relationships, one
with two loans outstanding and the other with one loan outstanding.
Included in nonaccrual loans as of December 31, 2008 are two collateral dependent lending
relationships with aggregate principal balances of approximately $27.9 million and related
impairment reserves of $1.9 million which
were established based on appraisal values obtained for the respective properties. Both of these
lending
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relationships are in the real estate industry and include a residential condominium
construction project with two loans outstanding and an apartment complex rehabilitation project
with two loans outstanding.
If interest on the nonaccrual loans had been accrued during 2009, 2008, and 2007, the interest
income reported in the accompanying consolidated statement of operations would have increased by
approximately $4.8 million, $2.6 million, and $1.4 million, respectively. Interest income
recognized on impaired loans totaled $2.1 million for the year ended December 31, 2009, $578,000
for the year ended December 31, 2008, and $10,000 for the year ended December 31, 2007.
Noninterest Income
Noninterest income was $21.9 million for 2009, a 36% increase when compared with 2008.
Noninterest income in 2008 decreased 2% when compared with 2007.
COMPARISON SUMMARY-NONINTEREST INCOME
2009 Change | 2008 Change | |||||||||||||||||||
(Dollars in thousands) | 2009 | From 2008 | 2008 | From 2007 | 2007 | |||||||||||||||
Service charges and fees |
$ | 11,704 | $ | 678 | $ | 11,026 | $ | 1,106 | $ | 9,920 | ||||||||||
Other noninterest income |
4,344 | 2,798 | 1,546 | (44 | ) | 1,590 | ||||||||||||||
Gain on sales of loans |
2,963 | 299 | 2,664 | (675 | ) | 3,339 | ||||||||||||||
Gain on sales of investment
securities |
2,925 | 2,023 | 902 | (682 | ) | 1,584 | ||||||||||||||
Total noninterest income |
$ | 21,936 | $ | 5,798 | $ | 16,138 | $ | (295 | ) | $ | 16,433 | |||||||||
Service charges and fees. Service charges and fees increased $678,000, or 6%, in 2009 as a
result of increased commercial account service charges due to a reduction in earnings credits on
balances caused by decreased interest rates and the acquisition of FNBA, offset in part by
decreased brokerage fees.
Service charges and fees increased $1.1 million, or 11%, in 2008 as a result of growth in
commercial account service charges due to a reduction in earnings credits on balances caused by
decreased interest rates and an increase in ATM & Visa Debit Card interchange revenue, offset in
part by $557,000 in impairment charges on mortgage loan servicing rights.
Other noninterest income. Other noninterest income includes consulting fees and other
miscellaneous income items. The increase of $2.8 million, or 186%, in 2009 is the result of the
$3.3 million gain recognized on the FDIC-assisted acquisition of FNBA, offset in part by decreased
consulting fees.
Gain on sales of loans. Gain on sales of loans includes the net gains recognized from the sale of
student loans, mortgage loans, and other commercial loans that are classified as held for sale.
For 2009, the increase is the result of increased sales of mortgage loans, offset in part by a
reduction in student loans. For 2008, the decrease is the result of the reduction in student
loans.
Gain on sales of investment securities. The 2009 gain on sales of investment securities includes a
$2.9 million gain recognized as the result of the restructuring of the investment portfolio. The
2008 gain on sales of investment securities includes a $1.2 million gain due to the redemption of
certain VISA USA common shares, offset in part by a securities loss of $400,000 recorded due to the
other than temporary impairment of two investment securities during the year.
Noninterest expense
Noninterest expense was $60.9 million for 2009, a decrease of $1.6 million, or 3%, from 2008.
Noninterest expense decreased $2.6 million, or 4%, in 2008 from 2007.
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COMPARISON SUMMARY-NONINTEREST EXPENSE
2009 Change | 2008 Change | |||||||||||||||||||
(Dollars in thousands) | 2009 | From 2008 | 2008 | From 2007 | 2007 | |||||||||||||||
Salaries and employee benefits |
$ | 29,299 | $ | (4,031 | ) | $ | 33,330 | $ | (1,957 | ) | $ | 35,287 | ||||||||
Occupancy |
11,637 | 765 | 10,872 | 1,027 | 9,845 | |||||||||||||||
FDIC and other insurance |
5,545 | 3,457 | 2,088 | 1,466 | 622 | |||||||||||||||
Other real estate, net |
130 | (16 | ) | 146 | 204 | (58 | ) | |||||||||||||
Provision for unfunded loan
commitments |
(230 | ) | (865 | ) | 635 | (494 | ) | 1,129 | ||||||||||||
Other general and administrative |
14,477 | (940 | ) | 15,417 | (2,866 | ) | 18,283 | |||||||||||||
Total noninterest expense |
$ | 60,858 | $ | (1,630 | ) | $ | 62,488 | $ | (2,620 | ) | $ | 65,108 | ||||||||
Salaries and employee benefits. Salaries and employee benefits decreased $4.0 million, or
12%, in 2009 primarily as a result of decreased salary expense and decreased profit sharing and
bonus accruals.
Salaries and employee benefits decreased $2.0 million, or 6%, in 2008 primarily as a result of a
decrease in the number of employees and decreased bonus and profit sharing accruals.
Occupancy expense. Occupancy expense increased $765,000, or 7%, in 2009 due to increased building
rental expense, depreciation expense, security service expense, and janitorial service expense.
Approximately $500,000 of the increase is the result of the FNBA acquisition.
Occupancy expense increased $1.0 million, or 10%, in 2008 due to increased maintenance costs,
building rental expense, and data processing fees associated with the operating system.
FDIC and other insurance. Southwests bank subsidiaries pay deposit insurance premiums to the FDIC
based on assessment rates. The increase from prior year is due to a special assessment of 5 basis
points, resulting in an additional $1.4 million. The FDIC raised the current assessment rates
uniformly by 7 basis points for the 2009 assessment, and an additional 10 basis point assessment is
paid on transaction accounts exceeding $250,000 under the Temporary Liquidity Guaranty Program.
In February 2009, the FDIC issued final rules that changed the risk-based assessment system and set
assessment rates to begin in the second quarter of 2009. Four risk categories (I-IV), each subject
to different premium rates, were established, based upon an institutions status as well
capitalized, adequately capitalized, or undercapitalized, and the institutions supervisory rating.
Until April 1, 2009, insured depository institutions paid deposit insurance premiums that ranged
from 5 to 7 basis points on an institutions assessment base for institutions in Risk Category I
(well capitalized institutions perceived as posing the least risk to the insurance fund), and 10,
28, and 43 basis points for institutions in Risk Categories II, III, and IV. Stillwater National
and Bank of Kansas are in Risk Category I at December 31 2009. Beginning on April 1, 2009, three
new factors result in adjustments to an institutions initial base assessment rate: (1) a
potential decrease for long-term unsecured debt, including senior and subordinated debt and, for
small institutions, a portion of Tier I capital; (2) a potential increase for secured liabilities
above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for
brokered deposits above a threshold amount, other than those received through a deposit placement
network on a reciprocal basis. Beginning April 1, 2009, the adjusted premium rates increased to
range from 7 to 24 basis points for Risk Category I and from 17 to 77.5 for Risk Categories II
through IV.
On May 22, 2009, the FDIC adopted a final rule levying a special assessment on insured institutions
as part of the agencys efforts to rebuild the Deposit Insurance Fund and help maintain public
confidence in the banking system. The final rule established a special assessment of 5 basis
points on each FDIC-insured depository institution. The assessment was paid on September 30, 2009.
On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay three
years of premiums in order to restore the Deposit Insurance Fund. By prepaying three years of
premiums, banks will be
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allowed to defer recognition of the insurance expense until the payments are recognized by the FDIC
on a quarterly basis. Under this rule, on December 30, 2009, Stillwater National and Bank of
Kansas prepaid their estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011, and 2012. Under the rule, banks will be assessed through 2010 according to
the risk-based premium schedule adopted earlier this year. We are expecting an increase in FDIC
insurance expense in 2010 due to a change in Risk Category. The base rate will increase by an
additional 3 basis points beginning January 1, 2011.
The increase in FDIC and other insurance expense for 2008 was the result of the full utilization of
available assessment credits that had substantially offset the FDIC insurance premiums through June
30, 2008.
Other real estate, net. The decreased other real estate expenses in 2009 occurred as Southwest
received income from previously acquired properties. During 2008, Southwest acquired properties
that caused an increase in other real estate expenses.
Provision for unfunded loan commitments. The provision for unfunded loan commitments is computed
using a methodology similar to that used to determine the allowance for loan losses, modified to
take into account the probability of a drawdown on the commitment. The $865,000 and $494,000
decreases in 2009 and 2008, respectively, are due to declines in the level of commitments when
compared to prior years.
Other general and administrative. Other general and administrative expenses decreased $940,000, or
6%, in 2009 and $2.9 million, or 16%, in 2008. The decline in 2009 is primarily the result of an
increase in deferred expense recognition related to loan origination costs. The decline in 2008 is
primarily the result of the non-recurrence of expenses that were incurred in 2007.
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Operating Segments
CONTRIBUTION OF OPERATING SEGMENTS | FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Oklahoma banking |
$ | 12,160 | $ | 12,505 | $ | 15,937 | ||||||
Texas banking |
10,722 | 7,551 | 6,550 | |||||||||
Kansas banking |
424 | (1,122 | ) | 859 | ||||||||
Other states banking |
(1,618 | ) | 2,756 | 2,163 | ||||||||
Secondary market |
(148 | ) | (144 | ) | 1,097 | |||||||
Other operations |
(8,558 | ) | (6,645 | ) | (5,228 | ) | ||||||
Consolidated net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Oklahoma banking |
$ | 933,150 | $ | 966,243 | $ | 876,085 | ||||||
Texas banking |
1,054,404 | 947,603 | 759,389 | |||||||||
Kansas banking |
359,633 | 304,855 | 282,846 | |||||||||
Other states banking |
277,512 | 275,805 | 227,237 | |||||||||
Secondary market |
43,134 | 56,941 | 66,275 | |||||||||
Consolidated total loans |
$ | 2,667,833 | $ | 2,551,447 | $ | 2,211,832 | ||||||
Oklahoma banking |
$ | 950,355 | $ | 984,298 | $ | 883,156 | ||||||
Texas banking |
1,044,324 | 945,907 | 759,837 | |||||||||
Kansas banking |
441,114 | 310,503 | 294,927 | |||||||||
Other states banking |
275,653 | 272,599 | 230,109 | |||||||||
Secondary market |
45,148 | 61,149 | 71,843 | |||||||||
Other operations |
351,697 | 305,306 | 324,426 | |||||||||
Consolidated total assets |
$ | 3,108,291 | $ | 2,879,762 | $ | 2,564,298 | ||||||
Oklahoma banking |
$ | 1,640,839 | $ | 1,394,008 | $ | 1,278,954 | ||||||
Texas banking |
160,064 | 133,745 | 127,053 | |||||||||
Kansas banking |
283,506 | 146,182 | 120,754 | |||||||||
Secondary market |
1,527 | 1,550 | 1,346 | |||||||||
Other operations |
506,794 | 504,637 | 530,472 | |||||||||
Consolidated total deposits |
$ | 2,592,730 | $ | 2,180,122 | $ | 2,058,579 | ||||||
Southwest has six reportable operating segments: Oklahoma Banking, Texas Banking, Kansas
Banking, Other States Banking, loans originated for sale in the secondary market (Secondary
Market), and Other Operations. These business segments were identified through the products and
services that are offered within each segment and the geographic area they serve.
Portfolio loans are allocated based upon the state of the borrower or the location of the real
estate in the case of real estate loans. Loans included in the Other States Banking segment are
portfolio loans attributable to states other than Oklahoma, Texas, or Kansas and primarily consist
of healthcare and commercial real estate credits. These out of state loans are administered by
offices in Oklahoma, Texas, or Kansas.
Capital is assigned to each of the segments using a risk-based capital pricing methodology that
assigns capital by asset, deposit, or revenue category based on Credit, Interest Rate, Market,
Operational, and Liquidity Risks.
The contribution of the Oklahoma Banking segment decreased $345,000, or 3%, in 2009, primarily as a
result of a $3.6 million decrease in net interest income and a $2.6 million increase in the
provision for loan losses, offset in part by a decrease of $4.8 million in noninterest expense and
a decrease of $747,000 in income taxes. Oklahoma Banking segment net income decreased $3.4
million, or 22%, in 2008, primarily as a result of an increase in the provision for loan losses of
$3.0 million, an increase in noninterest expense of $1.4 million, and a decrease in noninterest
income of $898,000, offset in part by decreased taxes of $1.8 million.
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The contribution of the Texas Banking segment increased $3.2 million, or 42%, in 2009, primarily as
a result of an $8.4 million increase in net interest income and decreased noninterest expenses of
$1.9 million, offset in part by an increased provision for loan losses of $5.2 million and
increased taxes of $1.8 million. Texas Banking segment net income increased $1.0 million, or 15%,
in 2008, primarily as a result of a $7.1 million increase in net interest income, offset in part by
an increased provision for loan losses of $3.4 million, increased noninterest expenses of $2.3
million, and increased taxes of $699,000.
The contribution of the Kansas Banking segment increased $1.5 million, or 138%, in 2009 primarily
as a result of a $6.0 million increase in noninterest income, which includes the $3.3 million
recognized gain on the FDIC-assisted acquisition of FNBA, and a $5.4 million increase in net
interest income. These increases were offset in part by a $5.7 million increase in noninterest
expense and a $3.7 million increase in the provision for loan losses. At December 31, 2008, the
Kansas Banking segment incurred a loss of $1.1 million, a decrease of $2.0 million, or 231%, from
2007. The decline in 2008 occurred primarily as a result of an increase of $3.1 million in the
provision for loan losses and a decrease of $1.1 million in net interest income, offset in part by
a decrease of $1.6 million in noninterest expenses and an $853,000 decrease in taxes.
The contribution of the Other States Banking segment decreased by $4.4 million, or 159%, in 2009
primarily as a result of an $8.7 million increased provision for loan losses, offset in part by a
$3.0 million decrease in taxes and a $1.1 million decrease in noninterest expenses. Other states
banking net income increased by $593,000, or 27%, in 2008 primarily as a result of a $2.6 million
increase in net interest income, offset in part by a $1.0 million increase in noninterest expenses,
a $664,000 increase in taxes, and a $421,000 increased provision for loan losses.
At December 31, 2009, Southwests eleven Oklahoma offices accounted for $933.2 million in loans, or
36% of total portfolio loans, the seven Texas offices accounted for $1.1 billion in loans, or 40%
of total portfolio loans, the nine Kansas offices accounted for $359.6 million in loans, or 14% of
total portfolio loans, and the Other States Banking segment accounted for $277.5 million in loans,
or 11% of total portfolio loans.
For 2009, the Secondary Market segment incurred a loss of $148,000, which is essentially unchanged
when compared with 2008. The Secondary Market segment incurred a loss of $144,000, or a decrease
of $1.2 million, or 113%, in 2008. The reduction occurred primarily in noninterest income which
decreased $1.9 million due to decreased gain on sale of student loans and an impairment charge for
mortgage loan servicing rights. See Business Secondary
Market Segment on page 74.
For 2009 and 2008, the Other Operations segment, which includes Southwests fund management unit,
incurred a loss of $8.6 million and $6.6 million, respectively. The value of funds provided and
cost of funds borrowed from the funds management unit by the operating segments are internally
priced at rates that approximate market rates for funds with similar duration.
The segment disclosures above and in Note 21 to the Consolidated Financial Statements show that the
Oklahoma Banking, Texas Banking, Kansas Banking, and Other States Banking segments provide the
majority of consolidated net interest income and net income and for the year ended December 31,
2009, accounted for approximately $2.7 billion, or 87%, of total assets.
The segment disclosures are based upon a number of assumptions and allocations of expense.
Southwest allocates resources and evaluates performance of its segments after allocation of funds,
indirect expenses, taxes, and capital costs.
Taxes on Income
Southwests income tax expense for fiscal years 2009, 2008, and 2007 was $7.6 million, $9.5
million, and $13.6 million, respectively. Southwests effective tax rates have been lower than
statutory federal and state statutory rates primarily because of the organization of a real estate
investment trust in July 2001, as well as tax credits generated by certain lending and investment
activities, and tax-exempt income on municipal obligations and loans.
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Financial Condition
Southwests total assets increased by $228.5 million, or 8%, to $3.1 billion at December 31,
2009, compared to $2.9 billion at December 31, 2008 after increasing by $315.5 million, or 12%,
between December 31, 2008 and 2007. The growth in assets in 2009 was primarily attributable to the
$116.4 million, or 5%, increase in total loans, which includes the $85.4 million remaining covered
loans acquired from FNBA, and the $91.6 million, or 336%, increase in cash.
Southwests investment securities decreased $727,000, or less than 1%, to $263.4 million at
December 31, 2009 from $264.2 million at December 31, 2008. The decrease in 2009 came from
decreases in federal agency securities of $3.8 million, or 5%, and tax-exempt municipal securities,
which decreased $2.6 million, or 26%, offset in part by increased mortgage-backed securities, which
increased $5.1 million, or 3%, and other investments, which increased $426,000, or 2%.
Mortgage-backed securities consist of agency securities underwritten and guaranteed by Government
National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie
Mac), and Federal National Mortgage Association (Fannie Mae).
Southwests investment securities increased by $7.6 million, or 3%, to $264.2 million at December
31, 2008 from $256.6 million at December 31, 2007. The increase in 2008 came from mortgage-backed
securities, which increased $115.7 million, or 302%, tax-exempt municipal securities, which
increased $927,000, or 10%, and other investments, which increased $896,000, or 5%, offset in part
by decreases in federal agency securities of $109.9 million, or 58%.
Analysis of Securities
At December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
U.S. Government obligations |
$ | 1,100 | $ | 999 | $ | 1,000 | ||||||
Federal agency securities |
75,385 | 79,197 | 189,127 | |||||||||
Obligations of states and political subdivisions |
7,523 | 10,098 | 9,171 | |||||||||
Residential mortgage-backed securities |
159,146 | 154,013 | 38,347 | |||||||||
Other investments |
20,285 | 19,859 | 18,963 | |||||||||
Total investment securities |
$ | 263,439 | $ | 264,166 | $ | 256,608 | ||||||
Available for sale (fair value) |
$ | 237,703 | $ | 238,037 | $ | 233,531 | ||||||
Held to maturity (amortized cost) |
6,670 | 7,343 | 5,838 | |||||||||
Other investments (cost) |
19,066 | 18,786 | 17,239 | |||||||||
Total investment securities |
$ | 263,439 | $ | 264,166 | $ | 256,608 | ||||||
Southwest does not have any material amounts of investment securities or other
interest-earning assets, other than loans, that would have been classified as nonperforming if such
assets were loans or which were recognized by management as potential problem assets based upon
known information about possible credit problems of the borrower or issuer.
The following table shows the maturities, carrying value (amortized cost for investment securities
being held to maturity or estimated fair value for investment securities available for sale),
estimated fair market values, and average yields for Southwests investment portfolio at December
31, 2009. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed
securities are based on expected maturities. Expected maturities differ from contractual
maturities because borrowers of the underlying mortgages may have the right to call or prepay
obligations with or without prepayment penalties. The securities of no single issuer (other than
the United States or its agencies), or in the case of securities issued by state and political
subdivisions, no source or group of sources of repayment, accounted for more than 10% of
shareholders equity of Southwest at December 31, 2009.
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Maturity Table for Investment Securities
After One | After Five | |||||||||||||||||||||||||||||||||||||||||||
One Year | Year through | Years through | After | Total Investment | ||||||||||||||||||||||||||||||||||||||||
or Less | Five Years | Ten Years | Ten Years | Securities | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Market | Yield | |||||||||||||||||||||||||||||||||
Held to Maturity: |
||||||||||||||||||||||||||||||||||||||||||||
Obligations of states and
political subdivisions |
$ | 2,825 | 3.54 | % | $ | 3,845 | 3.12 | % | $ | | | % | $ | | | % | $ | 6,670 | $ | 6,754 | 3.30 | % | ||||||||||||||||||||||
Total |
$ | 2,825 | 3.54 | % | $ | 3,845 | 3.12 | % | $ | | | % | $ | | | % | $ | 6,670 | $ | 6,754 | 3.30 | % | ||||||||||||||||||||||
Available for Sale: |
||||||||||||||||||||||||||||||||||||||||||||
U.S. government
obligations |
$ | | | % | $ | 1,098 | 1.20 | % | $ | | | % | $ | | | % | $ | 1,098 | $ | 1,100 | 1.20 | % | ||||||||||||||||||||||
Federal agency securities |
2,857 | 1.34 | % | 20,184 | 2.72 | % | 39,670 | 3.36 | % | 13,078 | 4.19 | % | 75,789 | 75,385 | 3.26 | % | ||||||||||||||||||||||||||||
Obligations of states and
political subdivisions |
601 | 3.99 | % | 181 | 3.77 | % | | | % | 55 | 6.72 | % | 837 | 853 | 4.12 | % | ||||||||||||||||||||||||||||
Residential mortgage-backed
securities |
13,838 | 3.56 | % | 99,247 | 3.44 | % | 38,161 | 2.93 | % | 6,293 | 4.37 | % | 157,539 | 159,146 | 3.37 | % | ||||||||||||||||||||||||||||
Other securities |
| | % | 20,002 | | % | | | % | | | % | 20,002 | 20,285 | 0.00 | % | ||||||||||||||||||||||||||||
Total |
$ | 17,296 | 3.21 | % | $ | 140,712 | 2.83 | % | $ | 77,831 | 3.15 | % | $ | 19,426 | 4.26 | % | $ | 255,265 | $ | 256,769 | 3.06 | % | ||||||||||||||||||||||
Total |
$ | 20,121 | $ | 144,557 | $ | 77,831 | $ | 19,426 | $ | 261,935 | $ | 263,523 | ||||||||||||||||||||||||||||||||
Note: Average yield for investments held for sale is based on amortized cost
Analysis of Loans
Total noncovered loans were $2.6 billion at December 31, 2009, an increase of $31.0 million, or 1%,
compared to December 31, 2008. The allowance for loan losses increased by $22.6 million, or 57%,
from December 31, 2008 to December 31, 2009. At December 31, 2009, the allowance for loan losses
was $62.4 million, or 2.42% of total noncovered loans, compared to $39.8 million, or 1.56% of total
noncovered loans, at December 31, 2008.
Total noncovered loans were $2.6 billion at December 31, 2008, an increase of $339.6 million, or
15%, compared to December 31, 2007. The allowance for loan losses increased by $10.2 million, or
34%, from December 31, 2007 to December 31, 2008. At December 31, 2008, the allowance for loan
losses was $39.8 million, or 1.56% of total noncovered loans, compared to $29.6 million, or 1.34%
of total noncovered loans, at December 31, 2007. (See Provision and Allowance for Loan Losses on
page 10.)
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This table presents the trends in the composition of the loan portfolio over the previous five
years.
Trends in the Composition of the Loan Portfolio
At December 31, | ||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||
(Dollars in thousands) | Noncovered | Covered | 2008* | 2007* | 2006* | 2005* | ||||||||||||||||||
Real estate mortgage -
Commercial |
$ | 1,212,409 | $ | 39,836 | $ | 1,118,828 | $ | 750,047 | $ | 609,271 | $ | 563,074 | ||||||||||||
One to four family
residential |
114,614 | 12,630 | 113,665 | 111,085 | 91,441 | 93,478 | ||||||||||||||||||
Real estate construction -
Commercial |
618,078 | 12,515 | 579,795 | 643,656 | 384,072 | 258,275 | ||||||||||||||||||
One to four family
residential |
41,109 | 5,324 | 79,565 | 81,273 | 69,678 | 41,069 | ||||||||||||||||||
Commercial |
520,505 | 13,412 | 564,670 | 521,501 | 424,189 | 374,101 | ||||||||||||||||||
Installment and consumer -
Guaranteed student loans |
36,163 | | 54,057 | 61,555 | 181,458 | 377,110 | ||||||||||||||||||
Other |
39,550 | 1,688 | 40,867 | 42,715 | 31,081 | 28,773 | ||||||||||||||||||
2,582,428 | 85,405 | 2,551,447 | 2,211,832 | 1,791,190 | 1,735,880 | |||||||||||||||||||
Less: Allowance for loan
losses |
(62,413 | ) | | (39,773 | ) | (29,584 | ) | (27,293 | ) | (23,812 | ) | |||||||||||||
Total loans, net |
$ | 2,520,015 | $ | 85,405 | $ | 2,511,674 | $ | 2,182,248 | $ | 1,763,897 | $ | 1,712,068 | ||||||||||||
* | There were no covered loans as of December 31, 2008, 2007, 2006, or 2005. |
Included in covered loans above is $23.9 million of loss share receivable from the FDIC.
Southwest has a strategic focus on providing loans and other services to healthcare and health
professionals, businesses and their managers and owners, and commercial and commercial real estate
borrowers. At December 31, 2009 and December 31, 2008, loans to individuals and businesses in the
healthcare industry totaled $697.7 million, or 27%, and $661.6 million, or 27%, of noncovered
portfolio loans, respectively.
Capital Resources
In late 2008, Southwest elected to participate in the Capital Purchase Program of the United
States Department of the Treasury (the Treasury Department). On December 5, 2008, Southwest
issued to the Treasury Department 70,000 shares of Fixed Rate Cumulative Preferred Stock, Series B
(the Series B Preferred Stock), and a ten-year warrant to purchase 703,753 shares of Southwest
common stock at an initial per share exercise price of $14.92, for a total price of $70.0 million.
At December 31, 2009, total shareholders equity was $309.8 million, compared to $302.2 million at
December 31, 2008. Earnings, net of common and preferred dividends, contributed $8.1 million to
shareholders equity. Sales of common stock through the employee stock purchase plan and the
employee stock option plan contributed an additional $1.5 million to shareholders equity in 2009,
including stock option exercises and restricted stock grants and tax benefits realized by Southwest
relating to option exercises. Under U.S. generally accepted accounting principles, these tax
benefits increase shareholders equity but do not affect net income. Net unrealized holding gains
on investment securities available for sale (net of tax) decreased to $945,000 million at December
31, 2009, from $2.9 million at December 31, 2008.
At December 31, 2008, total shareholders equity was $302.2 million, compared to $217.6 million at
December 31, 2007. Earnings, net of common and preferred dividends, contributed $9.1 million to
shareholders equity. Issuance of preferred shares and the warrant to purchase common shares
contributed $70.0 million to shareholders equity. Sales of common stock through the dividend
reinvestment plan, the employee stock purchase plan, and the employee stock option plan contributed
an additional $2.9 million to shareholders equity in 2008, including stock option exercises and
restricted stock grants and tax benefits realized by Southwest relating to option exercises.
Under U.S. generally accepted accounting principles, these tax benefits increase shareholders
equity, but do not affect net income. Net unrealized holding gains on investment securities
available for sale (net of tax) increased to $2.9 million at December 31, 2008, from $408,000 at
December 31, 2007.
22
Table of Contents
Bank holding companies are required to maintain capital ratios in accordance with guidelines
adopted by the Federal Reserve Board. The guidelines are commonly known as Risk-Based Capital
Guidelines. On December 31, 2009, Southwest exceeded all applicable capital requirements, having a
total risk-based capital ratio of 14.55%, a Tier 1 risk-based capital ratio of 13.28%, and a
leverage ratio of 12.42%. Banking subsidiaries are also required to maintain capital ratios in
accordance with guidelines adopted by their primary regulators. The general regulatory minimums to
be well-capitalized are a total capital to risk weighted assets ratio of 10.00%, a Tier I risk
based capital ratio of 6.00%, and a Tier 1 leverage ratio of 5.00%. As of December 31, 2009,
Southwest, Stillwater National, and Bank of Kansas each met the criteria for classification as a
well-capitalized institution under the prompt corrective action rules promulgated under the
Federal Deposit Insurance Act. Designation as a well-capitalized institution under these
regulations does not constitute a recommendation or endorsement of Southwest, Stillwater National,
or Bank of Kansas by Federal bank regulators. See Certain
Regulatory Matters on page 27 of this
report.
Liquidity
Liquidity is measured by a financial institutions ability to raise funds through deposits,
borrowed funds, capital, or the sale of highly marketable assets, such as available for sale
investments, in order to meet current and future cash flow needs as they become due. Southwests
portfolio of guaranteed student loans is also readily salable. Additional sources of liquidity,
including cash flow from the repayment of loans and maturities of investment securities, are also
considered in determining whether liquidity is satisfactory. Liquidity is also achieved through
growth of deposits and liquid assets and accessibility to the capital and money markets. These
funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, purchase
securities, and operate the organization.
The following table indicates the amount of Southwests certificates of deposit of $100,000 or more
by time remaining until maturity as of December 31, 2009:
(Dollars in thousands) | Amount | |||
Three months or less(1) |
$ | 61,571 | ||
Over three through six months(1) |
177,699 | |||
Over six through 12 months(1) |
487,825 | |||
Over 12 months |
277,344 | |||
Total |
$ | 1,004,439 | ||
(1) | The amount of certificates of deposit of $100,000 and more that mature within 12 months is $727.1 million. |
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The following table illustrates, during the years presented, the mix of Southwests funding
sources and the assets in which those funds are invested as a percentage of Southwests average
total assets for the period indicated. Average assets totaled $3.0 billion in 2009 compared to
$2.7 billion in 2008 and $2.3 billion in 2007.
Percentage of Total Average Assets | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Sources of Funds: |
||||||||||||
Deposits: |
||||||||||||
Noninterest-bearing demand |
9.55 | % | 9.80 | % | 10.72 | % | ||||||
Interest-bearing demand and money market accounts |
19.05 | 22.39 | 22.43 | |||||||||
Time and savings deposits |
51.54 | 46.19 | 47.56 | |||||||||
Other borrowings |
6.08 | 9.99 | 7.09 | |||||||||
Subordinated debentures |
2.74 | 2.34 | 2.04 | |||||||||
Other liabilities |
0.70 | 0.80 | 0.95 | |||||||||
Equity capital |
10.34 | 8.49 | 9.21 | |||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Uses of Funds: |
||||||||||||
Loans |
89.30 | % | 88.56 | % | 84.36 | % | ||||||
Investment securities |
8.22 | 8.70 | 12.15 | |||||||||
Other interest-earning assets |
0.19 | 0.14 | 0.22 | |||||||||
Noninterest-earning assets |
2.29 | 2.60 | 3.27 | |||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Sources and uses of cash are presented in the Consolidated Statements of Cash Flows on page 24
of this report. Total cash and cash equivalents increased by $91.6 million, or 336%, to $118.8
million in 2009 from $27.3 million at year-end 2008. This increase was the net result of cash
provided from financing activities of $59.3 million and cash provided from operating activities of
$44.4 million, offset by cash used in investing activities of $12.2 million.
Total cash and cash equivalents decreased by $18.4 million, or 40%, to $27.3 million in 2008 from
$45.7 million at year-end 2007. This decrease was the net result of cash used in investing
activities of $364.0 million, primarily net loans originated net of principal repayments, offset by
cash provided from financing activities of $299.8 million, primarily from increased deposits and
capital raising, and cash provided from operating activities of $45.8 million.
Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk
Southwests net income is largely dependent on its net interest income. Southwest seeks to
maximize its net interest margin within an acceptable level of interest rate risk. Interest rate
risk can be defined as the amount of forecasted net interest income that may be gained or lost due
to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ significantly from the
maturity or repricing characteristics of liabilities. Net interest income is also affected by
changes in the portion of interest-earning assets that are funded by interest-bearing liabilities
rather than by other sources of funds such as noninterest-bearing deposits and shareholders
equity.
Southwest attempts to manage interest rate risk while enhancing net interest margin by adjusting
its asset/liability position. At times, depending on the level of general interest rates, the
relationship between long-term and other interest rates, market conditions, and competitive
factors, Southwest may increase its interest rate risk position in order to increase its net
interest margin. Southwest monitors interest rate risk and adjusts the composition of its
rate-sensitive assets and liabilities in order to limit its exposure to changes in interest rates
on net interest income over time. Southwests asset/liability committee reviews its interest rate
risk position and profitability and recommends adjustments. The asset/liability committee also
reviews the securities portfolio, formulates investment strategies, and oversees the timing and
implementation of transactions. Notwithstanding Southwests
24
Table of Contents
interest rate risk management activities, the actual magnitude, direction, and relationship of
future interest rates are uncertain and can have adverse effects on net income and liquidity.
Interest rate sensitivity analysis measures the cumulative differences between the amounts of
assets and liabilities maturing or repricing within various time periods.
The following table shows Southwests interest rate sensitivity gaps for selected maturity periods
at December 31, 2009:
0 to 3 | 4 to 12 | Over 1 to | Over | |||||||||||||||||
(Dollars in thousands) | Months | Months | 5 Years | 5 Years | Total | |||||||||||||||
Rate-sensitive assets: |
||||||||||||||||||||
Total loans |
$ | 1,005,577 | $ | 310,310 | $ | 1,018,444 | $ | 333,502 | $ | 2,667,833 | ||||||||||
Investment securities |
22,067 | 4,527 | 23,441 | 213,404 | 263,439 | |||||||||||||||
Due from banks |
2,584 | | | | 2,584 | |||||||||||||||
Total |
1,030,228 | 314,837 | 1,041,885 | 546,906 | 2,933,856 | |||||||||||||||
Rate-sensitive liabilities: |
||||||||||||||||||||
Money market deposit accounts |
505,521 | | | | 505,521 | |||||||||||||||
Time deposits |
600,356 | 928,962 | 133,131 | | 1,662,449 | |||||||||||||||
Savings accounts |
25,730 | | | | 25,730 | |||||||||||||||
Interest-bearing demand |
74,201 | | | | 74,201 | |||||||||||||||
Other borrowings |
34,522 | 12,000 | 31,500 | 25,000 | 103,022 | |||||||||||||||
Subordinated debentures |
| | | 81,963 | 81,963 | |||||||||||||||
Total |
1,240,330 | 940,962 | 164,631 | 106,963 | 2,452,886 | |||||||||||||||
Interest sensitivity gap |
$ | (210,102 | ) | $ | (626,125 | ) | $ | 877,254 | $ | 439,943 | $ | 480,970 | ||||||||
Cumulative interest sensitivity gap |
$ | (210,102 | ) | $ | (836,227 | ) | $ | 41,027 | $ | 480,970 | $ | 480,970 | ||||||||
Percentage of rate-sensitive assets
to rate-sensitive liabilities |
83.06 | % | 33.46 | % | 632.86 | % | 511.30 | % | 119.61 | % | ||||||||||
Percentage of cumulative gap to
total assets |
(6.76 | )% | (26.90 | )% | 1.32 | % | 15.47 | % | 15.47 | % | ||||||||||
The percentage of rate-sensitive assets to rate-sensitive liabilities presents a static
position as of a single day, is not necessarily indicative of Southwests position at any other
point in time, and does not take into account the sensitivity of yields and costs of specific
assets and liabilities to changes in market rates. The foregoing analysis assumes that Southwests
mortgage-backed securities mature during the period in which they are estimated to prepay. No
other prepayment or repricing assumptions have been applied to Southwests interest-earning assets
for this analysis.
A principal objective of Southwests asset/liability management effort is to balance the various
factors that generate interest rate risk, thereby maintaining the interest rate sensitivity of
Southwest within acceptable risk levels. To measure its interest rate sensitivity position,
Southwest utilizes a simulation model that facilitates the forecasting of net interest income over
the next twelve month period under a variety of interest rate and growth scenarios.
The earnings simulation model uses numerous assumptions regarding the effect of changes in interest
rates on the timing and extent of repricing characteristics, future cash flows, and customer
behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely
estimate net income. Actual results differ from simulated results due to the timing, magnitude,
and frequency of interest rate changes and changes in market conditions, cash flows, and management
strategies, among other factors.
The balance sheet is subject to quarterly testing for six alternative interest rate shock
possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by
+/- 100, 200, and 300 basis points (bp),
25
Table of Contents
although Southwest may elect not to use particular
scenarios that it determines are impractical in a current rate environment. It is managements
goal to structure the balance sheet so that net interest earnings at risk over a twelve-month
period and the economic value of equity at risk do not exceed policy guidelines at various interest
rate shock levels.
Measures of net interest income at risk produced by simulation analysis are indicators of an
institutions short-term performance in alternative rate environments. These measures are
typically based upon a relatively brief period, usually one year. They do not necessarily indicate
the long-term prospects or economic value of the institution.
Estimated Changes in Net Interest Income
Changes in Interest Rates: | +300 bp | +200 bp | +100 bp | |||||||||
Policy Limit |
(18.00 | )% | (10.00 | )% | (5.00 | )% | ||||||
December 31, 2009 |
1.98 | % | (2.33 | )% | (1.91 | )% | ||||||
December 31, 2008 |
(2.26 | )% | (4.08 | )% | (3.81 | )% |
On December 16, 2008 the Federal Open Market Committee established the overnight rate as a
range of 0% to 0.25%. Southwest believes that all down rate scenarios are impractical since they
would result in rates of less than 0%. As a result, the down 100 bp, down 200 bp, and down 300 bp
scenarios have been excluded. The Net Interest Income at Risk position improved in each of the
increasing interest rate scenarios when compared to the December 31, 2008 risk position.
Southwests largest exposure to changes in interest rate is in the +200 bp scenario with a measure
of (2.33)% at December 31, 2009, a decline of 1.75 percentage points from December 31, 2008 level
of (4.08)%. All of the above measures of net interest income at risk remain well within prescribed
policy limits.
The measure of equity value at risk indicates the ongoing economic value of Southwest by
considering the effects of changes in interest rates on all of Southwests cash flows and
discounting the cash flows to estimate the present value of assets and liabilities. The difference
between these discounted values of the assets and liabilities is the economic value of equity,
which, in theory, approximates the fair value of Southwests net assets.
Estimated Changes in Economic Value of Equity (EVE)
Changes in Interest Rates: | +300 bp | +200 bp | + 100 bp | |||||||||
Policy Limit |
(35.00 | )% | (20.00 | )% | (10.00 | )% | ||||||
December 31, 2009 |
(9.55 | )% | (4.78 | )% | (0.27 | )% | ||||||
December 31, 2008 |
(8.48 | )% | (4.03 | )% | (0.82 | )% |
As of December 31, 2009, the economic value of equity measure decreased in the +200 bp and
+300 bp scenarios while increasing in the +100 bp scenario when compared to December 31, 2008.
Southwests largest economic value of equity exposure is the +300 bp scenario which declined 1.07
percentage points to (9.55)% on December 31, 2009 from December 31, 2008 value of (8.48)%. The
economic value of equity ratio in all scenarios remains well within Southwests Asset and Liability
Management Policy limits.
Off-Balance Sheet Arrangements
In the normal course of business, Southwest makes use of a number of different financial
instruments to help meet the financial needs of its customers. In accordance with accounting
principles generally accepted in the United States, the full notional amounts of these transactions
are not recorded in the accompanying consolidated financial statements and are referred to as
off-balance sheet instruments. These transactions and activities include commitments to extend
lines of commercial and
real estate mortgage credit and standby and commercial letters of credit and are discussed further
in Note 17 to the Consolidated Financial Statements on page 65 of this report.
26
Table of Contents
Off-balance sheet arrangements also include Trust Preferred Securities, which have been
de-consolidated in this report. Further information regarding Trust Preferred Securities can be
found in Note 9 to the Consolidated Financial Statements on page 56 of this report.
Effects of Inflation
The consolidated financial statements and related consolidated financial data in this report
have been prepared in accordance with accounting principles generally accepted in the United States
and practices within the banking industry that require the measurement of financial position and
operating results in terms of historical dollars without considering fluctuations in the relative
purchasing power of money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institutions performance than the
effects of general levels of inflation.
Contractual Obligations
Southwest has various contractual obligations that require future cash payment. The following
table presents, as of December 31, 2009, significant fixed and determinable contractual obligations
to third parties by payment date.
Payments due by period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | Over | |||||||||||||||||
(Dollars in thousands) | 1 Year | Years | Years | 5 Years | Total | |||||||||||||||
Deposits without stated maturity:(1) |
||||||||||||||||||||
Noninterest bearing |
$ | 324,829 | $ | | $ | | $ | | $ | 324,829 | ||||||||||
Interest bearing |
605,452 | | | | 605,452 | |||||||||||||||
Time deposits(2) |
1,542,315 | 126,144 | 12,149 | 5 | 1,680,613 | |||||||||||||||
Other borrowings(2) |
34,002 | 35,024 | 2,644 | 53,626 | 125,296 | |||||||||||||||
Subordinated debentures(2) |
2,872 | 5,745 | 5,745 | 99,919 | 114,281 | |||||||||||||||
Operating leases |
2,655 | 3,639 | 1,991 | 1,735 | 10,020 | |||||||||||||||
Total |
$ | 2,512,125 | $ | 170,552 | $ | 22,529 | $ | 155,285 | $ | 2,860,491 | ||||||||||
(1) | Excludes interest. | |
(2) | Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2009. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. |
Southwest adopted ASC 740, Income Taxes, on January 1, 2007. The obligation associated with
uncertain tax positions is $4.9 million. The payment period for this obligation is not estimable
at this time.
At December 31, 2009, Southwests purchase obligations are not reflected on the Consolidated
Statements of Condition, and its other long-term liabilities are not considered material.
For additional information regarding contractual obligations, please also see Asset/Liability
Management and Quantitative and Qualitative Disclosures about Market Risk on page 24, Off-Balance
Sheet Arrangements on page 26, and in the Notes to the Consolidated Financial Statements in this
report, Note 8 Other Borrowed Funds on page 55, Note 9 Subordinated Debentures on page 56,
Note 16 Operating Leases on page 65, Note 17 Financial Instruments with Off-Balance Sheet Risk
on page 65, and Note 18 Commitments and Contingencies on page 66.
Certain Regulatory Matters
Our levels of nonperforming assets and our concentrations in commercial real estate loans have
led to agreements with and commitments to our banking regulators. Please see Trends in the
Composition of the Loan Portfolio on page 22, Provision and Allowance for Loan Losses beginning
on page 10, Nonperforming Assets beginning on page 14, and Risk Factors beginning on page 87.
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Under the terms of a January 27, 2010 Agreement with the Office of the Comptroller of the Currency
(OCC), Stillwater National, is required to submit written plans to the OCC and to take action
required 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 Nationals loan portfolio; | ||
| Improving Stillwater Nationals 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. |
In addition, Stillwater National is required to prepare a three-year capital plan and to obtain OCC
approval before increasing its use of brokered deposits or declaring dividends.
The compliance committee of the Board of Directors of Stillwater National will submit quarterly
reports to the OCC setting forth a description of the actions needed to achieve full compliance
with the formal agreement, actions taken to comply, and the results and status of these actions.
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 1 leverage
ratio of 8.5% and a total capital to risk weighted assets ratio of 12.5%.
Stillwater National remains well-capitalized for regulatory purposes and exceeds the general
minimum ratios for well-capitalized status and the higher level to which we have committed. At
December 31, 2009, Stillwater National had a Tier 1 leverage ratio of 11.37%, a Tier 1 risk based
capital ratio of 12.00%, and a total capital to risk weighted assets ratio of 13.84%. Generally
regulatory minimums to be well-capitalized are a Tier 1 leverage ratio of 5.00%, a Tier 1 risk
based capital ratio of 6%, and a total capital to risk weighted assets ratio of 10.00%.
Southwest has made informal commitments to the Federal Reserve, which include providing prior
notice of the declaration and payment of dividends on trust preferred securities, preferred stock
issued under the Treasury Departments Capital Purchase Program, and common stock, and of planned
receipt of dividends from its banking subsidiaries. Southwest also has agreed to submit a capital
plan to the Federal Reserve and to obtain Federal Reserve approval for any additional borrowings at
the holding company level. Southwest does not intend to increase its borrowings.
Southwest is firmly committed to our regulatory compliance efforts. We have taken actions to
reduce our concentrations in commercial real estate, and will continue to do so, and are diligently
working to reduce levels of nonperforming assets.
Critical Accounting Policies
Southwests consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (GAAP) and follow general practices within the banking industry.
Application of these principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying notes. These
estimates, assumptions, and judgments are based on information that is subject to change. Certain
policies inherently rely more on the use of estimates, assumptions, and judgments and as such have
a greater possibility of producing results that could be materially different than originally
reported. Management is required to use estimates, assumptions, and judgments when assets and
liabilities are required to be recorded at fair value, when a decline in the value of an asset not
carried on the financial statements at fair value warrants an impairment write-down or valuation
allowance to be established, or when an asset or liability must be recorded contingent upon a
future event. Carrying assets and liabilities at fair
28
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value inherently results in more financial
statement volatility. The fair values and the information used to record valuation adjustments for
certain assets and liabilities are based either on quoted market prices or are provided by other
third-party sources, when readily available.
The most significant accounting policies followed by Southwest are presented in Note 1 to the
Consolidated Financial Statements. These policies, along with the disclosures presented in the
other financial statement notes and in this discussion provide information on how significant
assets and liabilities are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the
methods, assumptions, and estimates underlying those amounts, management has identified the Loans
Acquired through Transfer, Allowance for Loan Losses, and Goodwill and Intangible Assets accounting
policies to be the accounting areas that require the most subjective or complex judgments, and as
such could be most subject to revisions as new information becomes available.
Loans Acquired through Transfer To determine the fair value of loans acquired through transfer,
management made assumptions about the collectibility of acquired loans, including the
creditworthiness of the borrowers and the value of the real estate and other assets serving as
collateral for the repayment of secured loans. In accordance with the accounting guidance of ASC
310.30, Loan and Debt Securities Acquired with Deteriorated Credit Quality, the estimation of fair
value is required for the acquisition of loans that have evidence of deterioration of credit
quality since origination and for which it is probable that not all of the contractually required
payments will be collected. The corresponding income associated with the accretion of the
discounts on the loan portfolio will be recorded in net interest income.
Allowance for Loan Losses - The allowance for loan losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1)
ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring
and estimable, and (2) ASC 310.10.35, Receivables: Subsequent Measurement, which requires that
losses be accrued when it is probable that Southwest will not collect all principal and interest
payments according to the loans contractual terms.
The allowance determination process requires significant judgment. Estimates of probable losses
inherent in the loan portfolio can vary significantly from the amounts that actually occur. While
management uses available information to recognize probable losses, future additions to the
allowance may be necessary based on changes in the loans comprising the portfolio and changes in
the financial condition of borrowers, such as may result from changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by Southwest, periodically review the loan portfolio and the
allowance. These reviews may result in additional provisions based on the agencies judgments
based upon information available at the time of each examination. Because the loan portfolio
contains a significant number of commercial and commercial real estate loans with relatively large
balances, the unexpected deterioration of one or a few of such loans may cause a significant
increase in the provision for loan losses and nonperforming assets, and may lead to a material
increase in charge-offs and the provision for loan losses in future periods.
Southwests methodology for assessing the appropriateness of the allowance is in accordance with
regulatory guidelines and generally accepted accounting principles, as described in Provision and
Allowance for Loan Losses on page 10 and in Note 1 to the Consolidated Financial Statements on
page 38.
Goodwill and Intangible Assets Goodwill and intangible assets that have indefinite useful lives
are subject to an impairment test at least annually and more frequently if circumstances indicate
their value may not be recoverable. Goodwill is tested for impairment using a two-step process
that begins with an estimation of the fair value of each of Southwests reporting units compared
with its carrying value. Southwest defines reporting units as a level below each of its operating
segments for which there is discrete financial information that is regularly reviewed. As of
December 31, 2009, Southwest has eight reporting units, for which three have goodwill allocated to
them. If the carrying value amount exceeds the fair value of a reporting unit, a second test is
completed comparing the implied fair value of the reporting units goodwill to its carrying value
to measure the amount of impairment. Intangible assets that are not amortized will be tested for
impairment at least annually by comparing the fair values of those assets to their carrying values.
Other identifiable intangible assets that are subject to amortization are
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amortized on an
accelerated basis over the years expected to be benefited, which Southwest believes are up to ten
years. These amortizable intangible assets are reviewed for impairment if circumstances indicate
their value may not be recoverable based on a comparison of fair value. Based on Southwests
annual goodwill impairment test as of October 1, 2009 and updated through December 31, 2009,
management does not believe any of its goodwill is impaired as of December 31, 2009. The test
includes an analysis of estimated fair value of reporting units to the aggregate market
capitalization of Southwest. While Southwest believes no impairment existed at December 31,
2009, different conditions or assumptions used to measure fair value of reporting units, or changes
in cash flows or profitability if significantly negative or unfavorable, could have a material
adverse effect on the outcome of Southwests impairment evaluation and financial condition or
future results of operations. Approximately $5.6 million of Southwests total goodwill of $6.8
million came from its acquisition of Bank of Kansas during 2007. Bank of Kansas is a separate
reporting unit as defined above.
Non-GAAP Financial Measures
None of the financial measures used in this report are defined as non-GAAP financial measures
under federal securities regulations. Other banking organizations, however, may present such
non-GAAP financial measures, which differ from measures based upon U.S. generally accepted
accounting principles. For example, such non-GAAP measures may exclude certain income or expense
items in calculating operating income or efficiency ratios or may increase yields and margins to
reflect the benefits of tax-exempt earning assets. Readers of this report should be aware that
non-GAAP ratios and other measures presented by some banking organizations or financial analysts
may not be directly comparable to similarly named ratios or other measures used by Southwest or
other banking organizations.
Controls and Procedures
Disclosure Controls and Procedures
As required by SEC rules, Southwests management evaluated the effectiveness of Southwests
disclosure controls and procedures as of December 31, 2009. Southwests Chief Executive Officer
and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwests
Chief Executive Officer and Chief Financial Officer concluded that Southwests disclosure controls
and procedures were effective as of December 31, 2009.
Managements Report on Internal Control over Financial Reporting
Southwests management is responsible for establishing and maintaining adequate internal
control over financial reporting. As required by SEC rules, Southwests management evaluated the
effectiveness of Southwests internal control over financial reporting as defined in SEC Rule
13a-15 as of December 31, 2009. Southwests Chief Executive Officer and Chief Financial Officer
participated in the evaluation, which was based upon the criteria for effective internal control
over financial reporting included in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
Southwests management concluded that Southwests internal control over financial reporting was
effective as of December 31, 2009.
The report by Southwests independent registered public accounting firm, Ernst & Young LLP, on
Southwests internal control over financial reporting is included on page 31.
Fourth Quarter 2009 Changes in Internal Control over Financial Reporting
No change occurred during the fourth quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, Southwests internal control over financial reporting.
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Report on Effectiveness of Internal Control over Financial Reporting
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited Southwest Bancorp, Inc.s internal control over financial reporting as of December
31, 2009 based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Southwest
Bancorp, Inc.s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Southwest Bancorp, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the 2009 consolidated financial statements of Southwest Bancorp, Inc. and
our report dated March 5, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
March 5, 2010
Tulsa, Oklahoma
March 5, 2010
31
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Reports of Independent Registered Public Accounting Firm
Report on Consolidated Financial Statements
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition of Southwest
Bancorp, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of
operations, comprehensive income, shareholders equity, and cash flows for each of the three years
in the period ended December 31, 2009. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Southwest Bancorp, Inc. at December 31, 2009 and
2008 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Southwest Bancorp, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March
5, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
March 5, 2010
Tulsa, Oklahoma
March 5, 2010
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 118,847 | $ | 27,287 | ||||
Investment securities: |
||||||||
Held to maturity, fair value $6,754 and $7,293, respectively |
6,670 | 7,343 | ||||||
Available for sale, amortized cost $236,199 and $233,293, respectively |
237,703 | 238,037 | ||||||
Other investments at cost |
19,066 | 18,786 | ||||||
Loans held for sale |
43,134 | 56,941 | ||||||
Noncovered loans receivable |
2,539,294 | 2,494,506 | ||||||
Less: Allowance for loan losses |
(62,413 | ) | (39,773 | ) | ||||
Net noncovered loans receivable |
2,476,881 | 2,454,733 | ||||||
Covered loans receivable (includes loss share receivable of $23.9 million) |
85,405 | | ||||||
Net loans receivable |
2,562,286 | 2,454,733 | ||||||
Accrued interest receivable |
10,806 | 11,512 | ||||||
Premises and equipment, net |
26,536 | 24,580 | ||||||
Noncovered other real estate |
18,432 | 6,092 | ||||||
Covered other real estate |
4,748 | | ||||||
Goodwill |
6,811 | 7,071 | ||||||
Other intangible assets, net |
5,779 | 3,764 | ||||||
Prepaid FDIC insurance premium |
14,581 | | ||||||
Other assets |
32,892 | 23,616 | ||||||
Total assets |
$ | 3,108,291 | $ | 2,879,762 | ||||
Liabilities & shareholders equity |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 324,829 | $ | 261,940 | ||||
Interest-bearing demand |
74,201 | 76,027 | ||||||
Money market accounts |
505,521 | 454,250 | ||||||
Savings accounts |
25,730 | 14,135 | ||||||
Time deposits of $100,000 or more |
1,004,439 | 802,244 | ||||||
Other time deposits |
658,010 | 571,526 | ||||||
Total deposits |
2,592,730 | 2,180,122 | ||||||
Accrued interest payable |
3,191 | 7,018 | ||||||
Income tax payable |
4,486 | 3,651 | ||||||
Other liabilities |
13,121 | 9,667 | ||||||
Other borrowings |
103,022 | 295,138 | ||||||
Subordinated debentures |
81,963 | 81,963 | ||||||
Total liabilities |
2,798,513 | 2,577,559 | ||||||
Shareholders equity: |
||||||||
Preferred stock, Series B $1 par value; 1,000,000 shares
authorized; 70,000 shares issued |
67,037 | 66,392 | ||||||
Common stock $1 par value; 20,000,000 shares authorized;
14,750,713 and 14,658,042 shares issued, respectively |
14,751 | 14,658 | ||||||
Paid in capital |
49,029 | 49,101 | ||||||
Retained earnings |
178,016 | 170,579 | ||||||
Accumulated other comprehensive gain |
945 | 2,921 | ||||||
Treasury stock, at cost; 0 and 80,383 shares, respectively |
| (1,448 | ) | |||||
Total shareholders equity |
309,778 | 302,203 | ||||||
Total liabilities & shareholders equity |
$ | 3,108,291 | $ | 2,879,762 | ||||
The accompanying notes are an integral part of this statement.
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, | ||||||||||||
(Dollars in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
Interest income: |
||||||||||||
Interest and fees on loans |
$ | 141,239 | $ | 152,719 | $ | 165,759 | ||||||
Investment securities: |
||||||||||||
U.S. Government and agency obligations |
1,960 | 3,552 | 8,506 | |||||||||
Mortgage-backed securities |
6,257 | 5,514 | 1,444 | |||||||||
State and political subdivisions |
299 | 375 | 260 | |||||||||
Other securities |
630 | 545 | 845 | |||||||||
Other interest-earning assets |
14 | 89 | 254 | |||||||||
Total interest income |
150,399 | 162,794 | 177,068 | |||||||||
Interest expense: |
||||||||||||
Interest-bearing demand |
476 | 584 | 355 | |||||||||
Money market accounts |
4,954 | 12,620 | 19,664 | |||||||||
Savings accounts |
78 | 69 | 87 | |||||||||
Time deposits of $100,000 or more |
20,864 | 28,214 | 31,231 | |||||||||
Other time deposits |
15,947 | 19,535 | 21,802 | |||||||||
Other borrowings |
4,049 | 7,242 | 7,555 | |||||||||
Subordinated debentures |
5,340 | 4,811 | 3,777 | |||||||||
Total interest expense |
51,708 | 73,075 | 84,471 | |||||||||
Net interest income |
98,691 | 89,719 | 92,597 | |||||||||
Provision for loan losses |
39,176 | 18,979 | 8,947 | |||||||||
Net interest income after provision for loan losses |
59,515 | 70,740 | 83,650 | |||||||||
Noninterest income: |
||||||||||||
Service charges and fees |
11,704 | 11,026 | 9,920 | |||||||||
Other noninterest income |
1,063 | 1,546 | 1,590 | |||||||||
Gain on acquisition |
3,281 | | | |||||||||
Gain on sales of loans |
2,963 | 2,664 | 3,339 | |||||||||
Gain on sale/call of investment securities |
2,925 | 902 | 1,584 | |||||||||
Total noninterest income |
21,936 | 16,138 | 16,433 | |||||||||
Noninterest expense: |
||||||||||||
Salaries and employee benefits |
29,299 | 33,330 | 35,287 | |||||||||
Occupancy |
11,637 | 10,872 | 9,845 | |||||||||
FDIC and other insurance |
5,545 | 2,088 | 622 | |||||||||
Other real estate, net |
130 | 146 | (58 | ) | ||||||||
General and administrative |
14,247 | 16,052 | 19,412 | |||||||||
Total noninterest expense |
60,858 | 62,488 | 65,108 | |||||||||
Income before taxes |
20,593 | 24,390 | 34,975 | |||||||||
Taxes on income |
7,611 | 9,489 | 13,597 | |||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Net income available to common shareholders |
$ | 8,837 | $ | 14,658 | $ | 21,378 | ||||||
Basic earnings per common share |
$ | 0.60 | $ | 1.01 | $ | 1.49 | ||||||
Diluted earnings per common share |
0.60 | 1.00 | 1.46 | |||||||||
Common dividends declared per share |
0.0952 | 0.3800 | 0.3700 |
The accompanying notes are an integral part of this statement.
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Other comprehensive income: |
||||||||||||
Unrealized holding gain (loss) on available for sale securities |
(315 | ) | 4,995 | 5,073 | ||||||||
Reclassification adjustment for net gains realized during the
period |
(2,925 | ) | (902 | ) | (1,584 | ) | ||||||
Other comprehensive income (loss), before tax |
(3,240 | ) | 4,093 | 3,489 | ||||||||
Tax benefit (expense) related to items of other comprehensive
income |
1,264 | (1,580 | ) | (1,343 | ) | |||||||
Other comprehensive income (loss), net of tax |
(1,976 | ) | 2,513 | 2,146 | ||||||||
Comprehensive income |
$ | 11,006 | $ | 17,414 | $ | 23,524 | ||||||
The accompanying notes are an integral part of this statement.
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Accumulated | Total | |||||||||||||||||||||||||||||||
Other | Share- | |||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid in | Retained | Comprehensive | Treasury | holders | ||||||||||||||||||||||||||
Stock | Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Equity | |||||||||||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2006 |
| 14,658,042 | $ | 14,658 | $ | 45,901 | $ | 146,197 | $ | (1,738 | ) | $ | (7,508 | ) | $ | 197,510 | ||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||||||
Common, $0.37 per
share, and
other dividends |
| | | | (5,290 | ) | | | (5,290 | ) | ||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Employee Stock
Option Plan |
| | | (782 | ) | | | 1,707 | 925 | |||||||||||||||||||||||
Employee Stock
Purchase Plan |
| | | 20 | | | 76 | 96 | ||||||||||||||||||||||||
Dividend
Reinvestment Plan |
| | | 23 | | | 71 | 94 | ||||||||||||||||||||||||
Restricted Stock |
| | | 108 | | | 237 | 345 | ||||||||||||||||||||||||
Adjustment related to adoption
of FIN 48 |
| | | | (803 | ) | | | (803 | ) | ||||||||||||||||||||||
Tax benefit related to exercise
of stock options |
| | | 474 | | | | 474 | ||||||||||||||||||||||||
Stock compensation expense |
| | | 734 | | | | 734 | ||||||||||||||||||||||||
Other comprehensive income,
net of tax |
| | | | | 2,146 | | 2,146 | ||||||||||||||||||||||||
Net income |
| | | | 21,378 | | | 21,378 | ||||||||||||||||||||||||
Balance, December 31, 2007 |
| 14,658,042 | 14,658 | 46,478 | 161,482 | 408 | (5,417 | ) | 217,609 | |||||||||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||||||
Preferred |
| | | | (243 | ) | | | (243 | ) | ||||||||||||||||||||||
Common, $0.38 per
share, and
other dividends |
| | | | (5,517 | ) | | | (5,517 | ) | ||||||||||||||||||||||
Preferred stock |
66,348 | | | 3,652 | | | | 70,000 | ||||||||||||||||||||||||
Warrant amortization |
44 | | | | (44 | ) | | | | |||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Employee Stock
Option Plan |
| | | (1,554 | ) | | | 3,489 | 1,935 | |||||||||||||||||||||||
Employee Stock
Purchase Plan |
| | | (13 | ) | | | 106 | 93 | |||||||||||||||||||||||
Dividend
Reinvestment Plan |
| | | (2 | ) | | | 28 | 26 | |||||||||||||||||||||||
Restricted Stock |
| | | (21 | ) | | | 346 | 325 | |||||||||||||||||||||||
Tax benefit related to exercise
of stock options |
| | | 339 | | | | 339 | ||||||||||||||||||||||||
Stock compensation expense |
| | | 222 | | | | 222 | ||||||||||||||||||||||||
Other comprehensive income,
net of tax |
| | | | | 2,513 | | 2,513 | ||||||||||||||||||||||||
Net income |
| | | | 14,901 | | | 14,901 | ||||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 66,392 | 14,658,042 | $ | 14,658 | $ | 49,101 | $ | 170,579 | $ | 2,921 | $ | (1,448 | ) | $ | 302,203 | ||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||||||
Preferred |
| | | | (3,500 | ) | | | (3,500 | ) | ||||||||||||||||||||||
Common, $0.0952 per
share,
and other dividends |
| | | | (1,400 | ) | | | (1,400 | ) | ||||||||||||||||||||||
Warrant amortization |
645 | | | | (645 | ) | | | | |||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Employee Stock
Option Plan |
| 89,705 | 90 | (87 | ) | | | 883 | 886 | |||||||||||||||||||||||
Employee Stock
Purchase Plan |
| 2,966 | 3 | (21 | ) | | | 102 | 84 | |||||||||||||||||||||||
Restricted Stock |
| | | (240 | ) | | | 463 | 223 | |||||||||||||||||||||||
Tax benefit related to exercise
of stock options |
| | | 244 | | | | 244 | ||||||||||||||||||||||||
Stock compensation expense |
| | | 32 | | | | 32 | ||||||||||||||||||||||||
Other comprehensive loss,
net of tax |
| | | | | (1,976 | ) | | (1,976 | ) | ||||||||||||||||||||||
Net income |
| | | | 12,982 | | | 12,982 | ||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 67,037 | 14,750,713 | $ | 14,751 | $ | 49,029 | $ | 178,016 | $ | 945 | $ | 0 | $ | 309,778 | |||||||||||||||||
The accompanying notes are an integral part of this statement.
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, | ||||||||||||
(Dollars in thousands) | 2008 | 2008 | 2007 | |||||||||
Operating activities: |
||||||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for loan losses |
39,176 | 18,979 | 8,947 | |||||||||
Deferred tax benefit |
(5,843 | ) | (2,788 | ) | (839 | ) | ||||||
Asset depreciation |
3,187 | 2,963 | 2,812 | |||||||||
Securities premium amortization (discount
accretion), net |
1,718 | 118 | (205 | ) | ||||||||
Amortization of intangibles |
1,650 | 1,456 | 646 | |||||||||
Stock based compensation |
321 | 512 | 959 | |||||||||
Net gain on sale/call of investment securities |
(2,925 | ) | (902 | ) | (1,584 | ) | ||||||
Net gain on sales of available for sale loans |
(2,963 | ) | (2,664 | ) | (3,339 | ) | ||||||
Net loss on sales of premises/equipment |
62 | 258 | 11 | |||||||||
Net gain on other real estate |
(636 | ) | (571 | ) | (11 | ) | ||||||
Gain from FDIC assisted acquisition |
(3,281 | ) | | | ||||||||
Proceeds from sales of residential mortgage loans |
153,541 | 63,479 | 55,274 | |||||||||
Residential mortgage loans originated for resale |
(154,964 | ) | (61,195 | ) | (54,276 | ) | ||||||
Proceeds from sales of student loans |
88,105 | 104,946 | 271,798 | |||||||||
Student loans originated for resale |
(69,817 | ) | (96,257 | ) | (149,629 | ) | ||||||
Net changes in assets and liabilities: |
||||||||||||
Accrued interest receivable |
706 | 11,605 | 1,396 | |||||||||
Other assets |
(17,097 | ) | (5,012 | ) | 5,884 | |||||||
Income taxes payable |
1,079 | 2,217 | 1,104 | |||||||||
Excess tax benefit from share-based payment arrangements |
(244 | ) | (339 | ) | (474 | ) | ||||||
Accrued interest payable |
(3,827 | ) | (4,423 | ) | (2,159 | ) | ||||||
Other liabilities |
3,518 | (1,424 | ) | 51 | ||||||||
Net cash provided by operating activities |
44,448 | 45,859 | 157,744 | |||||||||
Investing activities: |
||||||||||||
Proceeds from sales of available for sale securities |
123,458 | 7,839 | 10,204 | |||||||||
Proceeds from principal repayments, calls and maturities: |
||||||||||||
Held to maturity securities |
1,675 | 1,000 | | |||||||||
Available for sale securities |
68,828 | 193,958 | 55,212 | |||||||||
Proceeds from redemptions of Federal Home Loan Bank stock |
1,081 | | | |||||||||
Purchases of other investments |
(1,361 | ) | (1,947 | ) | (801 | ) | ||||||
Purchases of held to maturity securities |
| (2,500 | ) | (4,202 | ) | |||||||
Purchases of available for sale securities |
(174,343 | ) | (201,031 | ) | (22,096 | ) | ||||||
Loans originated and principal repayments, net |
(50,572 | ) | (370,558 | ) | (505,335 | ) | ||||||
Acquisitions, net, FDIC assisted (2009), Bank of Kansas (2007) |
17,161 | | (4,057 | ) | ||||||||
Investment in subsidiary |
| 1,070 | | |||||||||
Purchases of premises and equipment |
(5,245 | ) | (3,655 | ) | (3,287 | ) | ||||||
Proceeds from sales of premises and equipment |
90 | 219 | 63 | |||||||||
Proceeds from sales of other real estate |
7,050 | 11,595 | 469 | |||||||||
Net cash used in investing activities |
(12,178 | ) | (364,010 | ) | (473,830 | ) | ||||||
Financing activities: |
||||||||||||
Net increase in deposits |
277,601 | 121,543 | 227,431 | |||||||||
Net increase (decrease) in other borrowings |
(213,788 | ) | 76,782 | 80,262 | ||||||||
Net proceeds from issuance of preferred stock |
| 70,000 | | |||||||||
Net proceeds from issuance of common stock |
970 | 2,054 | 1,115 | |||||||||
Net proceeds from issuance of subordinated debentures |
| 34,500 | | |||||||||
Excess tax benefit from share-based payment arrangements |
244 | 339 | 474 | |||||||||
Preferred stock dividends paid |
(3,305 | ) | (243 | ) | | |||||||
Common stock dividends paid |
(2,432 | ) | (5,215 | ) | (5,136 | ) | ||||||
Net cash provided from financing activities |
59,290 | 299,760 | 304,146 | |||||||||
Net increase (decrease) in cash and cash equivalents |
91,560 | (18,391 | ) | (11,940 | ) | |||||||
Cash and cash equivalents beginning of period |
27,287 | 45,678 | 57,618 | |||||||||
Cash and cash equivalents end of period |
$ | 118,847 | $ | 27,287 | $ | 45,678 | ||||||
The accompanying notes are an integral part of this statement.
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SOUTHWEST BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
1. Summary of Significant Accounting and Reporting Policies
Organization and Nature of Operations - Southwest, incorporated in 1981, is a bank holding
company headquartered in Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the states of Oklahoma, Texas, and Kansas. The accompanying consolidated financial
statements include the accounts of Stillwater National, a national bank established in 1894, Bank
of Kansas, a state-chartered commercial bank established in 1907, Business Consulting Group, Inc.
(BCG), a business consulting company established in 2002, Healthcare Strategic Support, Inc.
(HSSI), a healthcare consulting company established in 2003, SNB Capital Corporation a lending
and loan workout subsidiary established in 2009, and consolidated subsidiaries of Stillwater
National, including SNB Real Estate Holdings, Inc. Stillwater National, Bank of Kansas, BCG, HSSI,
and SNB Capital Corporation are wholly owned, direct subsidiaries of Southwest. All significant
intercompany balances and transactions have been eliminated in consolidation. In 2010, Southwest
decided and subsequently sold the stock of HSSI.
Basis of Presentation - The Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became
FASBs officially recognized source of authoritative U.S. generally accepted accounting principles
(GAAP) applicable to all public and non-public non-governmental entities, superseding existing
FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force
(EITF) and related literature. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered non-authoritative.
ASC 855, Subsequent Events (formerly SFAS No. 165) became effective for Southwest for reporting
periods ending after June 15, 2009. This ASC establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC 855.10.05-1 defines (i) the period after the balance sheet
date during which a reporting entitys management should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, (ii) the circumstances
under which an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should make about events or
transactions that occurred after the balance sheet date. In accordance with ASC 855, Southwest has
evaluated subsequent events for potential recognitions and disclosure through the date the
consolidated financial statements included in this Annual Report on Form 10-K were issued.
Management Estimates - In preparing Southwests financial statements, management is
required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the dates shown on the
consolidated statements of financial condition and revenues and expenses during the periods
reported. Actual results could differ significantly from those estimates. Changes in economic
conditions could affect the determination of material estimates such as the allowance for loan
losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of
loans, income taxes, and the fair value of financial instruments.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from depository institutions, and federal funds sold.
Interest-bearing balances held at depository institutions were $84.6 million at December 31, 2009
and $1.9 million at December 31, 2008. Federal funds sold are sold for one-to-four day periods.
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Investment Securities - Investments in debt and equity securities are identified as held
to maturity or available for sale based on management considerations of asset/liability strategy,
changes in interest rates and prepayment
risk, the need to increase liquidity, and other factors, including managements intent and ability
to hold securities to maturity. Southwest has the ability and intent to hold to maturity its
investment securities classified as held to maturity. Southwest had no investments held for
trading purposes for any period presented. Under certain circumstances (including the
deterioration of the issuers creditworthiness, a change in tax law, or statutory or regulatory
requirements), Southwest may change the investment security classification. The classifications
Southwest utilizes determine the related accounting treatment for each category of investments.
Available for sale securities are accounted for at fair value with unrealized gains or losses, net
of taxes, excluded from operations and reported as accumulated other comprehensive income or loss.
Held to maturity securities are accounted for at amortized cost.
All investment securities are adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded to operations over the contractual
maturity or estimated life of the individual investment on the level yield method. Gain or loss on
sale of investments is based upon the specific identification method. Income earned on Southwests
investments in state and political subdivisions generally is not subject to ordinary Federal income
tax.
Southwest periodically reviews all individual securities for which the fair values are below the
book values. If it is determined that Southwest does not have the ability and intent to hold these
securities for a period of time sufficient for a forecasted market price recovery up to (or beyond)
the cost of the investment, or to maturity when the full cost will be recovered, then an other than
temporary loss will be recognized in the consolidated statements of operations. For 2009, 2008,
and 2007, Southwest recognized impairment charges of $0, $400,000, and $448,000, respectively, upon
determining that declines in the value of securities were other than temporary.
Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and certain other
investments are not readily marketable; therefore these investments are carried at cost.
Loans - Interest on loans is accrued and credited to operations based upon the principal
amount outstanding. Loan origination fees and certain costs of originated loans are amortized as
an adjustment to the yield over the term of the loan. Net unamortized deferred loan fees were $2.1
million and $4.4 million at December 31, 2009 and 2008, respectively.
Southwest generally places loans, except for consumer loans, on nonaccrual when any portion of the
principal or interest is ninety days past due and collateral is insufficient to discharge the debt
in full. Interest accrual may also be discontinued earlier if, in managements opinion, collection
is unlikely. Generally, consumer installment loans are not placed on nonaccrual but are
charged-off when they are four months past due. Accrued interest is written off when a loan is
placed on nonaccrual status. Loans are returned to accrual status: when none of its principal and
interest is due and unpaid, repayment is expected and there has been a sustained period (at least
six months) of repayment performance; when the loan is not brought current, but there is a
sustained period of performance and repayment within a reasonable period is reasonably assured; or
when the loan otherwise becomes well secured and in process of collection. Purchased impaired
loans also may be returned to accrual status without becoming fully current. Loans that have been
restructured because of weakened financial positions of the borrowers also may be returned to
accrual status if repayment is reasonably assured under the revised terms and there has been a
sustained period of repayment performance.
In general, accrued interest income on impaired loans is written off after the loan is 90 days past
due; subsequent interest income is recorded when cash receipts are received from the borrower.
Southwest identifies past due loans based on contractual terms on a loan by loan basis.
Southwest originates real estate mortgage loans and guaranteed student loans for either portfolio
investment or sale in the secondary market. During the period of origination, real estate mortgage
loans are designated as held either for investment purposes or sale. Mortgage loans held for sale
are generally sold within a one-month period from
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loan closing at amounts determined by the
investor commitment based upon the pricing of the loan. Guaranteed student loans have typically
been sold at the time the student graduates or withdraws from school. Gains or losses recognized
upon the sale of loans are determined on a specific identification basis.
Loans Acquired through Transfer - The accounting guidance of ASC 310.30, Loan and Debt
Securities Acquired with Deteriorated Credit Quality, applies to loans acquired through the
completion of a transfer, including loans
acquired in a business combination that have evidence of deterioration of credit quality since
origination and for which it is probable, at acquisition, that Southwest will be unable to collect
all contractually required payment receivables. In accordance with this guidance, these loans are
initially recorded at fair value (as determined by the present value of expected future cash flows)
with no valuation allowance. The difference between the undiscounted cash flows expected at
acquisition and the investment in the loan, or the accretable yield, is recognized as interest
income on a level-yield method over the life of the loan. Contractually required payments for
interest and principal that exceed the undiscounted cash flows expected at acquisition, or the
nonaccretable difference, are not recognized as a yield adjustment or as a loss accrual or a
valuation allowance. Increases in expected cash flows subsequent to the initial investment are
recognized prospectively through adjustment of the yield on the loan over its remaining life.
Decreases in expected cash flows are recognized as impairment. Valuation allowances on these
impaired loans reflect only losses incurred after the acquisition
Loss Share Receivable - Bank of Kansas and the FDIC entered into loss sharing agreements that
provide Bank of Kansas with significant protection against credit losses from loans and related
assets acquired in the FNBA FDIC-assisted transaction, see Note 2 Acquisitions. Under these
agreements, the FDIC will reimburse Bank of Kansas 80% of net losses up to $35.0 million on covered
assets, primarily acquired loans and other real estate, and 95% of any net losses above $35.0
million. Bank of Kansas services the covered assets. The loss sharing agreements have terms of
ten years for one-to-four family residential loans and eight years for all other loan types. The
expected payments from the FDIC under the loss sharing agreements were recorded as part of the
loans acquired at their fair value as of June 19, 2009. (Assets subject to these agreements are
referred to as covered.)
The difference between the undiscounted expected recoveries at acquisition and the fair value of
the loss share receivable is the accretable portion and is recognized as interest income over the
estimated life of the acquired loan portfolio. The initially recorded loss share receivable
represented 85% of the aggregate loan discount related to the acquired loan portfolio. Because of
the relationship of the loss share receivable to the loan discount, when an adjustment is made to a
loan discount to reflect changes in the expected cash flows of the loan, an adjustment to the
corresponding loss share receivable attributable to that loan will also occur.
Allowance for Loan Losses - The allowance for loan losses is a reserve established
through a provision for loan losses charged to operations. Loan amounts which are determined to be
uncollectible are charged against this allowance, and recoveries, if any, are added to the
allowance. The appropriate amount of the allowance is based on continuous review and evaluation of
the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan
and lease portfolio. The allowance for loan and lease losses is determined in accordance with
regulatory guidelines and generally accepted accounting principles and is comprised of two primary
components. Loans deemed to be impaired are evaluated on an individual basis consistent with ASC
310.10.35, Receivables: Subsequent Measurement. The amount and level of the impairment allowance
is ultimately determined by managements estimate of the amount of expected future cash flows or,
if the loan is collateral dependent, on the value of the collateral, which may vary from period to
period depending on changes in the financial condition of the borrower or changes in the estimated
value of the collateral. Charge-offs against the allowance of impaired loans are made when and to
the extent the loan is deemed uncollectible. The remaining portion of the allowance is calculated
based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into
loan pools by type of loan. Estimated allowances are based on historical loss trends with
adjustments factored in based on qualitative risk factors both internal and external to Southwest.
These factors include but are not limited to, economic and business conditions, changes in lending
staff, lending policies and procedures, quality of loan review, changes in the nature and volume of
the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory
considerations.
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A loan is considered to be impaired when, based on current information and events, it is probable
that Southwest will be unable to collect all amounts due according to the contractual terms of the
loan agreement. The allowance for loan losses related to loans that are evaluated for impairment
is based either on the discounted cash flows using the loans initial effective interest rate or on
the fair value of the collateral for certain collateral dependent loans. Smaller balance,
homogeneous loans, including mortgage, student, and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. All of Southwests nonaccrual loans are considered to be
impaired loans.
Independent appraisals on real estate collateral securing loans are obtained at origination. New
appraisals are obtained periodically and upon discovery of factors that may significantly affect
the value of the collateral. Appraisals usually are received within 30 days of request. Results
of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and
also are reviewed monthly 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 measurement of an impairment.
Management strives to carefully monitor credit quality and to identify loans that may become
nonperforming. At any time, however, there are loans included in the portfolio that will result in
losses to Southwest but that have not been identified as nonperforming or potential problem loans.
Because the loan portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a few of such loans
may cause a significant increase in nonperforming assets and may lead to a material increase in
charge-offs and the provision for loan losses in future periods.
Reserve for Unfunded Loan Commitments - The reserve for unfunded loan commitments is a
liability on Southwests statement of financial condition. The reserve is computed using a
methodology similar to that used to determine the allowance for loan losses, modified to take into
account the probability of a drawdown on the commitment.
Premises and Equipment - Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis
over the estimated useful life of each asset. Useful lives range from 10 years to 40 years for
buildings and improvements, and 3 years to 10 years for furniture, fixtures, and equipment.
Southwest reviews the carrying value of long-lived assets used in operations when changes in events
or circumstances indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated to be generated by
those assets. If this review indicates that an asset is impaired, Southwest records a charge to
operations to reduce the assets carrying value to fair value, which is based on estimated
discounted cash flows. Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less costs to sell.
Other Real Estate Owned - Other real estate owned is initially recorded at the lesser of
the carrying value or fair value less the estimated costs to sell the asset. Write-downs of
carrying value required at the time of foreclosure are recorded as a charge to the allowance for
loan losses. Costs related to the development of such real estate are capitalized, and costs
related to holding the property are expensed. Foreclosed property is subject to periodic
revaluation based upon estimates of fair value. In determining the valuation of other real estate
owned, management obtains independent appraisals for significant properties. Valuation adjustments
are provided, as necessary, by charges to operations. Profits and losses from sales of foreclosed
property are recognized as incurred. At December 31, 2009 and 2008, the balances of noncovered
other real estate owned were $18.4 million and $6.1 million, respectively.
Goodwill and Other Intangible Assets - Intangible assets consist of goodwill, core
deposit intangibles, and loan servicing rights. Goodwill and core deposit intangibles, which
generally result from a business combination, are accounted for under the provisions of ASC 350,
Intangibles - Goodwill and Other, and ASC 805, Business Combinations. Loan servicing rights are
accounted for under the provisions of ASC 860, Transfers and Servicing.
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Goodwill represents the excess of the cost of businesses acquired over the fair value of the net
assets acquired and is assigned to reporting units. Goodwill is not amortized, but is tested for
impairment at least annually or more frequently if conditions indicate impairment. The evaluation
of possible impairment involves significant judgment based upon short-term and long-term
projections of future performance of each reporting unit.
Core deposit intangibles are amortized using an economic life method based on deposit attrition.
As a result, amortization will decline over time with most of the amortization occurring during the
initial years. The net book value of core deposit intangibles is evaluated for impairment when
economic conditions indicate impairment may exist.
Loan servicing rights are capitalized based on estimated fair value at the point of origination.
The servicing rights are amortized on an individual loan by loan basis over the period of estimated
net servicing income. Impairment of loan servicing rights is assessed based on the fair value of
those rights. Southwest reviews the carrying value of loan servicing rights quarterly for
impairment. At least annually, we obtain estimates of fair value from outside sources to
corroborate the results of the valuation model. Assets are considered impaired when the balances
are not recoverable from estimated future cash flows. At December 31, 2009, the fair value of loan
servicing rights was $1.7 million, which approximates book value.
Prepaid FDIC Insurance Premium - On November 12, 2009, the FDIC adopted a final rule
requiring insured institutions to prepay three years of premiums in order to restore the Deposit
Insurance Fund. By prepaying three years of premiums, banks will be allowed to defer recognition
of the insurance expense until the payments are recognized by the FDIC on a quarterly basis. Under
this rule, on December 30, 2009, Stillwater National and Bank of Kansas prepaid their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and
2012. Under the rule, banks will be assessed through 2010 according to the risk-based premium
schedule adopted earlier this year. However, beginning January 1, 2011, the base rate will
increase by 3 basis points.
Fair Value Measurements - Effective January 1, 2008, Southwest adopted the provisions of
ASC 820, Fair Value Measurements and Disclosure, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. In general, fair values of financial instruments are based upon quoted
market prices, where available. If such quoted market prices are not available, fair value is
based upon internally developed models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at
fair value. These adjustments may include amounts to reflect counterparty credit quality and
Southwests creditworthiness, among other things, as well as unobservable parameters. Any such
valuation adjustments are applied consistently over time.
Deposits - The total amount of time deposits with a minimum denomination of $100,000 was
approximately $1.0 billion and $802.2 million at December 31, 2009 and 2008, respectively. The
total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2009 and
2008 was $779,000 and $1.0 million, respectively. Time deposit maturities are as follows: $1.5
billion in 2010, $117.1 million in 2011, $5.0 million in 2012, $6.9 million in 2013, and $3.9
million in 2014.
Loan Servicing Income - Southwest earns fees for servicing real estate mortgages and
other loans owned by others. These fees are generally calculated on the outstanding principal
balance of the loans serviced and are recorded as income when earned.
Taxes on Income - Southwest and its subsidiaries file consolidated income tax returns.
Income tax expense is based on the results of operations, adjusted for permanent differences
between items of income or expense reported in the financial statements and those reported for tax
purposes. Under the liability method, deferred income taxes are determined based on the
differences between the financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance will be established if it is more likely than not that some
portion of the deferred tax asset will not be realized.
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Earnings per Common Share - Basic earnings per common share is computed based upon net
income, after deducting the dividend requirements of preferred stock, divided by the weighted
average number of common shares outstanding during each period, excluding non-vested stock.
Diluted earnings per common share is computed based upon net income, after deducting the dividend
requirements of preferred stock, divided by the weighted average number of common shares
outstanding during each period, excluding non-vested stock and adjusted for the effect of dilutive
potential common shares calculated using the treasury stock method. A reconciliation of the
weighted-average common shares used in the calculations of basic and diluted earnings per common
share for the reported periods is provided in Note 11 Shareholders Equity and Note 12 Earnings per
Common Share.
For the years ended December 31, 2009, 2008, and 2007, Southwest had 380,390, 469,941, and 403,950
antidilutive options to purchase common shares, respectively.
Share-Based Compensation - The Southwest Bancorp, Inc. 1994 Stock Option Plan (the 1994
Plan), the 1999 Stock Option Plan (the 1999 Plan), and the 2008 Stock Based Award Plan (the
2008 Stock Plan), collectively the Stock Plans, provide selected key employees with the
opportunity to acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the stock option
agreements, stock options generally become exercisable on an annual basis and expire from five to
ten years after the date of grant.
The 2008 Stock Plan replaced the1999 Plan, as amended. Options issued under the 1999 Plan and the
1994 Plan will continue in effect and will be subject to the requirements of those plans, but no
new options will be granted under them. The 2008 Stock Plan authorized awards for up to 800,000
shares of Southwest common stock over its ten-year term.
Comprehensive Income - Southwests comprehensive income (net income plus all other
changes in shareholders equity from non-equity sources) consists of its net income and unrealized
holding gains (losses) in its available for sale securities.
Trust - Southwest offers trust services to customers through its relationship with the
Heritage Trust Company, a trust services company, and directly through the trust department of Bank
of Kansas. Property (other than cash on deposit) held by Southwest in a fiduciary or agency
capacity for its customers is not included in the consolidated statements of financial condition as
it is not an asset or liability of Southwest. Assets held in trust were $77.0 million and $74.9
million at December 31, 2009 and 2008, respectively.
Liquidity - Stillwater National and Bank of Kansas are required by the FRB to maintain
average reserve balances. Cash and due from banks in the consolidated statements of financial
condition include restricted amounts of $1.3 million and $627,000 at December 31, 2009 and 2008,
respectively.
2. Acquisitions
On June 19, 2009, Bank of Kansas entered into a purchase and assumption agreement with the
Federal Deposit Insurance Corporation (FDIC) to acquire substantially all deposits and loans as
well as certain other liabilities and assets of First National Bank of Anthony, Anthony, Kansas
(FNBA) in an FDIC-assisted transaction. FNBA was a full service commercial bank that had been
placed in receivership with the FDIC. In this transaction, Bank of Kansas acquired the following
assets and liabilities at their respective fair values on the date of acquisition:
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(Dollars in thousands) | Amount | |||
Cash and cash equivalents |
$ | 6,039 | ||
Loans |
117,096 | |||
Investment securities |
20,644 | |||
Core deposit intangibles |
1,983 | |||
Other real estate owned |
2,938 | |||
Other assets |
1,141 | |||
Total assets acquired |
$ | 149,841 | ||
Deposits |
135,007 | |||
Borrowings |
21,672 | |||
Other liabilities |
1,003 | |||
Net assets acquired |
$ | (7,841 | ) | |
Plus: cash received from FDIC |
11,122 | |||
Gain on acquisition |
$ | 3,281 | ||
The acquisition of these assets and liabilities constitute a business as defined by ASC 805,
Business Combinations, because they are capable of being operated as a business. Based upon the
acquisition date fair values of the net assets acquired, no goodwill was recorded. The resulting
gain of $3.3 million on the acquisition is included in noninterest income in the Consolidated
Statement of Operations.
Bank of Kansas elected to exercise its option to acquire four former FNBA branch offices from the
FDIC. As of December 31, 2009, the four branch offices were acquired for $2.0 million and
equipment was acquired for $214,000.
The carrying value of the FDIC covered assets at December 31, 2009 consisted of loans accounted for
in accordance with ASC 310.30 and other assets, as follows:
ASC 310.30 | ||||||||||||
(Dollars in thousands) | Loans | Other | Total | |||||||||
Commercial real estate |
$ | 30,186 | $ | | $ | 30,186 | ||||||
1-4 family residential |
8,394 | | 8,394 | |||||||||
Real Estate Construction |
12,475 | | 12,475 | |||||||||
Commercial |
9,247 | | 9,247 | |||||||||
Consumer |
1,158 | | 1,158 | |||||||||
Other real estate owned |
| 4,748 | 4,748 | |||||||||
Estimated loss reimbursement
from the FDIC |
23,945 | | 23,945 | |||||||||
Total covered assets |
$ | 85,405 | $ | 4,748 | $ | 90,153 | ||||||
As of the acquisition date, the preliminary estimate of the contractually required payments
receivable for the ASC 310.30 loans was $123.2 million, the cash flows expected to be collected
were $84.0 million including interest, and the estimated fair value of the loans was $117.1
million, including the loss share receivable. These amounts were determined based upon the
estimated remaining life of the underlying loans, which included the effects of estimated
prepayments.
Based upon the analysis performed by an outside valuation firm, Bank of Kansas initially recorded a
loan discount of $39.1 million on the date of acquisition. Included was $37.5 million related to
projected credit losses (the credit component) and a $1.6 million accretable portion related to the
discount rate used in the valuations (the interest component). The accretable portion is
recognized in interest income on a monthly basis and periodically adjusted to reflect changes in
expected cash flows. There was $324,000 of loan discount accretion during 2009.
The nonaccretable portion of the loan discount, to the extent available, is used to offset
applicable loan charge-offs. There was $3.9 million in applicable loan discounts used to offset
charge-offs during 2009. Charge-offs in excess of the nonaccretable portion will be charged
against the allowance for loan losses. There were no such
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charges against the allowance in 2009.
When a loan has been charged off, paid off, or paid down to a level where the remaining amount of
the nonaccretable discount is no longer appropriate, based on the future expected cash flows of the
underlying loans, adjustments will be made to reduce the carrying value of the nonaccretable
discount through a combination of interest income and the loss share receivable. During 2009,
Southwest recognized $822,000 in interest income as a result of a $5.4 million reduction in loan discount due to payoffs
and charge-offs offset by a $4.5 million reduction in the applicable loss share receivable.
The initial loss share receivable recorded at the date of acquisition was $33.1 million, based on
the discounted cash flow of expected recoveries. The undiscounted expected recoveries, using the
FDIC loss share agreements reimbursement rates, initially aggregated $35.2 million. The $2.1
million accretable portion is being recognized in interest income on a monthly basis and
periodically adjusted to reflect changes in expected cash flows. There was $264,000 of loss share
receivable accretion during 2009. Bank of Kansas has identified $7.6 million in net losses to
submit to the FDIC under the loss sharing agreements for the period from June 19, 2009 through
December 31, 2009.
Should a covered loan be renewed, the loan discount and related loss share receivable (net loan
discount) will stay with that loan and be amortized over the expected future recovery period of the
loan. Changes in covered loan balances, due to collections, paydowns, payoffs, or charge-offs are
assessed on at least a quarterly basis and the related loan discounts and the allocated loss share
receivable are adjusted to reflect the changes in the expected cash flows.
When a loan is foreclosed, any residual loan discount net of the related loss share receivable is
transferred along with the applicable loan balance to the other real estate owned or repossessed
asset account. There were $553,000 of net loan discounts transferred to other real estate owned
during 2009.
Changes in the carrying amount and accretable amounts for ASC 310.30 loans were as follows through
December 31, 2009:
2009 | ||||||||
Net | Carrying | |||||||
accretable | amount | |||||||
(Dollars in thousands) | amount | of loans | ||||||
Fair value of acquired loans at
beginning of period (or date of
acquisition) |
$ | 3,743 | $ | 117,096 | ||||
Payments received |
| (32,240 | ) | |||||
Charge-offs |
(81 | ) | | |||||
Amortization |
(588 | ) | 549 | |||||
Balance at end of period |
$ | 3,074 | $ | 85,405 | ||||
The results of operations of FNBA are included with Southwests results of operations since
the date of acquisition. The results of operations of FNBA were not significant to Southwests
consolidated results of operations during the pre-acquisition periods of 2009 and 2008.
On July 27, 2007, Southwest acquired all of the assets and liabilities of Bank of Kansas in a stock
acquisition for cash consideration of $15.6 million. Bank of Kansas was a privately held bank
which operated two banking offices in the Hutchinson, Kansas area. The acquisition was accounted
for under the purchase method of accounting, and accordingly, the purchase price was allocated to
the tangible and identified intangible assets purchased and liabilities assumed based on the
estimated fair value at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired was recorded as goodwill, none of which is
deductible for tax purposes. Goodwill will not be amortized, but will be reviewed for impairment.
This transaction produced goodwill of $5.9 million and a core deposit intangible of $1.7 million.
Upon completion of this acquisition, Bank of Kansas was fully integrated into Southwest.
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3. Investment Securities
Effective April 1, 2009, Southwest adopted the provisions of new authoritative accounting
guidance under ASC 320, Debt and Equity Securities. The provisions (i) change existing guidance
for determining whether an impairment is other than temporary to debt securities and (ii) replace
the existing requirement that the entitys management assert it has both the intent and ability to
hold an impaired security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it will not have to
sell the security before recovery of its cost basis. Under this section, declines in fair value of
held-to-maturity and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. Adoption of the new guidance did not have a material impact on our financial
condition and results of operations.
A summary of the amortized cost and fair values of investment securities follows:
At December 31, 2009 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Held to Maturity: |
||||||||||||||||
Obligations of state and political subdivisions |
$ | 6,670 | $ | 84 | $ | | $ | 6,754 | ||||||||
Total |
$ | 6,670 | $ | 84 | $ | | $ | 6,754 | ||||||||
Available for Sale: |
||||||||||||||||
U.S. Government obligations |
$ | 1,098 | $ | 2 | $ | | $ | 1,100 | ||||||||
Federal agency securities |
75,789 | 445 | (849 | ) | 75,385 | |||||||||||
Obligations of state and political subdivisions |
837 | 16 | | 853 | ||||||||||||
Residential mortgage-backed securities |
157,539 | 2,241 | (634 | ) | 159,146 | |||||||||||
Equity securities |
936 | 283 | | 1,219 | ||||||||||||
Total |
$ | 236,199 | $ | 2,987 | $ | (1,483 | ) | $ | 237,703 | |||||||
At December 31, 2008 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Held to Maturity: |
||||||||||||||||
Obligations of state and political subdivisions |
$ | 7,343 | $ | 10 | $ | (60 | ) | $ | 7,293 | |||||||
Total |
$ | 7,343 | $ | 10 | $ | (60 | ) | $ | 7,293 | |||||||
Available for Sale: |
||||||||||||||||
U.S. Government obligations |
$ | 986 | $ | 13 | $ | | $ | 999 | ||||||||
Federal agency securities |
77,543 | 1,663 | (9 | ) | 79,197 | |||||||||||
Obligations of state and political subdivisions |
2,736 | 19 | | 2,755 | ||||||||||||
Residential mortgage-backed securities |
151,130 | 2,897 | (14 | ) | 154,013 | |||||||||||
Equity securities |
898 | 175 | | 1,073 | ||||||||||||
Total |
$ | 233,293 | $ | 4,767 | $ | (23 | ) | $ | 238,037 | |||||||
Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments are
not readily marketable and are carried at cost. Total investments carried at cost were $19.1
million and $18.8 million at December 31, 2009 and 2008, respectively. There are no identified
events or changes in circumstances that may have a significant adverse effect on these investments
carried at cost.
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Gross unrealized losses and fair value by length of time that the individual securities have been
in a continuous unrealized loss position at December 31, 2009 and 2008 are as follows:
Continuous Unrealized Losses Existing for: | ||||||||||||||||||||
Amortized cost of | Fair value of | |||||||||||||||||||
Number of | securities with | Less Than | More Than | securities with | ||||||||||||||||
(Dollars in thousands) | Securities | unrealized losses | 12 Months | 12 Months | unrealized losses | |||||||||||||||
At December 31, 2009: |
||||||||||||||||||||
Available for Sale: |
||||||||||||||||||||
Federal agency securities |
14 | $ | 38,710 | $ | (849 | ) | $ | | $ | 37,861 | ||||||||||
Obligations of state and political
subdivisions |
1 | 55 | | | 55 | |||||||||||||||
Residential mortgage-backed securities |
20 | 59,327 | (634 | ) | | 58,693 | ||||||||||||||
Total |
35 | $ | 98,092 | $ | (1,483 | ) | $ | | $ | 96,609 | ||||||||||
At December 31, 2008: |
||||||||||||||||||||
Held to Maturity: |
||||||||||||||||||||
Obligations of state and political
subdivisions |
5 | $ | 2,875 | $ | (60 | ) | $ | | $ | 2,815 | ||||||||||
Total |
5 | $ | 2,875 | $ | (60 | ) | $ | | $ | 2,815 | ||||||||||
Available for Sale: |
||||||||||||||||||||
Federal agency securities |
2 | $ | 5,962 | $ | (9 | ) | $ | | $ | 5,953 | ||||||||||
Obligations of state and political
subdivisions |
1 | 1,250 | | | 1,250 | |||||||||||||||
Residential mortgage-backed securities |
8 | 3,608 | (14 | ) | | 3,594 | ||||||||||||||
Total |
11 | $ | 10,820 | $ | (23 | ) | $ | | $ | 10,797 | ||||||||||
Residential mortgage-backed securities consist of agency securities underwritten and
guaranteed by Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac), and Federal National Mortgage Association (Fannie Mae).
Southwest evaluates all securities on an individual basis for other-than-temporary impairment on at
least a quarterly basis. Consideration is given to the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term prospects of the issuer,
and the intent and ability of Southwest to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held to maturity in the
table above until they mature, at which time Southwest will receive full value for the securities.
Furthermore, as of December 31, 2009, management does not have the intent to sell any of the
securities classified as available for sale in the table above and believes that it is more likely
than not that Southwest will not have to sell any such securities before a recovery of cost. The
declines in fair value were attributable to increases in market interest rates over the yields
available at the time the underlying securities were purchased or increases in spreads over market
interest rates. Management does not believe any of the securities are impaired due to credit
quality. Accordingly, as of December 31 2009, management believes the impairment of these
investments is not deemed to be other-than-temporary.
As required by law, investment securities are pledged to secure public and trust deposits, as well
as the Sweep Agreement product and borrowings from the FHLB. Securities with an amortized cost of
$241.9 million and $239.7 million were pledged to meet such requirements of $62.6 million and
$109.9 million at December 31, 2009 and 2008,
respectively. Any amount over pledged can be released at any time.
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A comparison of the amortized cost and approximate fair value of Southwests debt securities by
maturity date at December 31, 2009 follows in the next table.
Available for Sale | Held to Maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(Dollars in thousands) | Cost | Value | Cost | Value | ||||||||||||
One year or less |
$ | 17,296 | $ | 17,539 | $ | 2,825 | $ | 2,853 | ||||||||
More than one year through five years |
121,646 | 123,881 | 3,845 | 3,901 | ||||||||||||
More than five years through ten years |
77,831 | 77,173 | | | ||||||||||||
More than ten years |
19,426 | 19,110 | | | ||||||||||||
Total |
$ | 236,199 | $ | 237,703 | $ | 6,670 | $ | 6,754 | ||||||||
The foregoing analysis assumes that Southwests residential mortgage-backed securities mature
during the period in which they are estimated to prepay. No other prepayment or repricing
assumptions have been applied to Southwests debt securities for this analysis.
Gross realized gains on sales and calls of investment securities were $2.9 million during 2009,
$1.3 million during 2008, and $2.0 million during 2007. Gross realized losses on sales and
write-down of investment securities were $0 during 2009, $400,000 during 2008, and $448,000 during
2007. The gross proceeds from such sales and calls of investment securities totaled approximately
$141.2 million, $7.8 million, and $10.2 during 2009, 2008, and 2007, respectively.
4. Loans
Major classifications of loans are as follows:
At December 31, | ||||||||||||
2009 | 2008* | |||||||||||
(Dollars in thousands) | Noncovered | Covered | ||||||||||
Real estate mortgage: |
||||||||||||
Commercial |
$ | 1,212,409 | $ | 39,836 | $ | 1,118,828 | ||||||
One-to-four family residential |
114,614 | 12,630 | 113,665 | |||||||||
Real estate construction |
||||||||||||
Commercial |
618,078 | 12,515 | 579,795 | |||||||||
One-to-four family residential |
41,109 | 5,324 | 79,565 | |||||||||
Commercial |
520,505 | 13,412 | 564,670 | |||||||||
Installment and consumer: |
||||||||||||
Guaranteed student loans |
36,163 | | 54,057 | |||||||||
Other |
39,550 | 1,688 | 40,867 | |||||||||
2,582,428 | 85,405 | 2,551,447 | ||||||||||
Allowance for loan losses |
(62,413 | ) | | (39,773 | ) | |||||||
Total loans, net |
$ | 2,520,015 | $ | 85,405 | $ | 2,511,674 | ||||||
* | There were no covered loans as of December 31, 2008. |
Southwest extends commercial and consumer credit primarily to customers in the states of
Oklahoma, Texas, and Kansas which subjects the loan portfolio to the general economic conditions
within these areas. At December 31, 2009 and 2008, substantially all of Southwests loans were
collateralized with real estate, inventory, accounts receivable, and/or other assets or are
guaranteed by agencies of the United States Government or, in the case of private student loans,
insured by a private insurer.
Loans covered under the loss sharing agreements with the FDIC including the amounts of expected
reimbursements from the FDIC under these agreements are reported in loans and are referred to as
covered loans. Covered loans were initially recorded at fair value at the acquisition date.
Subsequent decreases in the amount expected to be collected result in a provision for loan losses
equal to the portion of the loss retained by the bank and an increase in the estimated FDIC
reimbursement equal to the portion of the loss reimbursable by the
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FDIC. Interest is accrued daily
on the outstanding principal balances. Covered loans which are more than 90 days delinquent with
respect to interest or principal, unless they are well secured and in the process of collection,
and other covered loans on which full recovery of principal or interest is in doubt are placed on
nonaccrual status. Interest previously accrued on covered loans placed on nonaccrual status is
charged against interest income, net of estimated FDIC reimbursements of such accrued interest.
When the ability to fully collect nonaccrual loan principal is in doubt, payments received are
applied against the principal balance of the loans until such time as full collection of the
remaining recorded balance is expected. Any additional interest payments received after that time
are recorded as interest income on a cash basis.
As of December 31, 2009, approximately $697.7 million, or 27%, of Southwests noncovered portfolio
loans consisted of loans to individuals and businesses in the healthcare industry. Southwest does
not have any other concentrations of loans to individuals or businesses involved in a single
industry of more than 10% of portfolio loans other than referred to in the table above. In the
event of total nonperformance by the borrowers or guarantors, Southwests accounting loss would be
limited to the recorded investment in the loans reduced by proceeds received from disposition of
the related collateral.
Southwest had loans which were held for sale of $43.1 million and $56.9 million at December 31,
2009 and 2008, respectively. These loans are carried at the lower of cost or market. Guaranteed
student loans are generally sold to a single servicer. A substantial portion of the one-to-four
family residential loans and loan servicing rights are sold to four investors.
The principal balance of loans for which accrual of interest has been discontinued totaled
approximately $118.2 million and $59.3 million at December 31, 2009 and 2008, respectively. If
interest on those loans had been accrued, the interest income as reported in the accompanying
consolidated statements of operations would have increased by approximately $4.8 million, $2.6
million, and $1.4 million, for 2009, 2008, and 2007, respectively.
The principal balance of loans past due ninety days or more for which Southwest was still accruing
interest totaled $1.4 million and $4.7 million at December 31, 2009 and 2008, respectively.
The unpaid principal balance of real estate mortgage loans serviced for others totaled $237.5
million, $158.1 million, and $141.7 million at December 31, 2009, 2008, and 2007, respectively.
Southwest maintained escrow accounts totaling $934,000 and $718,000 for real estate mortgage loans
serviced for others at December 31, 2009 and 2008, respectively.
The following table sets forth the remaining maturities for certain loan categories (including
loans held for sale) at December 31, 2009. Student loans that do not have stated maturities are
treated as due in one year or less. Real estate construction includes certain loans which will
convert to permanent financing at the point when construction is completed; these loans are
reported according to their final maturity.
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After one | ||||||||||||||||
One year | year through | After | ||||||||||||||
(Dollars in thousands) | or less | five years | five years | Total | ||||||||||||
Noncovered: |
||||||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
$ | 232,021 | $ | 801,680 | $ | 178,708 | $ | 1,212,409 | ||||||||
One-to-four family residential |
12,025 | 53,205 | 49,384 | 114,614 | ||||||||||||
Real estate construction |
367,477 | 270,879 | 20,831 | 659,187 | ||||||||||||
Commercial |
144,459 | 211,424 | 164,622 | 520,505 | ||||||||||||
Installment and consumer: |
||||||||||||||||
Guaranteed student loans |
36,163 | | | 36,163 | ||||||||||||
Other |
16,111 | 21,688 | 1,751 | 39,550 | ||||||||||||
Total noncovered |
808,256 | 1,358,876 | 415,296 | 2,582,428 | ||||||||||||
Covered: |
||||||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
2,162 | 11,366 | 26,308 | 39,836 | ||||||||||||
One-to-four family residential |
3,293 | 2,407 | 6,930 | 12,630 | ||||||||||||
Real estate construction |
15,420 | 513 | 1,906 | 17,839 | ||||||||||||
Commercial |
6,592 | 4,228 | 2,592 | 13,412 | ||||||||||||
Installment and consumer: |
253 | 1,375 | 60 | 1,688 | ||||||||||||
Total covered |
27,720 | 19,889 | 37,796 | 85,405 | ||||||||||||
Total |
$ | 835,976 | $ | 1,378,765 | $ | 453,092 | $ | 2,667,833 | ||||||||
The following table sets forth at December 31, 2009 the dollar amount of all loans due more
than one year after December 31, 2009.
(Dollars in thousands) | Fixed | Variable | ||||||
Noncovered: |
||||||||
Real estate mortgage: |
||||||||
Commercial |
$ | 333,438 | $ | 646,950 | ||||
One-to-four family residential |
50,460 | 52,129 | ||||||
Real estate construction |
59,086 | 232,624 | ||||||
Commercial |
121,756 | 254,290 | ||||||
Installment and consumer |
9,546 | 13,893 | ||||||
Total noncovered |
574,286 | 1,199,886 | ||||||
Covered: |
||||||||
Real estate mortgage: |
||||||||
Commercial |
5,794 | 31,880 | ||||||
One-to-four family residential |
1,939 | 7,398 | ||||||
Real estate construction |
550 | 1,869 | ||||||
Commercial |
2,674 | 4,146 | ||||||
Installment and consumer |
1,429 | 6 | ||||||
Total covered |
12,386 | 45,299 | ||||||
Total |
$ | 586,672 | $ | 1,245,185 | ||||
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Beginning balance |
$ | 39,773 | $ | 29,584 | $ | 27,293 | ||||||
Provision for loan losses |
39,176 | 18,979 | 8,947 | |||||||||
Loans charged off |
(18,913 | ) | (9,942 | ) | (7,365 | ) | ||||||
Recoveries |
2,377 | 1,152 | 709 | |||||||||
Total |
$ | 62,413 | $ | 39,773 | $ | 29,584 | ||||||
As of December 31, 2009 and 2008, noncovered impaired loans totaled $105.9 million and $59.3
million and had a related allowance for loan loss of $13.3 million and $5.4 million, respectively.
The average balance of noncovered
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impaired loans totaled $61.6 million, $35.2 million, and $19.8
million for the years ended December 31, 2009, 2008, and 2007, respectively. Interest income
recognized on impaired loans totaled $2.1 million, $578,000, and $10,000, respectively, for the
years ended December 31, 2009, 2008, and 2007.
5. Premises and Equipment
These consist of the following:
At December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Land |
$ | 6,841 | $ | 5,830 | ||||
Buildings and improvements |
17,872 | 15,210 | ||||||
Furniture, fixtures, and equipment |
32,463 | 30,907 | ||||||
Construction/Remodeling in progress |
139 | 380 | ||||||
57,315 | 52,327 | |||||||
Accumulated depreciation and amortization |
(30,779 | ) | (27,747 | ) | ||||
Premises and equipment, net |
$ | 26,536 | $ | 24,580 | ||||
6. Goodwill and Other Intangible Assets
Goodwill totaled $6.8 million and $7.1 million at December 31, 2009 and 2008, respectively.
During 2007, Southwest recorded goodwill totaling $5.9 million in connection with the acquisition
of Bank of Kansas. During 2009, we discovered an error in the entries made to record the Bank of
Kansas acquisition and recorded the correction. The adjustment was recorded to reduce goodwill by
$260,000 to properly record other asset balances that were established at the time of the
acquisition. This adjustment is not material to previous fiscal years, and accordingly, Southwest
has included the correction in the period in which it was identified.
As of year-end, approximately $200,000 of goodwill is reported in the Oklahoma Banking segment,
$5.6 million is reported in the Kansas Banking segment, and $1.0 million is reported in the Texas
Banking segment. Further information regarding operating segments can be found in Note 21 to the
Consolidated Financial Statements.
The following tables present the original cost and accumulated amortization of other intangible
assets:
At December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Core deposit premiums |
$ | 6,353 | $ | 4,370 | ||||
Less accumulated amortization |
2,249 | 1,774 | ||||||
Core deposit premiums, net |
$ | 4,104 | $ | 2,596 | ||||
Loan servicing rights |
$ | 6,687 | $ | 5,004 | ||||
Less accumulated amortization |
5,012 | 3,836 | ||||||
Loan servicing rights, net |
$ | 1,675 | $ | 1,168 | ||||
Other intangible assets, net |
$ | 5,779 | $ | 3,764 | ||||
During 2009, Bank of Kansas recorded core deposit intangibles totaling $2.0 million in
connection with the FNBA acquisition.
Core deposit intangibles are amortized using an economic life method based on deposit attrition.
As a result, amortization will decline over time with most of the amortization occurring during the
initial years. The weighted average amortization period for core deposit intangibles is
approximately 10 years. Amortization expense related to core deposit intangibles totaled $475,000
and $457,000, in 2009 and 2008, respectively.
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During 2009 and 2008, Southwest had recorded loan servicing right amortization expense of $847,000
and $441,000, respectively. During 2009 and 2008, mortgage loan servicing rights were written down
$329,000 and $557,000 to their respective fair values.
The estimated aggregate future amortization expense for other intangible assets remaining as of
December 31, 2009 is as follows:
Core Deposit | Loan Servicing | |||||||||||
(Dollars in thousands) | Premiums | Rights | Total | |||||||||
2010 |
547 | 637 | 1,184 | |||||||||
2011 |
527 | 465 | 992 | |||||||||
2012 |
488 | 317 | 805 | |||||||||
2013 |
484 | 183 | 667 | |||||||||
Thereafter |
2,058 | 73 | 2,131 | |||||||||
$ | 4,104 | $ | 1,675 | $ | 5,779 | |||||||
7. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. In
estimating fair value, Southwest utilizes valuation techniques that are consistent with the market
approach, the income approach, and/or the cost approach. Such valuation techniques are
consistently applied. Inputs to valuation techniques include the assumptions that market
participants would use in pricing an asset or liability.
ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
Level 1
|
Quoted prices in active markets for identical assets or liabilities: Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets. | |
Level 2
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments. This category includes U.S. Government and agency mortgage-backed debt securities, municipal obligation securities, loans held for sale, and certain private equity investments. | |
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes other real estate owned, goodwill, and other intangible assets. |
The estimated fair value amounts have been determined by Southwest using available market
information and appropriate valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts Southwest could realize in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
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A description of the valuation methodology used for financial assets measured at fair value on a
recurring basis is as follows:
Loans held for sale - Real estate mortgage loans held for sale are carried at the lower of
cost or market, which is determined on an individual loan basis. Guaranteed student loans held for
sale are carried at the lower of cost or market, which is determined on an aggregate basis.
Available for sale securities - The fair value of U.S. Government and federal agency
obligations, other securities, and mortgage-backed securities is estimated based on quoted market
prices or dealer quotes. The fair value for other investments such as obligations of state and
political subdivisions is estimated based on quoted market prices. The fair value of the certain
private equity investments is estimated based on Southwests proportionate share of net asset
value. These investments have a quarterly redemption with sixty-five days notice.
As of December 31, 2009, assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurement at December 31, 2009 Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Loans held for sale |
$ | 43,134 | $ | | $ | 43,134 | $ | | ||||||||
Available for sale securities |
237,703 | 1,241 | 236,462 | | ||||||||||||
Total |
$ | 280,837 | $ | 1,241 | $ | 279,596 | $ | | ||||||||
Certain financial assets are measured at fair value on a nonrecurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment). These
assets are recorded at the lower of cost or fair value. Valuation methodologies for assets
measured on a nonrecurring basis are as follows:
Impaired loans - Certain impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from collateral. Collateral values are estimated using
Level 2 inputs based on third-party appraisals. Certain impaired loans are remeasured and reported
at fair value through a specific valuation allowance allocation of the allowance for loan losses
based upon the fair value of the underlying collateral.
Other real estate owned - For other real estate owned, the fair value is based on third-party
appraisals for significant properties.
Goodwill - Fair value of goodwill is based on the fair value of each of Southwests eight
reporting units compared with their respective carrying value. There was no impairment during 2009
or 2008; therefore, no fair value adjustments were recorded in earnings.
Core deposit premiums - The fair value of core deposit premiums are based on third-party
appraisals. There was no impairment during 2009 or 2008; therefore no fair value adjustments were
recorded in earnings.
Mortgage loan servicing rights - There is no active trading market for loan servicing rights.
The fair value of loan servicing rights is estimated by calculating the present value of net
servicing revenue over the anticipated life of each loan. A cash flow model is used to determine
fair value. Key assumptions and estimates, including projected prepayments speeds and assumed
servicing costs, earnings on escrow deposits, ancillary income and discount rates, used by this
model are based on current market sources. A separate third party model is used to estimate
prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment,
anticipated defaults and other relevant factors. The prepayment model is updated for changes in
market conditions.
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During the year ended December 31, 2009, assets and liabilities measured at fair value on a
nonrecurring basis are summarized below:
Fair Value Measurements Using | ||||||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||||||
Year ended | Active Markets for | Significant Other | Unobservable | |||||||||||||||||
December 31, | Identical Assets | Observable Inputs | Inputs | Total Gains | ||||||||||||||||
(Dollars in thousands) | 2009 | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
Acquired assets and liabilities: |
||||||||||||||||||||
Investment securities |
$ | 20,644 | $ | | $ | 20,644 | $ | | $ | | ||||||||||
Loans |
117,096 | | 117,096 | | ||||||||||||||||
Core deposit intangible |
1,983 | | 1,983 | | | |||||||||||||||
Other real estate owned |
2,938 | | | 2,938 | | |||||||||||||||
Deposits |
135,007 | | | 135,007 | | |||||||||||||||
Borrowings |
21,672 | | 21672 | | | |||||||||||||||
Noncovered impaired loans at fair value |
65,505 | | 65,505 | | (14,006 | ) | ||||||||||||||
Mortgage loan servicing rights |
1,850 | | | 1,850 | (329 | ) | ||||||||||||||
Total |
$ | 366,695 | $ | | $ | 109,804 | $ | 256,891 | $ | (14,335 | ) | |||||||||
In accordance with ASC 805, acquired assets and liabilities were measured at fair value on the
date of acquisition. For more information please see Note 2.
Noncovered impaired loans measured at fair value with a carrying amount of $84.9 million were
written down to their fair value of $65.5 million, resulting in a life-to-date impairment charge of
$19.4 million, of which $14.0 million was included in the provision for loan losses for the year
ended December 31, 2009.
Mortgage loan servicing rights were written down to their fair value, resulting in an impairment
charge of $329,000, which was included in noninterest income for the year ended December 31, 2009.
ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of
financial instruments, including those that are not measured and reported at fair value on a
recurring or nonrecurring basis. The methodologies for estimating the fair value of financial
instruments that are measured on a recurring or nonrecurring basis are discussed above. The
methodologies for other financial instruments are discussed below:
Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a
reasonable estimate of fair value.
Investment securities - The investment securities held to maturity and the other
investment securities are carried at cost. The fair value of held to maturity securities is
estimated based on quoted market prices or dealer quotes.
Loans - Fair values are estimated for certain homogeneous categories of loans
adjusted for differences in loan characteristics. Southwests loans have been aggregated by
categories consisting of commercial, real estate, student, and other consumer. The fair value of
loans is estimated by discounting the cash flows using risks inherent in the loan category and
interest rates currently offered for loans with similar terms and credit risks.
Accrued interest receivable - The carrying amount is a reasonable estimate of fair
value for accrued interest receivable.
Deposits - The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the statement of financial condition date. The
fair value of fixed maturity certificates of deposits is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other borrowings - The fair value for fixed rate FHLB advances is based upon
discounted cash flow analysis using interest rates currently being offered for similar instruments.
The fair values of other borrowings are the amounts payable at the statement of financial
condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term
maturity rates. Included in other borrowings are federal funds
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purchased, FHLB advances,
securities sold under agreements to repurchase, and treasury tax and loan demand notes.
Subordinated debentures - Two subordinated debentures have floating rates that reset
quarterly and the third Subordinated debenture has a fixed rate. The fair value of the floating
rate Subordinated debentures is based on current book value. The fixed rate Subordinated debenture
is based on market price.
Other liabilities and accrued interest payable - The estimated fair value of other
liabilities, which primarily includes trade accounts payable, and accrued interest payable
approximates their carrying value.
Commitments - Commitments to extend credit, standby letters of credit, and financial
guarantees written or other items have short maturities and therefore have no significant fair
values.
The carrying values and estimated fair values of Southwests financial instruments follow:
At December 31, 2009 | At December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(Dollars in thousands) | Values | Values | Values | Values | ||||||||||||
Cash and cash equivalents |
$ | 118,847 | $ | 118,847 | $ | 27,287 | $ | 27,287 | ||||||||
Investment securities: |
||||||||||||||||
Held to maturity |
6,670 | 6,754 | 7,343 | 7,293 | ||||||||||||
Available for sale |
237,703 | 237,703 | 238,037 | 238,037 | ||||||||||||
Other investments |
19,066 | 19,066 | 18,786 | 18,786 | ||||||||||||
Total loans |
2,605,420 | 2,567,369 | 2,511,674 | 2,541,424 | ||||||||||||
Accrued interest receivable |
10,806 | 10,806 | 11,512 | 11,512 | ||||||||||||
Deposits |
2,592,730 | 2,583,691 | 2,180,122 | 2,190,988 | ||||||||||||
Accrued interest payable |
3,191 | 3,191 | 7,018 | 7,018 | ||||||||||||
Other liabilities |
13,121 | 13,121 | 9,667 | 9,667 | ||||||||||||
Other borrowings |
103,022 | 103,527 | 295,138 | 298,175 | ||||||||||||
Subordinated debentures |
81,963 | 83,343 | 81,963 | 82,653 |
8. Other Borrowed Funds
Southwest has available various forms of other borrowings for cash management and liquidity
purposes. These forms of borrowings include federal funds purchased, securities sold under
agreements to repurchase, and borrowings from the FHLB, and the FRB. Southwest also carries
interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and
Loan note program. The following table summarizes borrowed funds of Southwest for the periods
indicated:
2009 | 2008 | |||||||||||||||||||||||
Balance at | Average | Weighted | Balance at | Average | Weighted | |||||||||||||||||||
(Dollars in thousands) | December 31, | Balance | Average Rate | December 31, | Balance | Average Rate | ||||||||||||||||||
Federal funds purchased |
$ | 10,060 | $ | 36,732 | 0.20 | % | $ | 89,534 | $ | 91,173 | 2.25 | % | ||||||||||||
Securities sold under repurchase
agreements |
23,259 | 27,174 | 0.32 | 38,034 | 33,718 | 1.36 | ||||||||||||||||||
Federal Home Loan Bank advances |
68,560 | 103,510 | 3.04 | 151,500 | 128,687 | 3.13 | ||||||||||||||||||
Federal Reserve Bank borrowings |
| | | | 7,650 | 5.05 | ||||||||||||||||||
Treasury, tax and loan note option |
1,143 | 1,115 | | 1,070 | 622 | 2.71 | ||||||||||||||||||
Other |
| 13,151 | 5.36 | 15,000 | 12,213 | 4.83 | ||||||||||||||||||
$ | 103,022 | $ | 295,138 | |||||||||||||||||||||
Southwest has approved federal funds purchase lines totaling $362.4 million with ten financial
entities. Southwest sells securities under agreements to repurchase with Southwest retaining
custody of the collateral. Collateral consists of direct obligations of U.S. Government and
Federal Agency issues, which are designated as pledged with Southwests safekeeping agent. The
type of collateral required, the retention of the collateral, and the security sold minimize
Southwests risk of exposure to loss. These transactions are for one-to-four day periods. At
December 31, 2009, no repurchase agreement exceeded 10% of equity capital.
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Southwest has entered into an agreement with the FHLB to obtain advances from the FHLB from time to
time. Currently the line of credit totals $539.0 million. The terms of the agreement are set
forth in the Advance, Pledge and Security Agreement (the Agreement). The FHLB requires that
Southwest pledge collateral on such advances. Under the terms of the Agreement, the discounted
value of the collateral, as defined by the FHLB, should at all times be at least equal to the
amount borrowed by Southwest. Such advances outstanding are subject to a blanket collateral
arrangement, which requires the pledging of eligible collateral to secure such advances. Such
collateral principally includes certain loans and securities. At December 31, 2009 and 2008, loans
pledged under the Agreement were $862.4 million and $822.9 million, and investment securities
pledged (at carrying value) were $77.5 million and $36.8 million, respectively. Scheduled minimum
future principal payments on the FHLB line of credit as of December 31, 2009 are as follows: $12.0
million in 2010, $31.5 million in 2011, $0 in 2012, $0 in 2013, $0 in 2014, and $25.0 million
thereafter.
Southwest is qualified to borrow funds from the FRB through their Borrower-In-Custody (BIC)
program. Collateral under this program consists of pledged selected commercial and industrial
loans. Currently the collateral will allow Southwest to borrow up to $84.9 million. Southwest
also has substantial unused borrowing availability in the form of unsecured brokered certificate of
deposits program from Merrill Lynch & Co., Morgan Stanley & Co., Inc., Citigroup Global Markets,
Inc., Wachovia Securities LLC, UBS Financial Services, Inc., and RBC Capital Markets Corp. In
conjunction with these lines of credit, $330.0 million in retail certificates of deposit were
included in total deposits at December 31, 2009.
During 2009, the categories of other borrowings whose average exceeded 30% of ending shareholders
equity were advances from the FHLB.
At December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Amounts outstanding at end of period |
$ | 68,560 | $ | 151,500 | $ | 51,500 | ||||||
Weighted average rate at end of period |
2.91 | % | 2.63 | % | 4.10 | % | ||||||
Maximum amount outstanding at any month-end |
$ | 151,500 | $ | 156,600 | $ | 101,500 | ||||||
Approximate average outstanding for the year |
103,510 | 128,687 | 52,853 | |||||||||
Approximate weighted average rate for the year |
3.04 | % | 3.13 | % | 4.74 | % |
9. Subordinated Debentures
At December 31, 2009, Southwest had the following issues of trust preferred securities
outstanding and subordinated debentures owed to the Trusts.
Subordinated | Trust Preferred | |||||||||||||||
Debentures Owed | Securities of the | Interest Rates at | ||||||||||||||
(Dollars in thousands) | to Trusts | Trusts | December 31, 2009 | Final Maturity Date | ||||||||||||
OKSB Statutory I |
$ | 20,619 | $ | 20,000 | 3.35 | % | June 26, 2033 | |||||||||
SBI Capital Trust II |
25,774 | 25,000 | 3.13 | % | October 7, 2033 | |||||||||||
Soutwest Capital Trust II |
35,570 | 34,500 | 10.50 | % | September 15, 2038 | |||||||||||
$ | 81,963 | $ | 79,500 | |||||||||||||
On June 26, 2003, Southwests subsidiary, OKSB Statutory Trust I, sold to investors in a
private placement offering $20.0 million of adjustable rate trust preferred securities (the OKSB
Trust Preferred). The OKSB Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR
plus 3.10%. In addition to these adjustable rate securities, OKSB Statutory Trust I sold $619,000
of trust common equity to Southwest. The aggregate proceeds of $20.6 million were used to purchase
an equal principal amount of adjustable rate subordinated debentures of Southwest that bear
interest, adjustable quarterly, at 90-day LIBOR plus 3.10% (the OKSB Subordinated Debentures).
After deducting underwriters compensation and noninterest expenses of the offering, the net
proceeds were available to Southwest to increase capital and for general corporate purposes.
Interest payments on the OKSB Subordinated Debentures are deductible for federal income tax
purposes.
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On October 14, 2003, Southwests subsidiary, SBI Capital Trust II, sold to investors in a private
placement offering $25.0 million of adjustable rate trust preferred securities (the SBI II Trust
Preferred). The SBI II Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus
2.85%. In addition to these adjustable rate securities, SBI Capital Trust II sold $774,000 of
trust common equity to Southwest. The aggregate proceeds of $25.8 million were used to purchase an
equal principal amount of adjustable rate subordinated debentures of Southwest that bear interest,
adjustable quarterly 90-day LIBOR plus 2.85% (the SBI II Subordinated Debentures). The proceeds
were available to Southwest to increase capital and for general corporate purposes. Interest
payments on the SBI II Subordinated Debentures are deductible for federal income tax purposes.
In July 2008, Southwests 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).
At December 31, 2009, Southwest had an aggregate of $82.0 million of subordinated debentures
outstanding and had an asset of $2.5 million representing its total investment in the common equity
issued by the Trusts. The sole assets of the Trusts are the subordinated debentures and the
liabilities of the Trusts of the OKSB Trust Preferred, the SBI II Trust Preferred, and the OKSBP
Trust Preferred. Southwest has, through various contractual arrangements, unconditionally
guaranteed payment of all obligations of the Trusts with respect to the OKSB Trust Preferred, the
SBI II Trust Preferred, and the OKSBP Trust Preferred.
The OKSB Trust Preferred, the OKSB Subordinated Debentures, the SBI II Trust Preferred, the SBI II
Subordinated Debentures, the OKSBP Trust Preferred, and the OKSBP Subordinated Debentures mature at
or near the thirtieth anniversary date of their issuance. However, if certain conditions are met,
the OKSB Trust Preferred and the OKSB Subordinated Debentures and the SBI II Trust Preferred and
the SBI II Subordinated Debentures may be called at Southwests discretion with thirty days notice,
and the maturity dates of the OKSBP Trust Preferred and the OKSBP Subordinated Debentures may be
shortened at Southwests discretion to a date not earlier than September 15, 2013.
Southwest, OKSB Statutory Trust I, SBI Capital Trust II, and Southwest Capital Trust II believe
that, taken together, the obligations of Southwest under the Trust Preferred Guarantee Agreements,
the Amended and Restated Trust Agreements, the Subordinated Debentures, the Indentures and the
Agreements as to Expenses and Liabilities, entered into in connection with the offering of the
Trust Preferred and the Subordinated Debentures, in the aggregate constitute a full and
unconditional guarantee by Southwest of the obligations of OKSB Statutory Trust I, SBI Capital
Trust II, and Southwest Capital Trust II under the Trust Preferred.
OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose of issuing the OKSB
Trust Preferred and purchasing the OKSB Subordinated Debentures, which are its sole assets.
Southwest owns all of the 619 outstanding common securities of OKSB Statutory Trust I; the
liquidation value is $1,000 per share.
SBI Capital Trust II is a Delaware statutory trust created for the purpose of issuing the SBI II
Trust Preferred and purchasing the SBI II Subordinated Debentures, which are its sole assets.
Southwest owns all of the 774 outstanding common securities of SBI Capital Trust II; the
liquidation value is $1,000 per share.
Southwest Capital Trust II is a Delaware statutory trust created for the purpose of issuing the
OKSBP Trust Preferred and purchasing the OKSBP Subordinated Debentures, which are its sole assets.
Southwest owns all of the 42,800 outstanding common securities of Southwest Capital Trust II; the
liquidation value is $25 per share.
Each of the Trust Preferred issuances meets the regulatory criteria for Tier I capital, subject to
Federal Reserve guidelines that limit the amount of the Trust Preferred and cumulative perpetual
preferred stock to an aggregate of 25% of Tier I capital. At December 31, 2009, $79.5 million of
the Trust Preferred was included in Tier I capital.
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In accordance with current accounting guidance under ASC 810, Consolidation, Southwest
de-consolidates its investments in OKSB Statutory Trust I, SBI Capital Trust II, and Southwest
Capital Trust II (the Trusts) in this Annual Report and all future reports. Due to this required
de-consolidation, the Trust Preferred Securities are not presented on the Consolidated Statements
of Financial Condition and the Subordinated Debentures are presented on the Consolidated Statements
of Financial Condition as a separate liability category.
10. Income Taxes
The components of taxes on income follow:
For the Year Ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||||||
Current tax expense: |
||||||||||||||||
Federal |
$ | 13,032 | $ | 9,604 | $ | 13,311 | ||||||||||
State |
1,134 | 1,961 | 1,925 | |||||||||||||
Deferred tax benefit: |
||||||||||||||||
Federal |
(6,158 | ) | (1,747 | ) | (1,371 | ) | ||||||||||
State |
(397 | ) | (329 | ) | (268 | ) | ||||||||||
Taxes on income |
$ | 7,611 | $ | 9,489 | $ | 13,597 | ||||||||||
The amounts of taxes on income in the consolidated statements of operations in this report are
different from the expected outcomes using the U.S. Federal income tax rate of 35% for the
following reasons:
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Computed tax expense at statutory rates |
$ | 7,207 | $ | 8,537 | $ | 12,293 | ||||||
Increase (decrease) in income
taxes resulting from: |
||||||||||||
Benefit of income not subject to U.S. Federal income tax |
(142 | ) | (174 | ) | (137 | ) | ||||||
Expenses not deductible for U.S. Federal income tax |
178 | 372 | 475 | |||||||||
State income taxes, net of Federal income tax benefit |
165 | 405 | 396 | |||||||||
New markets tax credit |
(151 | ) | (151 | ) | (151 | ) | ||||||
Expiration of capital loss carryforward |
| 37 | | |||||||||
Other |
354 | 463 | 721 | |||||||||
Taxes on income |
$ | 7,611 | $ | 9,489 | $ | 13,597 | ||||||
Net deferred tax assets of $19.5 million and $14.3 million at December 31, 2009 and 2008,
respectively, are reflected in the accompanying Consolidated Statements of Financial Condition in
other assets. There were no valuation allowances at December 31, 2009 or 2008.
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Temporary differences that give rise to the deferred tax assets (liabilities) include the
following:
At December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Provision for loan losses |
$ | 24,751 | $ | 16,907 | ||||
Accumulated depreciation |
(3,486 | ) | (3,280 | ) | ||||
Prepaid maintenance |
(359 | ) | (300 | ) | ||||
Nonaccrual loan interest |
792 | 214 | ||||||
Deferred compensation accrual |
261 | 233 | ||||||
Mark-to-market adjustments |
47 | 221 | ||||||
FHLB stock dividends |
(989 | ) | (922 | ) | ||||
Write-downs on other real estate |
10 | 10 | ||||||
Amortizable assets |
(404 | ) | (485 | ) | ||||
Stock-based compensation |
177 | 177 | ||||||
Litigation and settlement |
2 | 135 | ||||||
New markets tax credit |
(460 | ) | (379 | ) | ||||
Dividend equity vs cost method |
(209 | ) | (217 | ) | ||||
Section 597 gain FNBA FDIC-assisted acquisition |
(589 | ) | | |||||
Inside basis difference on acquired loans |
(562 | ) | | |||||
Other |
(58 | ) | 56 | |||||
18,924 | 12,370 | |||||||
Deferred taxes (payable) receivable on
investment securities available for sale |
568 | 1,885 | ||||||
Net deferred tax asset |
$ | 19,492 | $ | 14,255 | ||||
At the beginning and end of 2009, Southwest had approximately $4.0 million and $4.6 million of
total gross unrecognized tax benefits, respectively. Of these totals, $1.6 million and $1.4
million (net of the federal benefit on state issues) represent the amounts of unrecognized tax
benefits that if recognized would affect the effective income tax rate in any future periods.
Southwest recognizes interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expenses. During the year ended December 31, 2009, Southwest recognized
approximately $594,000 in interest and penalties. Southwest had approximately $2.5 million accrued
for interest and penalties at December 31, 2009.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollars in thousands) | 2009 | 2008 | ||||||
Balance at January 1 |
$ | 3,966 | $ | 3,216 | ||||
Increases in unrecognized tax benefits as a result of tax positions taken during current
period |
631 | 750 | ||||||
Increases in unrecognized tax benefits as a result of tax positions taken during prior period |
| | ||||||
Amount of decreases in unrecognized tax benefits relating to settlements with taxing
authorities |
| | ||||||
Reductions to unrecognized tax benefits lapse of the applicable statute of limitations |
| | ||||||
Balance at December 31 |
$ | 4,597 | $ | 3,966 | ||||
Southwest or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. With few exceptions, Southwest is no longer subject to U.S.
federal or state tax examinations for years before 2003.
Southwest is currently under audit by the State of Oklahoma for the 2002 through 2006 tax years.
During the third quarter of 2008, Southwest received a Notice of Assessment from the Oklahoma Tax
Commission related to 2002 and 2003. During the fourth quarter of 2008, a formal Notice of Protest
was filed. It is possible that a reduction in the unrecognized tax benefits may occur; however,
quantification of an estimated range cannot be made at this time.
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11. Shareholders Equity
On December 5, 2008, Southwest issued to the United States Department of the Treasury (the
Treasury Department) 70,000 shares of Fixed Rate Cumulative Preferred Stock, Series B, par value
$1.00 per share (the Series B Preferred Stock), having a liquidation amount per share equal to
$1,000, for a total price of $70.0 million. The Series B Preferred Stock pays cumulative dividends
at a rate of 5% per year for the first 5 years and thereafter at a rate of 9% per year. Southwest
may not redeem the Series B Preferred Stock during the first three years except with the proceeds
from a qualified equity offering. After three years, Southwest, may, at their option, redeem the
Series B Preferred Stock at par value plus accrued and unpaid dividends.
As part of its purchase of the Series B Preferred Stock, the Treasury Department received a warrant
to purchase 703,753 shares of common stock at an initial per share exercise price of $14.92. The
warrant expires in ten years from the issuance date. Pursuant to the Securities Purchase
Agreement, the Treasury Department has agreed not to exercise voting power with respect to any
shares of common stock issued upon exercise of the warrant.
Southwest allocated $66.3 million to the Series B Preferred Stock and $3.7 million to the warrant
based on their relative fair values at the issue date. The amount allocated to the warrant is
accreted over the estimated life of the Series B Preferred Stock using five years. Such accretion
for the year ended December 31, 2009 was $645,000.
Southwest has reserved for issuance 150,000 shares of common stock pursuant to the terms of the
Employee Stock Purchase Plan. The Employee Stock Purchase Plan allows Southwests employees to
acquire additional common shares through payroll deductions. From July 1999 to August 2009, shares
issued out of this plan came from treasury shares, subsequently shares issued came from the
reserved shares. At December 31, 2009, 35,950 new shares had been issued and 52,500 treasury
shares had been reissued under this plan.
Southwest had reserved 1,960,000 shares of common stock pursuant to the terms of the 1999 Stock
Option Plan, which expired during 2008. The 1999 Plan provided selected key employees with the
opportunity to acquire common stock. At December 31, 2009, 180,155 new shares and 1,622,385
treasury shares had been reissued by this plan. Options issued under this plan will continue in
effect and will be subject to the requirements of the plan, but no new options will be granted
under this plan.
Southwest has reserved 800,000 shares of common stock pursuant to the terms of the 2008 Stock Based
Award Plan. The 2008 Stock Plan provides selected key employees with the opportunity to acquire
common stock. At December 31, 2009, no new shares and 25,725 treasury shares had been reissued by
this plan. See Share-Based Compensation in Note 1 to the Consolidated Financial Statements
beginning on page 43 for additional information on Southwests stock option plans.
12. Earnings Per Common Share
Effective January 1, 2009, Southwest adopted new authoritative accounting guidance under ASC
260, Earnings Per Share, which provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. Southwest has determined that its unvested restricted stock awards are
participating securities. Accordingly, effective January 1, 2009, earnings per common share is
computed using the two-class method prescribed by ASC 260. All previously reported earnings per
share data has been retroactively adjusted to conform to the new computation method and no
previously reported earnings per share amounts changed as a result of adoption.
Using the two-class method, basic earnings per common share is computed based upon net income
available to common shareholders divided by the weighted average number of common shares
outstanding during each period, which exclude the outstanding unvested restricted stock. Diluted
earnings per share is computed using the weighted average number of common shares determined for
the basic earnings per common share computation plus the dilutive effect of stock options using the
treasury stock method. Stock options and warrants, where the exercise price was greater than the
average market price of common shares, were not included in the computation of earnings per diluted
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share as they would have been antidilutive. On December 31, 2009 and 2008, there were 375,083 and
403,950 antidilutive stock options to purchase common shares, respectively. An antidilutive
warrant to purchase 703,753 shares of common stock was also outstanding on December 31, 2009.
The following table sets forth the computation of basic and diluted earnings per common share:
(Dollars in thousands, except earnings per share data) | 2009 | 2008 | 2007 | |||||||||
Numerator: |
||||||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Preferred dividend |
(3,500 | ) | (243 | ) | | |||||||
Warrant amortization |
(645 | ) | | | ||||||||
Net income available to common shareholders |
$ | 8,837 | $ | 14,658 | $ | 21,378 | ||||||
Earnings allocated to participating securities |
(26 | ) | (31 | ) | (33 | ) | ||||||
Numerator for basic earnings per common share |
$ | 8,811 | $ | 14,627 | $ | 21,345 | ||||||
Effect of reallocating undistributed earnings
of participating securities |
(22 | ) | (19 | ) | (24 | ) | ||||||
Numerator for diluted earnings per common share |
$ | 8,789 | $ | 14,608 | $ | 21,321 | ||||||
Denominator: |
||||||||||||
Denominator
for basic earnings per common share Weighted average common shares outstanding |
14,625,847 | 14,471,242 | 14,291,041 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
48,279 | 157,037 | 304,474 | |||||||||
Warrant |
| | | |||||||||
Denominator for diluted earnings per common share |
14,674,126 | 14,628,279 | 14,595,515 | |||||||||
Earnings per common share: |
||||||||||||
Basic |
$ | 0.60 | $ | 1.01 | $ | 1.49 | ||||||
Diluted |
$ | 0.60 | $ | 1.00 | $ | 1.46 | ||||||
13. Capital Requirements & Regulatory Matters
Southwest, Stillwater National, and Bank of Kansas are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Southwests, Stillwater
Nationals, and Bank of Kansas financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Southwest, Stillwater National, and Bank of
Kansas must meet specific capital guidelines that involve quantitative measures of Southwests,
Stillwater Nationals, and Bank of Kansas assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. Southwests, Stillwater Nationals, and Bank
of Kansas capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative measures established
by regulation to ensure capital adequacy require Southwest, Stillwater National, and Bank of Kansas
to maintain minimum amounts and of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2009 and 2008, that Southwest, Stillwater
National, and Bank of Kansas met all capital adequacy requirements to which they are subject.
As of December 31, 2009 and 2008, the most recent notification from the Office of the Comptroller
of the Currency (OCC) categorized Stillwater National as well-capitalized under the regulatory
framework for prompt corrective action. As of December 31, 2009 and 2008, the most recent
notification from the Federal Deposit Insurance Corporation (FDIC) categorized Bank of Kansas as
well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, Stillwater National and Bank
of Kansas must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the following table. There are no conditions or events since these notifications that
management believes have changed Stillwater Nationals or Bank of Kansas categories.
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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%.
Southwests, Stillwater Nationals, and Bank of Kansas actual capital amounts and ratios are
presented below.
To Be Well Capitalized | ||||||||||||||||||||||||
Under Prompt Corrective | For Capital | |||||||||||||||||||||||
Actual | Action Provisions | Adequacy Purposes | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
As of December 31, 2009: |
||||||||||||||||||||||||
Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Southwest |
$ | 413,438 | 14.55 | % | N/A | N/A | $ | 227,318 | 8.00 | % | ||||||||||||||
Stillwater National |
357,219 | 13.84 | $ | 258,032 | 10.00 | % | 206,426 | 8.00 | ||||||||||||||||
Bank of Kansas |
28,476 | 11.39 | 24,991 | 10.00 | 19,993 | 8.00 | ||||||||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Southwest |
377,418 | 13.28 | N/A | N/A | 113,659 | 4.00 | ||||||||||||||||||
Stillwater National |
309,530 | 12.00 | 154,819 | 6.00 | 103,213 | 4.00 | ||||||||||||||||||
Bank of Kansas |
25,352 | 10.14 | 14,994 | 6.00 | 9,996 | 4.00 | ||||||||||||||||||
Tier I Leverage (to average assets) |
||||||||||||||||||||||||
Southwest |
377,418 | 12.42 | N/A | N/A | 121,561 | 4.00 | ||||||||||||||||||
Stillwater National |
309,530 | 11.37 | 136,115 | 5.00 | 108,892 | 4.00 | ||||||||||||||||||
Bank of Kansas |
25,352 | 7.13 | 17,771 | 5.00 | 14,217 | 4.00 | ||||||||||||||||||
As of December 31, 2008: |
||||||||||||||||||||||||
Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Southwest |
$ | 404,695 | 14.26 | % | N/A | N/A | $ | 226,998 | 8.00 | % | ||||||||||||||
Stillwater National |
351,957 | 12.89 | $ | 273,111 | 10.00 | % | 218,489 | 8.00 | ||||||||||||||||
SNB Wichita* |
7,372 | 12.81 | 5,756 | 10.00 | 4,604 | 8.00 | ||||||||||||||||||
SNB Kansas* |
8,763 | 17.18 | 5,102 | 10.00 | 4,081 | 8.00 | ||||||||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Southwest |
369,049 | 13.01 | N/A | N/A | 113,499 | 4.00 | ||||||||||||||||||
Stillwater National |
302,641 | 11.08 | 163,867 | 6.00 | 109,244 | 4.00 | ||||||||||||||||||
SNB Wichita* |
6,652 | 11.56 | 3,453 | 6.00 | 2,302 | 4.00 | ||||||||||||||||||
SNB Kansas* |
8,125 | 15.93 | 3,061 | 6.00 | 2,041 | 4.00 | ||||||||||||||||||
Tier I Leverage (to average assets) |
||||||||||||||||||||||||
Southwest |
369,049 | 13.06 | N/A | N/A | 113,059 | 4.00 | ||||||||||||||||||
Stillwater National |
302,641 | 11.23 | 134,774 | 5.00 | 107,819 | 4.00 | ||||||||||||||||||
SNB Wichita* |
6,652 | 8.33 | 3,995 | 5.00 | 3,196 | 4.00 | ||||||||||||||||||
SNB Kansas* |
8,125 | 9.24 | 4,339 | 5.00 | 3,519 | 4.00 |
* | SNB Wichita and SNB Kansas were merged to form Bank of Kansas on January 23, 2009. |
The approval of the OCC is required if the total of all dividends declared by Stillwater
National in any calendar year exceeds the total of its net profits of that year combined with its
retained net profits of the preceding two years. In addition, Stillwater National may not pay a
dividend if, after paying the dividend, Stillwater National would be under capitalized. Stillwater
Nationals maximum amount of dividends available for payment totaled approximately $40.5 million at
December 31, 2009. Dividends declared by Stillwater National for the years ended December 31,
2009, 2008, and 2007 did not exceed the threshold requiring regulatory approval.
The same dividend restrictions apply to Bank of Kansas with approval required from the FDIC. Bank
of Kansas had $3.4 million available for dividend payment at December 31, 2009.
On January 27, 2010, Stillwater National executed a written formal agreement with the OCC relating
to its levels of commercial real estate lending and problem assets.
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14. Employee Benefits
Southwest sponsors a noncontributory, defined contribution profit sharing plan intended to
provide retirement benefits for employees of Southwest. The plan covers all employees who have
completed one year of service and have attained the age of 21. The plan is subject to the Employee
Retirement Income Security Act of 1974, as amended. Southwests contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not exceed 15% of the
total annual compensation of all participants. Southwest made contributions of $1.0 million, $1.2
million, and $2.2 million in 2009, 2008, and 2007, respectively.
Stock Options In accordance with current accounting guidance, Southwest recorded $32,000,
$222,000, and $734,000 of total share-based compensation expense for the periods ended December 31,
2009, December 31, 2008, and December 31, 2007, respectively. The share-based compensation is
calculated using the accrual method, which treats each vesting tranche as a separate award and
amortizes expense evenly from grant date to vest date for each tranche. The deferred tax asset
that was recorded related to this compensation expense was approximately $177,000 for both tax
years 2009 and 2008 and $171,000 for 2007.
Southwest has computed the estimated fair values of all share-based compensation using the
Black-Scholes option pricing model and has applied the assumptions set forth in the following
table. In 2007, Southwest evaluated the options granted in 2002 and the average life was 2.5
years. In 2008, Southwest evaluated the options granted in 2003 and the average life was 3.0
years. In 2009, Southwest evaluated the options granted in 2004 and the average life was 3.0
years. Southwest will continue to monitor the actual expected term of stock options and will
adjust the expected term used in the valuation process when the difference is determined to be
significant. No options were granted in 2009.
2009 | 2008 | 2007 | ||||||||||
Expected dividend yield |
N/A | 2.24 | % | 1.45 | % | |||||||
Expected volatility |
N/A | 34.36 | % | 29.70 | % | |||||||
Risk-free interest rate |
N/A | 2.30 | % | 4.48 | % | |||||||
Expected option term (in years) |
N/A | 3.00 | 2.50 |
The Black-Scholes option pricing model requires the input of highly subjective assumptions.
Management will continue to assess the assumptions and methodologies used to calculate estimated
fair value of share-based compensation. Circumstances may change and additional data may become
available over time, which result in changes to these assumptions and methodologies, which could
materially impact Southwests fair value determination.
The amortization of stock-based compensation reflects actual forfeitures.
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A summary of option activity under the Stock Plans as of December 31, 2009 and changes during the
36 month period then ended is presented below.
Weighted | ||||||||||||||||
Weighted | Average Aggregate | |||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value (dollars | |||||||||||||
Options | Price | Life (Years) | in thousands) | |||||||||||||
Outstanding at December 31, 2006 |
860,010 | $ | 13.50 | |||||||||||||
Granted |
124,431 | 25.78 | ||||||||||||||
Exercised |
(96,338 | ) | 9.88 | |||||||||||||
Canceled/expired |
(4,333 | ) | 26.58 | |||||||||||||
Outstanding at December 31, 2007 |
883,770 | $ | 15.56 | |||||||||||||
Granted |
5,000 | 16.93 | ||||||||||||||
Exercised |
(193,758 | ) | 9.99 | |||||||||||||
Canceled/expired |
(3,901 | ) | 21.39 | |||||||||||||
Outstanding at December 31, 2008 |
691,111 | $ | 17.10 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(139,170 | ) | 6.39 | |||||||||||||
Canceled/expired |
(172,617 | ) | 17.20 | |||||||||||||
Outstanding at December 31, 2009 |
379,324 | $ | 20.98 | 1.22 | $ | 69 | ||||||||||
Total exercisable at December 31, 2007 |
705,670 | $ | 14.56 | |||||||||||||
Total exercisable at December 31, 2008 |
634,451 | $ | 16.85 | |||||||||||||
Total exercisable at December 31, 2009 |
377,657 | $ | 21.00 | 1.21 | $ | 69 |
The weighted average grant date fair value of options granted during the twelve month period
ended December 31, 2009 and 2008 was $0 and $3.71, respectively. The total intrinsic value of
options exercised during the twelve month period ended December 31, 2009 and 2008 was $748,000 and
$1.1 million, respectively. The amount of cash received from exercises in 2009 was $889,000. The
fair value of options that became vested during 2009 and 2008 was $241,000 and $565,000,
respectively.
Shares issued in connection with the exercise of options are issued from available treasury shares.
If no treasury shares are available, new share are issued from available authorized shares.
During 2009, 90,155 shares issued in connection with stock option exercises were new shares issued
from available authorized shares, while 49,015 were issued from available treasury stock. During
2008 and 2007, all shares issued in connection with stock option exercises were issued from
available treasury stock.
A summary of the status of Southwests nonvested shares as of December 31, 2009 and changes during
the twelve month period then ended is presented below.
Shares | Weighted | |||||||
Issuable | Average | |||||||
Upon Exercise | Grant Date | |||||||
of Options | Fair Value | |||||||
Nonvested Balance at
December 31, 2008 |
56,660 | $ | 4.36 | |||||
Granted |
| | ||||||
Vested |
(54,993 | ) | 4.38 | |||||
Forfeited |
| | ||||||
Nonvested Balance at
December 31, 2009 |
1,667 | $ | 3.71 | |||||
As of December 31, 2009, there was approximately $200 of total unrecognized compensation
expense related to stock option arrangements granted under the Stock Plans. This expense is
expected to be recognized during the next year.
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Restricted Stock - Restricted shares granted as of December 31, 2009 and 2008 were 77,917 and
52,192, respectively. For both years 2009 and 2008, Southwest recognized $177,000 in compensation
expense, net of tax, related to all restricted shares outstanding. At December 31, 2009, there was
$277,000 of total unrecognized compensation expense related to restricted shares granted under the
Stock Plans. This unrecognized expense is expected to be recognized during the next three years.
The restricted stock grants vest one-third on the first, second and third anniversaries of the date
of grant provided the director or employee remains a director or employee of Southwest or a
subsidiary on those dates. The restrictions on the shares expire three years after the award date
provided that all restrictions will end, and the awards will be fully vested, upon a change in
control of Southwest or the permanent and total disability or death of the participant. Southwest
will continue to recognize compensation expense over the restricted periods.
15. Related Party Transactions
Directors and officers of Southwest, Stillwater National, and Bank of Kansas were customers
of, and had transactions with, Southwest in the ordinary course of business, and similar
transactions are expected in the future. All loans included in such transactions were made on
substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more than normal risk of
loss or present other unfavorable features. Certain directors, and companies in which they have
ownership interests, had indebtedness to Southwest totaling $2.9 million, and $2.2 million at
December 31, 2009 and 2008, respectively. During 2009, $14.0 million of new loans and advances on
existing loans were made to these persons and repayments totaled $13.3 million.
At December 31, 2009 and 2008, directors, officers and other related interest parties had demand,
non-interest bearing deposits of $5.4 million and $5.9 million, respectively, savings and
interest-bearing transaction accounts of $2.2 million and $2.6 million, respectively, and time
certificates of deposit of $670,000 and $1.3 million, respectively.
16. Operating Leases
Southwest leases certain equipment and facilities for its operations. Future minimum annual
rental payments required under operating leases, net of sublease agreements, that have initial or
remaining lease terms in excess of one year as of December 31, 2009 follow:
2010 |
$2.7 million | |||
2011 |
$2.1 million | |||
2012 |
$1.6 million | |||
2013 |
$1.1 million | |||
2014 |
$0.9 million | |||
Thereafter |
$1.7 million |
The total rental expense was $2.8 million, $2.6 million, and $2.4 million, in 2009, 2008, and 2007,
respectively.
17. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, Southwest makes use of a number of different financial
instruments to help meet the financial needs of its customers. In accordance with generally
accepted accounting principles, these transactions are not presented in the accompanying
consolidated financial statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial and real estate
mortgage credit, and standby and commercial letters of credit.
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The following table provides a summary of Southwests off-balance sheet financial instruments:
At December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Commitments to extend commercial and real estate mortgage credit |
$ | 387,486 | $ | 649,830 | ||||
Standby and commercial letters of credit |
5,105 | 7,752 | ||||||
Total |
$ | 392,591 | $ | 657,582 | ||||
A loan commitment is a binding contract to lend up to a maximum amount for a specified period
of time provided there is no violation of any financial, economic, or other terms of the contract.
A standby letter of credit obligates Southwest to honor a financial commitment to a third party
should Southwests customer fail to perform. Many loan commitments and most standby letters of
credit expire unfunded, and, therefore, total commitments do not represent future funding
obligations of Southwest. Loan commitments and letters of credit are made under normal credit
terms, including interest rates and collateral prevailing at the time, and usually require the
payment of a fee by the customer. Commercial letters of credit are commitments generally issued to
finance the movement of goods between buyers and sellers. Southwests exposure to credit loss,
assuming commitments are funded, in the event of nonperformance by the other party to the financial
instrument is represented by the contractual amount of those instruments. Southwest does not
anticipate any material losses as a result of the commitments.
18. Commitments and Contingencies
In the normal course of business, Southwest is at all times subject to various pending and
threatened legal actions. The relief or damages sought in some of these actions may be
substantial. After reviewing pending and threatened actions with counsel, management considers
that the outcome of such actions will not have a material adverse effect on Southwests financial
position; however, Southwest is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular future period as the
timing and amount of any resolution of such actions and relationship to the future results of
operations are not known.
At periodic intervals, the FRB, the OCC, the FDIC, and the State of Kansas, routinely examine
Southwests, Stillwater Nationals, and Bank of Kansas financial statements as part of their
legally prescribed oversight of the banking industry. Based on these examinations, the regulators
can direct that Southwests, Stillwater Nationals, and Bank of Kansas financial statements be
adjusted in accordance with their findings.
Southwest has adopted a Severance Compensation Plan (the Plan) for the benefit of certain
officers and key members of management. The Plans purpose is to protect and retain certain
qualified employees in the event of a change in control (as defined) and to reward those qualified
employees for loyal service to Southwest by providing severance compensation to them upon their
involuntary termination of employment after a change in control of Southwest. At December 31,
2009, Southwest has not recorded any amounts in the consolidated financial statements relating to
the Plan. If a change of control were to occur, the maximum amount payable to certain officers and
key members of management would approximate $689,000.
19. VISA USA Shares
Stillwater National and other VISA USA member banks are obligated to share in costs resulting
from litigation against VISA USA, including the costs of the November 9, 2007 settlement of an
antitrust lawsuit brought by American Express and potential costs of certain other pending
litigation. In March 2008, Visa, Inc. (Visa)
completed an initial public offering. This transaction allowed Visa to place part of the cash
proceeds into an escrow account that will be utilized to pay litigation and settlement expenses.
Stillwater National previously estimated the settlement costs of such litigation and recorded its
proportionate share of that estimated liability, reduced by its proportionate share of the escrow
account established by Visa. In the second quarter of 2009, Visa announced another deposit into
the litigation escrow account. As a result of this funding, Stillwater National reduced their
estimated settlement costs by approximately $340,000. As of December 31, 2009, Stillwater National
has a payable
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of $6,000 recorded on the books based on our review of the outstanding litigation. This amount is
an estimate and further adjustments may be required.
As a result of Visas public offering in March 2008, Stillwater National recorded a gain of $1.2
million before tax expense for the redemption for cash of 29,212 shares of VISA USA shares owned by
Stillwater National and carried at a zero dollar basis. Stillwater National owns an additional
46,348 shares of Class B Visa stock carried at a zero dollar basis. These remaining shares will be
held in escrow by Visa until the later of the third anniversary of the public offering date or the
final resolution of the litigation discussed above.
20. Supplemental Cash Flow Information
For the Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Cash paid for interest |
$ | 55,535 | $ | 77,498 | $ | 86,407 | ||||||
Cash paid for taxes on income |
12,434 | 9,774 | 14,808 | |||||||||
Loans transferred to other real estate owned |
23,552 | 14,479 | 1,284 |
21. Operating Segments
Southwest operates six principal segments: Oklahoma Banking, Texas Banking, Kansas Banking,
Other States Banking, Secondary Market, and Other Operations. The Oklahoma Banking segment, Texas
Banking segment, and the Kansas Banking segment provide lending and deposit services to customers
in the states of Oklahoma, Texas, and Kansas. The Other States Banking segment provides lending
services to customers outside Oklahoma, Texas, and Kansas. The Secondary Market segment consists
of two operating units: one that provides student lending services to post-secondary students in
Oklahoma and several other states and the other that provides residential mortgage lending services
to customers in Oklahoma, Texas, and Kansas. Other Operations includes Southwests fund management
unit.
The primary purpose of the funds management unit is to manage Southwests overall liquidity needs
and interest rate risk. Each segment borrows funds from and provides funds to the funds management
unit as needed to support its operations. The value of funds provided to and the cost of funds
borrowed from the funds management unit by each segment are internally priced at rates that
approximate market rates for funds with similar duration. The yield curve used in the funds
transfer pricing curve is a blend of rates based on the volume usage of retail and brokered
certificates of deposit, capital market certificates of deposit, and Federal Home Loan Bank
advances.
The Other Operations segment also includes SNB Wealth Management, corporate investments, consulting
subsidiaries, and nonbank cash machine operations.
Southwest identifies reportable segments by type of service provided and geographic location.
Operating results are adjusted for borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of Southwest as described
in Note 1. Expenses for consolidated back-office operations are allocated to operating segments
based on estimated uses of those services. General overhead expenses such as executive
administration, accounting, and internal audit are allocated based on the direct expense and/or
deposit and loan volumes of the operating segment. Income tax expense for the operating segments
is calculated at statutory rates. The Other Operations segment records the tax expense or benefit
necessary to reconcile to the consolidated financial statements.
Portfolio loans are allocated based upon the state of the borrower, or the location of the real
estate in the case of real estate loans. Loans included in the Other State Banking segment are
portfolio loans attributable to thirty-seven states other than Oklahoma, Texas, or Kansas, and
primarily consist of healthcare and commercial real estate credits. These out of state loans are
administered by offices in Oklahoma, Texas, or Kansas.
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The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
Oklahoma | Texas | Kansas | Other States | Secondary | Other | Total | ||||||||||||||||||||||
(Dollars in thousands) | Banking | Banking | Banking** | Banking | Market | Operations* | Company | |||||||||||||||||||||
Net interest income |
$ | 44,651 | $ | 42,236 | $ | 14,518 | $ | 9,424 | $ | 1,139 | $ | (13,277 | ) | $ | 98,691 | |||||||||||||
Provision for loan losses |
7,977 | 12,838 | 8,053 | 10,308 | | | 39,176 | |||||||||||||||||||||
Noninterest income |
8,899 | 1,805 | 6,020 | 422 | 2,063 | 2,727 | 21,936 | |||||||||||||||||||||
Noninterest expenses |
25,993 | 13,877 | 11,918 | 2,146 | 3,439 | 3,485 | 60,858 | |||||||||||||||||||||
Income before taxes |
19,580 | 17,326 | 567 | (2,608 | ) | (237 | ) | (14,035 | ) | 20,593 | ||||||||||||||||||
Taxes on income |
7,420 | 6,604 | 143 | (990 | ) | (89 | ) | (5,477 | ) | 7,611 | ||||||||||||||||||
Net income |
$ | 12,160 | $ | 10,722 | $ | 424 | $ | (1,618 | ) | $ | (148 | ) | $ | (8,558 | ) | $ | 12,982 | |||||||||||
* | Includes externally generated revenue of $9.6 million, primarily from investing services, and an internally generated loss of $20.2 million from the funds management unit | |
** | Noninterest income includes the $3.3 million gain on acquisition previously described. |
Fixed asset expenditures |
$ | 2,290 | $ | 10 | $ | 2,419 | $ | | $ | | $ | 526 | $ | 5,245 | ||||||||||||||
Total loans at period end |
933,150 | 1,054,404 | 359,633 | 277,512 | 43,134 | | 2,667,833 | |||||||||||||||||||||
Total assets at period end |
950,355 | 1,044,324 | 441,114 | 275,653 | 45,148 | 351,697 | 3,108,291 | |||||||||||||||||||||
Total deposits at period
end |
1,640,839 | 160,064 | 283,506 | | 1,527 | 506,794 | 2,592,730 |
For the Year Ended December 31, 2008 | ||||||||||||||||||||||||||||
Oklahoma | Texas | Kansas | Other States | Secondary | Other | Total | ||||||||||||||||||||||
(Dollars in thousands) | Banking | Banking | Banking | Banking | Market | Operations * | Company | |||||||||||||||||||||
Net interest income |
$ | 48,218 | $ | 33,802 | $ | 9,090 | $ | 9,486 | $ | 1,392 | $ | (12,269 | ) | $ | 89,719 | |||||||||||||
Provision for loan losses |
5,359 | 7,615 | 4,396 | 1,609 | | | 18,979 | |||||||||||||||||||||
Noninterest income |
8,607 | 1,920 | 12 | 187 | 1,500 | 3,912 | 16,138 | |||||||||||||||||||||
Noninterest expenses |
30,794 | 15,731 | 6,261 | 3,281 | 3,132 | 3,289 | 62,488 | |||||||||||||||||||||
Income before taxes |
20,672 | 12,376 | (1,555 | ) | 4,783 | (240 | ) | (11,646 | ) | 24,390 | ||||||||||||||||||
Taxes on income |
8,167 | 4,825 | (433 | ) | 2,027 | (96 | ) | (5,001 | ) | 9,489 | ||||||||||||||||||
Net income |
$ | 12,505 | $ | 7,551 | $ | (1,122 | ) | $ | 2,756 | $ | (144 | ) | $ | (6,645 | ) | $ | 14,901 | |||||||||||
* | Includes externally generated revenue of $9.6 million, primarily from investing services, and an internally generated loss of $18.0 million from the funds management unit |
Fixed asset expenditures |
$ | 1,678 | $ | 765 | $ | 306 | $ | 29 | $ | | $ | 878 | $ | 3,656 | ||||||||||||||
Total loans at period end |
966,243 | 947,603 | 304,855 | 275,805 | 56,941 | | 2,551,447 | |||||||||||||||||||||
Total assets at period end |
984,298 | 945,907 | 310,503 | 272,599 | 61,149 | 305,306 | 2,879,762 | |||||||||||||||||||||
Total deposits at period
end |
1,394,008 | 133,745 | 146,182 | | 1,550 | 504,637 | 2,180,122 |
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For the Year Ended December 31, 2007 | ||||||||||||||||||||||||||||
Oklahoma | Texas | Kansas | Other States | Secondary | Other | Total | ||||||||||||||||||||||
(Dollars in thousands) | Banking | Banking | Banking | Banking | Market | Operations * | Company | |||||||||||||||||||||
Net interest income |
$ | 48,103 | $ | 26,711 | $ | 10,209 | $ | 6,850 | $ | 1,738 | $ | (1,014 | ) | $ | 92,597 | |||||||||||||
Provision for loan losses |
2,317 | 4,189 | 1,253 | 1,188 | | | 8,947 | |||||||||||||||||||||
Noninterest income |
9,505 | 1,616 | 181 | 119 | 3,403 | 1,609 | 16,433 | |||||||||||||||||||||
Noninterest expenses |
29,408 | 13,462 | 7,858 | 2,255 | 3,360 | 8,765 | 65,108 | |||||||||||||||||||||
Income before taxes |
25,883 | 10,676 | 1,279 | 3,526 | 1,781 | (8,170 | ) | 34,975 | ||||||||||||||||||||
Taxes on income |
9,946 | 4,126 | 420 | 1,363 | 684 | (2,942 | ) | 13,597 | ||||||||||||||||||||
Net income |
$ | 15,937 | $ | 6,550 | $ | 859 | $ | 2,163 | $ | 1,097 | $ | (5,228 | ) | $ | 21,378 | |||||||||||||
* | Includes externally generated revenue of $4.4 million, primarily from consulting services, and an internally generated loss of $3.8 million from the funds management unit |
Fixed asset expenditures |
$ | 1,169 | $ | 728 | $ | 545 | $ | | $ | 57 | $ | 788 | $ | 3,287 | ||||||||||||||
Total loans at period end |
876,085 | 759,389 | 282,846 | 227,237 | 66,275 | | 2,211,832 | |||||||||||||||||||||
Total assets at period end |
883,156 | 759,837 | 294,927 | 230,109 | 71,843 | 324,426 | 2,564,298 | |||||||||||||||||||||
Total deposits at period end |
1,278,954 | 127,053 | 120,754 | | 1,346 | 530,472 | 2,058,579 |
22. Parent Company Condensed Financial Information
Following are the condensed financial statements of Southwest Bancorp, Inc. (Parent Company
only) for the periods indicated:
At December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Statements of Financial Condition |
||||||||
Assets: |
||||||||
Cash and due from banks |
$ | 13,918 | $ | 48,086 | ||||
Investment in subsidiary banks |
361,748 | 338,454 | ||||||
Investments in other subsidiaries |
13,360 | 10,153 | ||||||
Investment securities, available for sale |
1,079 | 888 | ||||||
Other assets |
2,560 | 4,063 | ||||||
Total |
$ | 392,665 | $ | 401,644 | ||||
Liabilities: |
||||||||
Subordinated debentures |
$ | 81,963 | $ | 81,963 | ||||
Notes payable |
| 15,000 | ||||||
Other liabilities |
924 | 2,478 | ||||||
Shareholders Equity: |
||||||||
Preferred stock and related accounts |
67,037 | 66,392 | ||||||
Common stock and related accounts |
242,741 | 235,811 | ||||||
Total |
$ | 392,665 | $ | 401,644 | ||||
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For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Statements of Operations |
||||||||||||
Income: |
||||||||||||
Cash dividends from subsidiaries |
$ | 6,655 | $ | 2,149 | $ | 7,117 | ||||||
Noninterest income |
1,091 | 995 | | |||||||||
Investment income |
101 | (275 | ) | 389 | ||||||||
Total income |
7,847 | 2,869 | 7,506 | |||||||||
Expense: |
||||||||||||
Interest on subordinated debentures |
5,495 | 4,961 | 3,894 | |||||||||
Noninterest expense |
2,273 | 2,001 | 2,492 | |||||||||
Total expense |
7,768 | 6,962 | 6,386 | |||||||||
Total income (loss) before taxes and equity in
undistributed income of subsidiaries |
79 | (4,093 | ) | 1,120 | ||||||||
Taxes on income |
(2,440 | ) | (2,303 | ) | (2,036 | ) | ||||||
Income before equity in undistributed
income of subsidiaries |
2,519 | (1,790 | ) | 3,156 | ||||||||
Equity in undistributed income of subsidiaries |
10,463 | 16,691 | 18,222 | |||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Statements of Cash Flows |
||||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 12,982 | $ | 14,901 | $ | 21,378 | ||||||
Equity in undistributed income of subsidiaries |
(10,463 | ) | (16,691 | ) | (18,222 | ) | ||||||
Other, net |
1,301 | (2,548 | ) | 1,343 | ||||||||
Net cash provided by (used in) operating activities |
3,820 | (4,338 | ) | 4,499 | ||||||||
Investing activities: |
||||||||||||
Available for sale securities: |
||||||||||||
Purchases |
(156 | ) | (2 | ) | (35 | ) | ||||||
Sales / Maturities |
118 | 12,124 | 13,124 | |||||||||
Capital contribution to Banks |
(8,500 | ) | (77,000 | ) | (15,510 | ) | ||||||
Investment in/capital contribution to other subsidiaries |
(10,010 | ) | (1,070 | ) | | |||||||
Return of capital/advances from other subsidiaries |
100 | | 450 | |||||||||
Net cash used in investing activities |
(18,448 | ) | (65,948 | ) | (1,971 | ) | ||||||
Financing activities: |
||||||||||||
Net increase (decrease) in short-term borrowings |
(15,000 | ) | 12,500 | 2,500 | ||||||||
Net proceeds from issuance of common stock |
1,193 | 2,380 | 1,460 | |||||||||
Proceeds from issuance of subordinated debentures |
| 35,570 | | |||||||||
Proceeds from issuance of preferred stock |
| 70,000 | | |||||||||
Preferred stock dividend |
(3,940 | ) | (243 | ) | | |||||||
Common stock dividends |
(1,793 | ) | (5,219 | ) | (5,145 | ) | ||||||
Net cash provided by (used in) financing activities |
(19,540 | ) | 114,988 | (1,185 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
(34,168 | ) | 44,702 | 1,343 | ||||||||
Cash and
cash equivalents, Beginning of year |
48,086 | 3,384 | 2,041 | |||||||||
End of year |
$ | 13,918 | $ | 48,086 | $ | 3,384 | ||||||
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23. Selected Quarterly Financial Data (Unaudited)
For the Quarter Ended | ||||||||||||||||
(Dollars in thousands, except per share data) | 12-31-09 | 09-30-09 | 06-30-09 | 03-31-09 | ||||||||||||
Operations Data |
||||||||||||||||
Interest income |
$ | 38,789 | $ | 37,733 | $ | 38,091 | $ | 35,786 | ||||||||
Interest expense |
10,992 | 12,333 | 13,635 | 14,748 | ||||||||||||
Net interest income |
27,797 | 25,400 | 24,456 | 21,038 | ||||||||||||
Provision for loan losses |
10,640 | 10,177 | 7,477 | 10,882 | ||||||||||||
Gain on sales of securities and loans |
936 | 396 | 917 | 3,639 | ||||||||||||
Noninterest income |
3,552 | 3,314 | 6,344 | 2,838 | ||||||||||||
Noninterest expenses |
16,041 | 15,528 | 14,690 | 14,599 | ||||||||||||
Income before taxes |
5,604 | 3,405 | 9,550 | 2,034 | ||||||||||||
Taxes on income |
2,030 | 1,271 | 3,605 | 705 | ||||||||||||
Net income |
$ | 3,574 | $ | 2,134 | $ | 5,945 | $ | 1,329 | ||||||||
Per Share Data |
||||||||||||||||
Basic earnings per common share |
$ | 0.17 | $ | 0.07 | $ | 0.34 | $ | 0.02 | ||||||||
Diluted earnings per common share |
0.17 | 0.07 | 0.33 | 0.02 | ||||||||||||
Dividends declared per common share |
0.0238 | 0.0238 | 0.0238 | 0.0238 | ||||||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
14,706,718 | 14,649,061 | 14,586,025 | 14,555,058 | ||||||||||||
Diluted |
14,740,449 | 14,709,134 | 14,626,952 | 14,631,471 |
For the Quarter Ended | ||||||||||||||||
(Dollars in thousands, except per share data) | 12-31-08 | 09-30-08 | 06-30-08 | 03-31-08 | ||||||||||||
Operations Data |
||||||||||||||||
Interest income |
$ | 38,895 | $ | 40,994 | $ | 39,931 | $ | 42,974 | ||||||||
Interest expense |
16,481 | 17,806 | 17,647 | 21,141 | ||||||||||||
Net interest income |
22,414 | 23,188 | 22,284 | 21,833 | ||||||||||||
Provision for loan losses |
6,698 | 6,855 | 3,190 | 2,236 | ||||||||||||
Gain on sales of securities and loans |
324 | 551 | 606 | 2,085 | ||||||||||||
Noninterest income |
3,105 | 3,511 | 3,353 | 2,603 | ||||||||||||
Noninterest expenses |
13,793 | 16,533 | 16,332 | 15,830 | ||||||||||||
Income before taxes |
5,352 | 3,862 | 6,721 | 8,455 | ||||||||||||
Taxes on income |
2,127 | 1,556 | 2,559 | 3,247 | ||||||||||||
Net income |
$ | 3,225 | $ | 2,306 | $ | 4,162 | $ | 5,208 | ||||||||
Per Share Data |
||||||||||||||||
Basic earnings per common share |
$ | 0.21 | $ | 0.16 | $ | 0.29 | $ | 0.36 | ||||||||
Diluted earnings per common share |
0.20 | 0.16 | 0.28 | 0.36 | ||||||||||||
Dividends declared per common share |
0.0950 | 0.0950 | 0.0950 | 0.0950 | ||||||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
14,450,733 | 14,527,893 | 14,526,038 | 14,413,686 | ||||||||||||
Diluted |
14,673,616 | 14,676,082 | 14,680,262 | 14,608,190 |
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24. Accounting Standard Issued But Not Yet Adopted
New authoritative accounting guidance under ASC 860, Transfers and Servicing, amends prior
accounting guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks related to transferred
financial assets. The new guidance eliminates the concept of a qualifying special-purpose entity
(SPE) and changes the requirements for derecognizing financial assets. It also requires
additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC 860 is effective for Southwest on January 1, 2010 and
is not expected to have a significant impact on Southwests financial statements.
New authoritative accounting guidance under ASC 810, Consolidation, amends prior guidance to change
how a company determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a company
is required to consolidate an entity is based on, among other things, an entitys purposes and
design and a companys ability to direct the activities of the entity that most significantly
impact the entitys economic performance. The new guidance requires additional disclosures about
the reporting entitys involvement with variable-interest entities and any significant changes in
risk exposure due to that involvement, as well as its effect on the entitys financial statements.
The new authoritative accounting guidance under ASC 810 is effective for Southwest on January 1,
2010 and is not expected to have a significant impact on Southwests financial statements.
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OTHER
MATERIAL REQUIRED BY FORM 10-K
Business
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 Southwests 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) Small Business
Administration (SBA) guaranteed loans. 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. Insurance, benefit, and annuity products are offered through SNB Insurance Agency,
Inc., a wholly owned subsidiary of Stillwater National. Trust services, personal brokerage, and
credit cards are offered through relationships with independent institutions and Bank of Kansas.
Strategic Focus
Southwests 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
Southwests Sweep Agreements, SNB Digital Lockbox, and SNB DirectBanker® and other internet banking
products, which complement Southwests 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, Southwests
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 Southwests traditional areas of expertise: healthcare and health professionals, businesses and
their managers and owners, and commercial and commercial real estate lending and makes uses 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. We reduced our loan growth in 2009,
and have determined to reduce our concentration in commercial real estate loans. Southwests
strategic focus also includes careful expansion of our community banking operations.
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Organization
Southwests business operations are conducted through six operating segments that include
regional divisions, a
Secondary Market segment consisting of student lending and residential mortgage lending services,
and an other segment that includes funds management (investment portfolio and funding), SNB
Wealth Management, and nonbank cash machine operations. The organizational structure is designed
to facilitate high customer service, prompt response, efficiency, and appropriate, uniform credit
standards and other controls.
Banking Segments. The banking segments include Oklahoma Banking, which includes the
Stillwater division, the Central Oklahoma division based in Oklahoma City, and the Tulsa division;
Texas Banking, which includes the Dallas-Frisco division, the Dallas-Preston Center division, the
Austin division, and the San Antonio division; Kansas Banking, which includes the FNBA division,
the Hutchinson division, the Wichita division, and the Kansas City division. The Stillwater and
Hutchinson divisions serve their respective markets as full-service community banks emphasizing
both commercial and consumer lending. The other eight divisions pursue a more focused marketing
strategy, targeting managers, professionals, and businesses for lending, and offering more
specialized services. All of the regional divisions focus on commercial and consumer financial
services to local businesses and their senior employees and to other managers and professionals
living and working in Southwests market areas. Southwest has a high-service level philosophy.
Loan officers often meet at the customers home or place of business to close loans.
Oklahoma Banking Segment The Oklahoma Banking segment accounted for $12.2 million,
or 94%, of consolidated net income. Net income from this segment decreased $345,000, or 3%,
primarily as a result of increased provision for loan loss and decreased net interest income,
offset in part by decreased noninterest expenses. During 2009, total assets decreased $33.9
million, or 3%.
Texas Banking Segment The Texas Banking segment accounted for $10.7 million, or 83%,
of consolidated net income. Net income from this segment increased $3.2 million, or 42%, primarily
as a result of increased net interest income and decreased noninterest expenses, offset in part by
increased provision for loan loss and increased income taxes. During 2009, total assets increased
$98.4 million, or 10%.
Kansas Banking Segment The Kansas Banking segment accounted for $424,000, or 3% of
consolidated net income. Net income from this segment increased $1.5 million, or 138%, primarily
as a result of increased noninterest income, which includes the $3.3 million recognized gain on the
FDIC-assisted acquisition of FNBA, and increased net interest income, offset in part by increased
provision for loan losses and increased noninterest expenses. During 2009, total assets increased
$130.6 million, or 42%, primarily as a result of the acquisition of FNBA.
Other States Banking Segment The Other States Banking segment primarily consists of
healthcare and commercial real estate credits in thirty-seven states other than Oklahoma, Texas and
Kansas. The Other States Banking segment incurred a net loss of $1.6 million for the year. Net
income from this segment decreased $4.4 million, or 159%, primarily as a result of increased
provision for loan losses, offset in part by decreased noninterest expenses and decreased income
taxes. During 2009, total assets increased $3.1 million, or 1%.
Secondary Market Segment Southwest has a long history of student and residential
mortgage lending. These operations comprise the Secondary Market business segment. During 2009,
this segment incurred a loss of $148,000 and $16.0 million fewer year-end assets, primarily loans
held for sale. This decline in outstanding loans was the result of less student lending.
Southwest manages its mortgage and student lending operations through its home office. Southwest
markets its student lending program directly to financial aid directors at colleges and
universities. Southwest also originates first mortgage loans for sale to the Federal National
Mortgage Association (FNMA) or private investors. Servicing on these loans may be released in
connection with the sale.
Operation of the student lending portion of this segment is substantially dependent on Sallie Mae,
which provides substantially all of the servicing for government guaranteed and private student
loans and provides liquidity through its purchases of student loans and lines of credit. Southwest
makes government guaranteed student loans and private student loans. At December 31, 2009, all
private student loans were self-insured by Sallie Mae.
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Support and Control Functions. Support and control functions are centralized, although
each segment has support and control personnel. Costs of centrally managed support and control
functions other than funds management (which is included in the Other Operations segment) are
allocated to the Banking and Secondary Market segments. Southwests philosophy of customer service
extends to its support and control functions. Southwest manages and offers products that are
technology based, or that otherwise are more efficiently offered centrally
through its home office. These include products that are marketed through the regional offices,
such as Southwests internet banking product for commercial and retail customers (SNB
DirectBanker®), commercial information, and item processing services (SNB Digital Lockbox).
Southwests technology products are marketed to existing customers and to help develop new customer
relationships. Use of these products by customers enables Southwest to serve its customers more
effectively, use its resources more efficiently, and increase fee income.
For additional information regarding Southwests operating segments, please see Note 21 Operating
Segments to the Consolidated Financial Statements on page 67 of this report. The total of net
income of the segments discussed above is more than consolidated net income for 2009 due to income
allocated to the Other Operations segment, which provides funding and liquidity services to the
rest of the organization.
Banking Offices and Geographic Markets
Southwest intends to focus its efforts on markets with characteristics that will allow it to
capitalize on its strengths, and to continue establishing new offices in those markets. Southwest
considers acquisitions of other financial institutions and other companies, from time to time.
Southwest also extends loans to borrowers in Oklahoma, Texas, Kansas and other states through
participations with correspondent banks.
Southwest has twenty-four full-service banking offices, four located in Stillwater, Oklahoma, two
each located in the Oklahoma City and Tulsa, Oklahoma metropolitan areas, two each located in the
Dallas and San Antonio, Texas metropolitan areas, two each located in the Hutchinson area and
Wichita, Kansas, one each in Chickasha and Edmond, Oklahoma, Austin and Tilden, Texas, and Anthony,
Harper, Mayfield and Overland Park, Kansas. It also operates loan production offices in the Kansas
City, Kansas area, on the campus of the University of Oklahoma Health Sciences Center, and in
Houston, Texas. See Item 2 Properties on page 94 of this report. Southwest has developed and
continues to pursue a business strategy that does not rely on an extensive branch network.
National banks headquartered in Oklahoma now have broad powers to establish de novo branches
anywhere in Oklahoma or Texas, and Kansas chartered banks have broad powers to establish branches
in Kansas.
Competition
Southwest encounters competition in seeking deposits and in obtaining loan, cash management,
investment, and other customers. The level of competition for deposits is high. Southwests
principal competitors for deposits are other financial institutions, including other national
banks, state chartered banks, federal savings banks, and credit unions. Competition among these
institutions is based primarily on interest rates and other terms offered, service charges imposed
on deposit accounts, the quality of services rendered, and the convenience of banking facilities.
Additional competition for depositors funds comes from U.S. Government securities, private issuers
of debt obligations, and suppliers of other investment alternatives for depositors, such as
securities firms. Competition from credit unions has intensified as historic federal limits on
membership have been relaxed. Because federal law subsidizes credit unions by giving them a
general exemption from federal income taxes, credit unions have a significant cost advantage over
national banks, federal savings banks, and state banks, which are fully subject to federal income
taxes. Credit unions may use this advantage to offer rates that are more competitive than those
offered by national banks, federal savings banks, and state banks.
Southwest also competes in its lending activities with other financial institutions such as
securities firms, insurance companies, credit unions, small loan companies, finance companies,
mortgage companies, real estate investment trusts, and other sources of funds. Many of Southwests
nonbank competitors are not subject to the same extensive federal regulations that govern bank
holding companies and federally-insured banks. As a result, such nonbank competitors have
advantages over Southwest in providing certain services. A number of the financial institutions
with which Southwest competes in lending, deposit, investment, cash management, and other
activities are larger
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than Southwest or have a significantly larger market share. The Texas and
Kansas offices compete for loans, deposits, and other services against local and nationally based
financial institutions, many of which have much larger market shares and widespread office
networks. In recent periods, competition has increased in Southwests Oklahoma market areas as new
entrants and existing competitors have sought to more aggressively expand their loan and deposit
market share.
The business of mortgage banking is highly competitive. Southwest competes for loan originations
with other financial institutions, such as mortgage bankers, state and national banks, federal
savings banks, credit unions, and
insurance companies. Many of Southwests competitors have financial resources that are
substantially greater than those available to Southwest. Southwest competes principally by
providing competitive pricing by motivating its sales force through the payment of commissions on
loans originated and by providing high quality service to builders, borrowers, and realtors.
The Holding Company Act permits the Federal Reserve to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a commercial bank located in a state other than that holding
companys home state. The Federal Reserve may not approve the acquisition of a commercial bank
that has not been in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Holding Company Act also prohibits the Federal Reserve
from approving an application if the applicant (and its depository institution affiliates) controls
or would control more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target commercial banks home state or in any state in which the target commercial
bank maintains a branch. The Holding Company Act does not affect the authority of states to limit
the percentage of total insured deposits in the state which may be held or controlled by a
commercial bank or bank holding company to the extent such limitation does not discriminate against
out-of-state commercial banks or bank holding companies. The States of Oklahoma and Texas allow
out-of-state financial institutions to establish branches in their borders, subject to certain
limitations. Kansas imposes more significant branching limitations on out of state banks.
Regulation, Supervision, and Governmental Policy
Following is a brief summary of certain statutes and regulations that significantly affect
Southwest and its banking subsidiaries. A number of other statutes and regulations affect
Southwest and its subsidiaries but are not summarized below. Although Stillwater National and Bank
Kansas have different primary federal banking regulators, many of the rules that govern them are
substantially the same. Where practical, the rules for all banks are discussed together below.
For ease of reference the term banks is used below to include national and federal savings banks,
unless otherwise indicated. The term commercial banks includes nationally and state chartered
banks, but not federal savings associations or federal savings banks.
Bank Holding Company Regulation. Southwest is registered as a bank holding company under
the Holding Company Act and, as such, is subject to supervision and regulation by the Federal
Reserve. As a bank holding company, Southwest is required to furnish to the Federal Reserve annual
and quarterly reports of its operations and additional information and reports. Southwest is also
subject to regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior approval of the Federal
Reserve before (1) acquiring direct or indirect ownership or control of any class of voting
securities of any national or state bank or bank holding company if, after the acquisition, the
bank holding company would directly or indirectly own or control more than 5% of the class; (2)
acquiring all or substantially all of the assets of another national bank or bank holding company;
or (3) merging or consolidating with another bank holding company.
Under the Holding Company Act, any company must obtain approval of the Federal Reserve prior to
acquiring control of Southwest or its banking subsidiaries. For purposes of the Holding Company
Act, control is defined as ownership of more than 25% of any class of voting securities, the
ability to control the election of a majority of the directors, or the exercise of a controlling
influence over management or policies.
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The federal Change in Bank Control Act and the related regulations of the Federal Reserve require
any person or persons acting in concert (except for companies required to make application under
the Holding Company Act) to file a written notice with the Federal Reserve before the person or
persons acquire control of Southwest or its banking subsidiaries. The Change in Bank Control Act
defines control as the direct or indirect power to vote 25% or more of any class of voting
securities or to direct the management or policies of a bank holding company or an insured bank.
The Holding Company Act also limits the investments and activities of bank holding companies. In
general, a bank holding company is prohibited from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of a company that is not a commercial bank or a bank
holding company or from engaging directly or indirectly in activities other than those of banking,
managing, or controlling commercial banks, providing services for its subsidiaries, non-bank
activities that are closely related to banking and other financially related activities. The
activities of Southwest are subject to these legal and regulatory limitations under the Holding
Company Act and Federal Reserve regulations. Non-bank and financially related activities of bank
holding companies also may be subject to regulation and oversight by regulators other than the
Federal Reserve.
The Federal Reserve also has the power to order a holding company or its subsidiaries to terminate
any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that the continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness, or stability of any banking subsidiary of that
holding company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding
companies, which require bank holding companies to maintain specified minimum ratios of capital to
total assets and capital to risk-weighted assets. See Regulatory Capital Requirements on page 79
of this report.
The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions
constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal Reserves view
that a bank holding company should pay cash dividends only to the extent that the companys net
income for the past year is sufficient to cover both the cash dividends and a rate of earnings
retention that is consistent with the companys capital needs, asset quality, and overall financial
condition. Southwest has made informal commitments to the Federal Reserve which include providing
prior notice of the declaration and payment of dividends on trust preferred securities, preferred
stock issued under the Treasury Departments Capital Purchase Program, and common stock, and of
planned receipt of dividends from its banking subsidiaries.
National Bank Regulation. As a national bank, Stillwater National is subject to the
primary supervision of the Office of the Comptroller of the Currency (OCC) under the National
Bank Act. The prior approval of the OCC is required for a national bank to establish or relocate a
branch office or to engage in any merger, consolidation, or significant purchase or sale of assets.
The OCC regularly examines the operations and condition of Stillwater National including but not
limited to its capital adequacy, loans, allowance for loan losses, investments, liquidity, interest
rate risk, and management practices. These examinations are for the protection of Stillwater
Nationals depositors and the deposit insurance funds administered by the FDIC. In addition,
Stillwater National is required to furnish quarterly and annual reports to the OCC. The OCCs
enforcement authority includes the power to remove officers and directors and the authority to
issue cease-and-desist orders to prevent a national bank from engaging in unsafe or unsound
practices or violating laws or regulations governing its business.
No national bank may pay dividends from its paid-in capital. All dividends must be paid out of
current or retained net profits. The National Bank Act further restricts the payment of dividends
out of net profits by prohibiting a national bank from declaring a dividend on its shares of common
stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of a national banks net profits for the
preceding half year in the case of quarterly or semi-annual dividends, or the preceding two
half-year periods in the case of annual dividends, are transferred to the surplus fund.
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The approval of the OCC is required prior to the payment of a dividend if the total of all
dividends declared by a national bank in any calendar year would exceed the total of its net
profits for that year combined with its retained net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred stock. In addition,
Stillwater National is prohibited by federal statute from paying dividends or making any other
capital distribution that would cause Stillwater National to fail to meet its regulatory capital
requirements. Further, the OCC also has authority to prohibit the payment of dividends by a
national bank when it determines that their payment would be an unsafe and unsound banking
practice. In addition, the January 2010 agreement between Stillwater National and the OCC requires
prior OCC approval of dividends.
State Non-Member Bank Regulation. As a Kansas-chartered bank that is not a member of the
Federal Reserve System, Bank of Kansas is subject to the primary supervision of the FDIC and Kansas
state banking authorities. Prior regulatory approval is required for Bank of Kansas to establish
or relocate a branch office or to engage in any merger, consolidation, or significant purchase or
sale of assets.
The FDIC and Kansas banking authorities regularly examine the operations and condition of Bank of
Kansas, including but not limited to its capital adequacy, loans, allowance for loan losses,
investments, liquidity, interest rate risk, and management practices. These examinations are for
the protection of Bank of Kansas depositors and the deposit insurance funds administered by the
FDIC. In addition, Bank of Kansas is required to furnish quarterly and annual reports to the FDIC.
FDIC and Kansas enforcement authority includes the power to remove officers and directors and the
authority to issues cease-and-desist orders to prevent a state non-member bank from engaging in
unsafe or unsound practices or violating laws or regulations governing its business.
Kansas state non-member banks are subject to limitations on dividends and are prohibited by federal
statute from paying dividends or making any other capital distribution that would cause the banks
to fail to meet its regulatory capital requirements or when dividend payment would be an unsafe and
unsound banking practice.
Limits on Loans to One Borrower. National banks are subject to loan to one borrower
limits. With certain limited exceptions, loans and extensions of credit from national banks
outstanding to any borrower (including certain related entities of the borrower) at any one time
may not exceed 15% of the unimpaired capital and surplus of the institution. A national bank may
lend an additional amount, equal to 10% of unimpaired capital and surplus, if the loan is fully
secured by readily marketable collateral. Certain types of loans are exempted from the lending
limits, including loans secured by in-bank deposits. Kansas chartered banks are generally not
allowed to make loans to one borrower (including certain related entities of the borrower) at any
one time in excess of 25% of bank capital, with exceptions for certain cash and real estate
collateralized extensions of credit.
Transactions with Affiliates. Stillwater National and Bank of Kansas are subject to
restrictions imposed by federal law on extensions of credit to, and certain other transactions
with, Southwest and other affiliates and on investments in their stock or other securities. These
restrictions prevent Southwest and its nonbanking subsidiaries from borrowing from Stillwater
National or Bank of Kansas unless the loans are secured by specified collateral and require those
transactions to have terms comparable to terms of arms-length transactions with third persons. In
addition, secured loans and other transactions and investments by Stillwater National or Bank of
Kansas are generally limited in amount as to Southwest and as to any other affiliate to 10% of
Stillwater Nationals or Bank of Kansas capital and surplus and as to Southwest and all other
affiliates together to an aggregate of 20% of Stillwater Nationals or Bank of Kansas capital and
surplus. Certain exemptions to these limitations apply to extensions of credit by, and other
transactions between, Stillwater National or Bank of Kansas and Southwests other subsidiaries.
These regulations and restrictions may limit Southwests ability to obtain funds from Stillwater
National and Bank of Kansas for its cash needs, including funds for acquisitions and for payment of
dividends, interest, and operating expenses.
Real Estate Lending Guidelines. Under federal banking regulations, banks must adopt and
maintain written policies that establish appropriate limits and standards for extensions of credit
secured by liens or interests in real estate or are made for the purpose of financing permanent
improvements to real estate. These policies must establish loan portfolio diversification
standards; prudent underwriting standards, including loan-to-value limits, that are clear
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and measurable; loan administration procedures; and documentation, approval, and reporting
requirements. A banks real estate lending policy must reflect consideration of the Guidelines for
Real Estate Lending Policies (the Guidelines) adopted by the federal banking regulators. The
Guidelines, among other things, call for internal loan-to-value limits for real estate loans that
are not in excess of the limits specified in the Guidelines. The Guidelines state, however, that
it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios
in excess of the supervisory loan-to-value limits.
Federal Deposit Insurance. Southwests bank subsidiaries pay deposit insurance premiums
to the FDIC based on risk-based assessment rates. For additional information, see Managements
Discussion and Analysis FDIC and other insurance on page 16 of this report.
Regulatory Capital Requirements. The Federal Reserve, the OCC, and the FDIC, have
established guidelines for maintenance of appropriate levels of capital by bank holding companies,
national banks, state chartered banks, and federal savings banks, respectively. The regulations
impose two sets of capital adequacy requirements: minimum leverage rules, which require bank
holding companies and banks to maintain a specified minimum ratio of capital to total assets, and
risk-based capital rules, which require the maintenance of specified minimum ratios of capital to
risk-weighted assets.
Federal regulations require bank holding companies and banks to maintain a minimum leverage ratio
of Tier 1 capital (as defined in the risk-based capital guidelines discussed in the following
paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies and banks with composite examination ratings of 1 under the rating
system used by the federal banking regulators would be permitted to operate at or near this minimum
level of capital. All other bank holding companies and banks are expected to maintain a leverage
ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual
organizations capital adequacy by its primary regulator. A bank, or bank holding company,
experiencing or anticipating significant growth is expected to maintain capital well above the
minimum levels. In addition, the Federal Reserve has indicated that it also may consider the level
of an organizations ratio of tangible Tier 1 capital (after deducting all intangibles) to total
assets in making an overall assessment of capital.
The risk-based capital rules require bank holding companies and banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1)
requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of
common stockholders equity, certain perpetual preferred stock (noncumulative perpetual preferred
stock with respect to national banks), and minority interests in the equity accounts of
consolidated subsidiaries, less all intangible assets, except for certain mortgage servicing rights
and purchased credit card relationships. Supplementary capital elements include, subject to
certain limitations, the allowance for losses on loans and leases, perpetual preferred stock that
does not qualify as Tier 1 capital, long-term preferred stock with an original maturity of at least
20 years from issuance, hybrid capital instruments, including perpetual debt and mandatory
convertible securities, subordinated debt, intermediate-term preferred stock, and up to 45% of
pre-tax net unrealized gains on available for sale equity securities.
The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of
off-balance sheet obligations to one of four broad risk categories based principally on the degree
of credit risk associated with the obligor. The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50%, and 100%. These computations result in the total
risk-weighted assets. The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at
least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital
is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of
supplementary capital is limited. In addition, the risk-based capital regulations limit the
allowance for loan losses that may be included in capital to 1.25% of total risk-weighted
assets.
The federal banking regulatory agencies have established a joint policy regarding the
evaluation of banks capital adequacy for interest rate risk. Under the policy, the assessment
of a banks capital adequacy includes an assessment
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of exposure to adverse changes in interest rates.
Management believes its interest rate risk management systems and its capital relative to its
interest rate risk are adequate.
Federal banking regulations also require banks with significant trading assets or liabilities to
maintain supplemental risk-based capital based upon their levels of market risk. Stillwater
National and Bank of Kansas did not have any trading assets or liabilities during 2009, 2008, and
2007 and were not required to maintain such supplemental capital.
The federal banking regulators have established regulations that classify banks by capital levels
and provide for various prompt corrective actions to resolve the problems of any bank that fails
to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is
not subject to any regulatory order or directive to meet any specific capital level and that has a
total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and
a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a total risk-based
capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4%
or (ii) 3% if the bank has the highest composite examination rating. A bank that does not meet
these standards is categorized as undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A bank that falls within any of the three
undercapitalized categories established by the prompt corrective action regulation is subject to
severe regulatory sanctions. As of December 31, 2009, Stillwater National and Bank of Kansas were
well-capitalized as defined in applicable banking regulations. Stillwater National has informally
agreed with the OCC to maintain a Tier I leverage ratio of at least 8.5% and a total capital ratio
of at least 12.5%. At December 31, 2009, Stillwater Nationals ratios substantially exceeded the
committed minimums. For information regarding Southwests, Stillwater Nationals, and
Bank of Kansas compliance with their respective regulatory capital requirements, see Managements
Discussion and Analysis Capital Resources on page 22 of this report, Managements Discussion
and Analysis Certain Regulatory Matters on page 27 of this report, and in the Notes to
Consolidated Financial Statements in this report, Note 10 Subordinated Debentures on page 56 and
Note 13 Capital Requirements & Regulatory Matters on pages 61 through 62.
Brokered Deposits. Well-capitalized institutions are not subject to limitations on
brokered deposits, while an adequately capitalized institution is able to accept, renew, or
rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on
the yield paid on such deposits. Undercapitalized institutions are not permitted to accept
brokered deposits. Stillwater National and Bank of Kansas are each eligible to accept brokered
deposits as a result of their capital levels. Stillwater National regularly makes use of brokered
deposits. Bank of Kansas has not used brokered deposits but may do so in the future when
management deems it appropriate from an asset/liability management perspective. Stillwater
National has agreed to obtain OCC approval before increasing its use of brokered deposits.
Stillwater National has reduced its reliance on brokered deposits and other non-core funding
sources, and does not anticipate any increase in the usage of brokered deposits.
Supervision and Regulation of Mortgage Banking Operations. Southwests mortgage banking
business is subject to the rules and regulations of the U.S. Department of Housing and Urban
Development (HUD), the Federal Housing Administration (FHA), the Veterans Administration
(VA), and FNMA with respect to originating, processing, selling, and servicing mortgage loans.
Those rules and regulations, among other things, prohibit discrimination and establish underwriting
guidelines, which include provisions for inspections, and appraisals, require credit reports on
prospective borrowers, and fix maximum loan amounts. Lenders such as Southwest are required
annually to submit financial statements to FNMA, FHA, and VA, and each regulatory entity has its
own financial requirements. Southwests affairs are also subject to examination by the Federal
Reserve, FNMA, FHA, and VA at all times to assure compliance with the applicable regulations,
policies, and procedures. Mortgage origination activities are subject to, among others, the Equal
Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Home Mortgage Disclosure
Act, Fair Credit Reporting Act, the National Flood Insurance Act, and the Real Estate Settlement
Procedures Act, and related regulations that prohibit discrimination and require the disclosure of
certain basic information to mortgagors concerning credit terms and settlement costs. Southwests
mortgage banking operations also are affected by various state and local laws and regulations and
the requirements of various private mortgage investors.
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Community Reinvestment. Under the Community Reinvestment Act (CRA), a financial
institution has a continuing and affirmative obligation to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions or limit an institutions discretion to
develop the types of products and services that it believes are best suited to its particular
community. However, institutions are rated on their performance in meeting the needs of their
communities. Performance is tested in three areas: (a) lending, to evaluate the institutions
record of making loans in its assessment areas; (b) investment, to evaluate the institutions
record of investing in community development projects, affordable housing, and programs benefiting
low- or moderate-income individuals and businesses; and (c) service, to evaluate the institutions
delivery of services through its branches, ATMs and other offices. The CRA requires each federal
banking agency, in connection with its examination of a financial institution, to assess and assign
one of four ratings to the institutions record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by the institution,
including applications for charters, branches, and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding
company acquisitions. The CRA also requires that all institutions make public disclosure of their
CRA ratings. Stillwater National and Bank of Kansas were all assigned a satisfactory rating as a
result of their last CRA examination.
Bank Secrecy Act. Under the Bank Secrecy Act (BSA), a financial institution is
required to have systems in place to detect certain transactions based on the size and nature of
the transaction. Financial institutions are generally required to report cash transactions
involving more than $10,000 to the United States Treasury. In addition, financial institutions are
required to file suspicious activity reports for transactions that involve more than $5,000 and
which the financial institution knows, suspects, or has reason to suspect involves illegal funds,
is designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act, commonly referred to as the USA PATRIOT
Act or the Patriot Act, enacted in response to the September 11, 2001 terrorist attacks, enacted
prohibitions against specified financial transactions and account relationships, as well as
enhanced due diligence standards intended to prevent the use of the United States financial system
for money laundering and terrorist financing activities. The Patriot Act requires banks and other
depository institutions, brokers, dealers and certain other businesses involved in the transfer of
money to establish anti-money laundering programs, including employee training and independent
audit requirements meeting minimum standards specified by the act, to follow standards for customer
identification and maintenance of customer identification records, and to compare customer lists
against lists of suspected terrorists, terrorist organizations, and money launderers. The Patriot
Act also requires federal bank regulators to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve a proposed bank acquisition.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley)
established a broad range of corporate governance and accounting measures intended to increase
corporate responsibility and protect investors by improving the accuracy and reliability of
disclosures under federal securities laws. Southwest is subject to Sarbanes-Oxley because it is
required to file periodic reports with the SEC under the Securities and Exchange Act of 1934.
Among other things, Sarbanes-Oxley, its implementing regulations, and related NASDAQ Stock Market
rules have established new membership requirements and additional responsibilities for Southwests
audit committee, imposed restrictions on the relationship between Southwest and its outside
auditors (including restrictions on the types of non-audit services auditors may provide to their
clients), imposed additional financial statement certification responsibilities for Southwests
Chief Executive Officer and Chief Financial Officer, expanded the disclosure requirements for
corporate insiders, required management to evaluate Southwests disclosure controls and procedures
and its internal control over financial reporting, and required Southwests auditors to issue a
report on Southwests internal control over financial reporting.
Capital Purchase Program. Southwest sold securities to the United States Treasury in the
Treasurys Capital Purchase Program, or CPP. The CPP is a voluntary program which offered
qualifying banks and bank holding companies to sell preferred securities and warrants to the
Treasury. The same terms applied to all public company participants in the plan. The CPP provided
an alternative source of capital funds to support growth and for other purposes at a time when the
public market for banks securities were weak due to economic uncertainties affecting the whole
banking sector. The purpose of the CPP was to stabilize financial markets by providing capital to
healthy
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institutions and increase the flow of credit to businesses and consumers. For a
description of CPP securities and their terms, see Note 11 Shareholders Equity to the
Consolidated Financial Statements on page 59.
Under the Emergency Economic Stabilization Act of 2008 as amended by the American Recovery and
Reinvestment Act of 2009 participants in the CPP and certain of their officers are subject to
special requirements during the time that Treasury continues to hold their preferred securities,
warrants, or common stock issued upon exercise of the warrants. These include prohibitions of:
incentive compensation payments payable in cash or stock options to covered officers; incentive
compensation paid in stock, except for grants of restricted stock that may not fully vest until
after none of Southwests CPP preferred shares remain outstanding, and are limited in value to 1/3
of total compensation per covered officer; incentives that would cause a covered officer to take
unnecessary and excessive risks that threaten the value of Southwest; payments to a covered officer
triggered by his or her departure from employment, other than payments for services performed and
accrued benefits; and payments of tax-gross ups, which are reimbursements to cover taxes owed by
officers with respect to any compensation.
The incentive compensation restrictions apply to the five most highly compensated employees at
Southwest. The severance payment restrictions apply to the Named Executive Officers and the next
five most highly compensated officers. Some of the additional provisions of the Recovery Act may
apply to additional officers at Southwest.
Covered officers also are required to return any bonus or incentive compensation they receive that
was based upon statements of earnings, revenues, gains, or other criteria that are later found to
be materially inaccurate.
Companies with outstanding CPP preferred securities also are required to: provide shareholders with
an opportunity to cast nonbinding advisory votes on executive compensation; establish independent
compensation committees; establish policies regarding excessive luxury expenditures; and provide
certifications of compliance with these requirements.
Temporary Liquidity Guarantee Program. Southwests bank subsidiaries participate in the
FDICs voluntary Temporary Liquidity Guarantee Program (TLGP), which was established in November
2008. Under the TLGP the FDIC will (i) guarantee, through the earlier maturity or June 30, 2012,
newly issued senior unsecured debt issued by participating institutions on or after October 14,
2008, and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for
non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (NOW) accounts
paying less than 0.5% interest per annum, and Interest and Lawyers Trust Accounts held at
participating FDIC insured institutions through June 30, 2010.
Other Laws and Regulations. Some of the aspects of the lending and deposit business of
Stillwater National and Bank of Kansas that are subject to regulation by the Federal Reserve and
the FDIC include reserve requirements and disclosure requirements in connection with personal and
mortgage loans and deposit accounts. Stillwater Nationals federal student lending activities are
subject to regulation and examination by the United States Department of Education. In addition,
Stillwater National and Bank of Kansas are subject to numerous federal and state laws and
regulations that include specific restrictions and procedural requirements with respect to the
establishment of branches, investments, interest rates on loans, credit practices, the disclosure
of credit terms, and discrimination in credit transactions.
Enforcement Actions. Federal statutes and regulations provide financial institution
regulatory agencies with great flexibility to undertake an enforcement action against an
institution that fails to comply with regulatory requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to civil money penalties,
cease-and-desist orders, receivership, conservatorship, or the termination of deposit insurance.
Employees
As of December 31, 2009, Southwest employed 466 persons on a full-time equivalent basis,
including executive officers, loan, and other banking officers, branch personnel, and others. No
employees of Southwest or any of its consolidated subsidiaries are represented by a union or
covered under a collective bargaining agreement. Management of Southwest considers their employee
relations to be excellent.
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Board of Directors of Southwest Bancorp, Inc. and Stillwater National Bank & Trust Company
Robert B. Rodgers, Chairman of the Board
|
President, Bob Rodgers Motor Company | |
Rick Green, Vice Chairman of the Board
|
President and Chief Executive Officer Southwest and Stillwater National |
|
James E. Berry II
|
Owner, Shading Concepts | |
Tom D. Berry
|
Auctioneer, Real Estate Broker, Oil & Gas Exploration | |
Joe Berry Cannon
|
Assistant Professor of Management, Oral Roberts University School of Business |
|
John Cohlmia
|
Real Estate Broker, Grubb & Ellis/Levy Beffort | |
David S. Crockett Jr., CPA
|
Owner, David S. Crockett & Co., CPAs | |
J. Berry Harrison
|
Oklahoma State Senator (retired) and Rancher | |
James M. Johnson
|
Self-employed Small Business Owner | |
David P. Lambert
|
Chairman of the Board, Lambert Construction Company | |
Linford R. Pitts
|
President, Stillwater Transfer & Storage, Inc. | |
Russell W. Teubner
|
Founder and Chief Executive Officer, HostBridge Technology |
|
Board of Directors of Bank of Kansas |
||
Robert B. Rodgers, Chairman of the Board
|
President, Bob Rodgers Motor Company | |
Rick Green, Vice Chairman of the Board
|
President and Chief Executive Officer Southwest and Stillwater National |
|
Patrick L. Gearhart
|
President, Wichita Division of Bank of Kansas | |
Jerry Lanier
|
President and Chief Executive Officer, Bank of Kansas; Executive Vice President and Chief Lending Officer of Stillwater National |
|
David Lesperance
|
President, Hutchinson Division of Bank of Kansas | |
Anthony W. Martin
|
Retired Dentist | |
David W. Pitts
|
Executive Vice President and Regional Director, Bank of Kansas; Senior Vice President of Stillwater National | |
Douglas J. Watts
|
President, Kansas City Division of Stillwater National |
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Executive Officers
The following table sets forth information regarding the executive officers of Southwest,
Stillwater National, and Bank of Kansas who are not directors of Southwest.
Name | Age | Position | ||||
Priscilla Barnes
|
53 | Executive Vice President, Director of Human Resources and Compliance of Stillwater National and Bank of Kansas | ||||
Kerby E. Crowell
|
60 | Executive Vice President, Chief Financial Officer, and Secretary of Southwest and Stillwater National; Executive Vice President, Chief Financial Officer, Cashier, and Secretary of Bank of Kansas | ||||
David Dietz
|
54 | Executive Vice President and Chief Information Officer of Stillwater National and Bank of Kansas | ||||
Steven M. Gobel
|
58 | Executive Vice President, Chief Accounting and Controls Officer and Associate Chief Financial Officer of Southwest and Stillwater National; Executive Vice President, Chief Accounting Officer and Assistant Secretary of Bank of Kansas | ||||
Jerry L. Lanier
|
61 | Executive Vice President and Chief Lending Officer of Stillwater National; President and Chief Executive Officer of Bank of Kansas | ||||
David W. Pitts
|
49 | Executive Vice President and Regional Director, Bank of Kansas; Senior Vice President of Stillwater National | ||||
Laura Robertson
|
36 | Senior Vice President, Public Company Reporting and Tax Manager of Southwest and Stillwater National | ||||
Kimberly G. Sinclair
|
54 | Executive Vice President and Chief Administrative Officer of Stillwater National and Bank of Kansas | ||||
Charles H. Westerheide
|
61 | Executive Vice President and Treasurer of Southwest, Stillwater National and Bank of Kansas |
The principal occupations and business experience of each executive officer of Southwest,
Stillwater National, and Bank of Kansas are shown below.
Priscilla Barnes was named Executive Vice President, Director of Human Resources and Compliance in
July 2009. Ms. Barnes has 30 years experience in the banking industry, joining Stillwater National
Bank in 2005 as Vice President, Compliance. Prior to joining Stillwater National Bank, Ms. Barnes
was a federal bank examiner, a senior consultant for a regional accounting firm, and served as a
banker in many similar capacities. She was named an Oklahoma State University Regents
Distinguished Scholar and attended the Graduate School of Banking in Madison, Wisconsin.
Kerby E. Crowell joined Stillwater in 1969; has served as Executive Vice President and Chief
Financial Officer of Southwest and Stillwater National since 1986; became Secretary of Southwest
and Stillwater National in 2000; and was named Secretary of Bank of Kansas in 2007. He is a
current member of the Independent Community Bankers Associations (ICBA) Large Community Bank
Council. Mr. Crowell is a past Board member of MetaFund Corporation (an Oklahoma Community
Development Financial Institution) and the Oklahoma City Chapter of the Financial Executives
Institute. In addition, he is a past Board member of ICBAs Credit Card Subsidiary. Mr. Crowell
is also past President of the Oklahoma City Chapter of the Financial Executives Institute, and has
served
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on the Federal Reserves Industry Advisory Group on Electronic Check Presentment. In 1996,
Mr. Crowell was recognized by the Oklahoma Society of Certified Public Accountants as the
Outstanding Certified Public Accountant in Business and Industry.
David Dietz was appointed Executive Vice President of Stillwater National in February 2007. Mr.
Dietz has 30 years of banking experience. He has been with Stillwater National since 1997 and
serves as the companys Chief Information Officer. Prior to joining Stillwater National, Mr. Dietz
served as S.V.P. and Cashier of First National Bank & Trust Company of Ponca City, Oklahoma. He is
a graduate of the University of Oklahoma. Mr. Dietz is active in the First United Methodist Church
of Pawnee, Oklahoma, and is on the alumni board of the Oklahoma State University chapter of the
Kappa Sigma fraternity.
Steven M. Gobel serves as Executive Vice President, Chief Accounting and Controls Officer, and
Associate Chief Financial Officer of Southwest and Stillwater National. From 1990 until joining
Stillwater National in September 2000, Mr. Gobel served as Senior Vice President of Finance and in
other positions with Bank of America and predecessor institutions in Oklahoma and Kansas (previous
institutions included NationsBank, Boatmens Bank of St. Louis, Bank IV of Wichita, Kansas, and
Fourth National Bank of Tulsa). From 1987 to 1990, Mr. Gobel served as a Vice President and
Manager of Financial Reporting and Financial Planning for Sooner Federal Savings and Loan of
Oklahoma. He is a Certified Public Accountant and prior to 1987 spent twelve years working for
international public accounting firms (previously Touche Ross and Coopers & Lybrand) in Tulsa,
Oklahoma, New York City, New York, and Milwaukee, Wisconsin.
Jerry L. Lanier was appointed Chief Executive Officer of Bank of Kansas in December 2008 and
Executive Vice President and Chief Lending Officer of Stillwater National in 2001. Mr. Lanier
previously served as Executive Vice President-Credit Administration beginning in December 1999,
supervising this area company-wide, and from January 1998 to December 1999, served as Senior Vice
President in Credit Administration. From 1992 until joining Stillwater National in 1998, Mr.
Lanier was a consultant specializing in loan review. During this same period he also served as
court-appointed receiver for a number of Oklahoma-based insurance companies. From 1982-1992, Mr.
Lanier served as President of American National Bank and Trust Co. of Shawnee, Oklahoma including
service as Chief Executive Officer from 1987-1992. From 1970-1981, he was a National Bank Examiner
for the Office of the Comptroller of the Currency in Oklahoma City, Oklahoma and Dallas, Texas,
and, while an examiner, served as Regional Director of Special Surveillance from 1979 to 1981. Mr.
Lanier has served as United Way Drive Chairman and President; Chairman of the Shawnee Advisory
Board of Oklahoma Baptist University; Director of the Shawnee Chamber of Commerce; Director and
Chairman of the Youth and Family Resource Center; and President and Trustee of the Shawnee
Educational Foundation.
Laura Robertson joined Stillwater National in April 2006. She has served as the Public Company
Reporting and Tax Manager since late 2006 and became an officer and assistant secretary of
Southwest in 2006. Prior to joining Stillwater National, Ms. Robertson practiced public accounting
in the Dallas, Texas metro area. She is a Certified Public Accountant and a member of both the
Oklahoma and Texas Society of CPAs as well as the American Institute of Certified Public
Accountants. Ms. Robertson currently serves on the Board of Directors for Payne County Court
Appointed Special Advocates.
Kimberly G. Sinclair was appointed Chief Administrative Officer in 1995 and has been Executive Vice
President of Stillwater National since 1991. Prior to 1991, she had been Senior Vice President and
Chief Operations Officer of Stillwater National since 1985. Ms. Sinclair joined Stillwater
National in 1975. She is a member of the Stillwater Junior Service Sustainers and just completed a
six year term on the Executive Board of Directors for the Stillwater United Way, where she chaired
the 2005 and 2006 Day of Caring, as well as the Leaders Society. She is past Treasurer of the
Board of Trustees of the Stillwater Public Education Foundation and a graduate of the Leadership
Stillwater Class IX. She has been an Ambassador with the Stillwater Chamber of Commerce and active
with various organizations throughout Stillwater.
Charles H. Westerheide was appointed Executive Vice President and Treasurer of Stillwater National
in 2000. Prior to that, he served as Senior Vice President and Treasury Manager. He joined
Stillwater National in 1997, coming from Bank of America (previously Bank IV and NationsBank),
Wichita, Kansas, where he served as
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Treasury/Funding Manager. Prior to joining BankIV, Mr.
Westerheide served as Executive Vice President and Chief Financial Officer of Security Bank and
Trust Co., Ponca City, Oklahoma. Mr. Westerheide has held a number of community leadership
positions including Chairman of the Ponca City Chamber of Commerce, President of the Ponca City
Foundation for Progress, Inc., and a director and officer of numerous community foundations and
clubs. Mr. Westerheide is a graduate of Leadership Oklahoma, Class II.
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RISK FACTORS
Investing in our common stock involves risks. You should carefully consider the following
risk factors before you decide to make an investment decision regarding our stock. The risk
factors may cause our future earnings to be lower or our financial condition to be less favorable
than we expect. In addition, other risks of which we are not aware, or which we do not believe are
material, may cause earnings to be lower or may hurt our financial condition. You should also
consider the other information in this Annual Report on Form 10-K, as well as in the documents
incorporated by reference into it.
Difficult and unsettled market conditions have affected our profits and loan quality and may
continue to do so for an unknown period.
The decrease in our earnings for 2009 is linked to current market conditions that have
required increases in our allowance for loan losses. We expect unsettled conditions to continue,
and that they may increase the likelihood and the severity of adverse effects discussed in the
following risk factors. In particular:
| There may be less demand for our products and services. | ||
| Competition in our industry could intensify as a result of increased consolidation of the banking industry. | ||
| It may become more difficult to estimate losses inherent in our loan portfolio. | ||
| Loan delinquencies and problem assets may increase. | ||
| Collateral for loans may decline in value, increasing loan to value ratios and reducing our customers borrowing power and the security for our loans. | ||
| Deposits and borrowings may become even more expensive relative to yields on loans and securities, further reducing our net interest margin, and making it more difficult to maintain adequate sources of liquidity. | ||
| Asset based liquidity, which depends upon the marketability of assets such as student loans and mortgages, may be reduced. | ||
| Weak market conditions for banking industry securities may make it unattractive or impractical to raise funds through equity offerings. | ||
| Compliance with new banking regulations enacted in connection with stimulus legislation may increase our costs, limit our ability to pursue business opportunities, and impair our ability to hire and retain talented managers. |
Changes in interest rates and other factors beyond our control may adversely affect our
earnings and financial condition.
Our net income depends to a great extent upon the level of our net interest income. Changes
in interest rates can increase or decrease net interest income and net income. Net interest income
is the difference between the interest income we earn on loans, investments, and other
interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits
and borrowings. Net interest income is affected by changes in market interest rates, because
different types of assets and liabilities may react differently, and at different times, to market
interest rate changes. When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase in market rates of interest could reduce net
interest income. Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond our control, including
inflation, unemployment, money supply, international events, and events in world financial markets.
We attempt to manage our risk from changes in market interest rates by adjusting the rates,
maturity, repricing, and balances of the different types of interest-earning assets and
interest-bearing liabilities, but interest rate risk management techniques are not exact. As a
result, a rapid increase or decrease in interest rates could have an adverse effect on our net
interest margin and results of operations. Changes in the market interest rates for types of
products and services in our various markets also may vary significantly from location to location
and over time based upon
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competition and local or regional economic factors. The results of our interest rate sensitivity
simulation model depend upon a number of assumptions which may not prove to be accurate. There can
be no assurance that we will be able to successfully manage our interest rate risk.
Changes in local economic conditions could adversely affect our business.
Our commercial and commercial real estate lending operations are concentrated in the
metropolitan areas of Oklahoma City, Stillwater, Edmond, and Tulsa, Oklahoma; Dallas, Austin, San
Antonio and Houston, Texas; and Hutchinson, Wichita and Kansas City, Kansas. Our success depends
in part upon economic conditions in these markets. Adverse changes in economic conditions in these
markets could reduce our growth in loans and deposits, impair our ability to collect our loans,
increase our problem loans and charge-offs and otherwise negatively affect our performance and
financial condition.
Adverse changes in healthcare-related businesses could lead to slower loan growth and higher
levels of problem loans and charge-offs.
We have a substantial amount of loans to individuals and businesses involved in the healthcare
industry, including business and personal loans to physicians, dentists, and other healthcare
professionals, and loans to for-profit hospitals, nursing homes, suppliers and other
healthcare-related businesses. Our strategy calls for continued growth in healthcare lending.
This concentration exposes us to the risk that adverse developments in the healthcare industry
could hurt our profitability and financial condition as a result of increased levels of
nonperforming loans and charge-offs and reduced loan demand and deposit growth.
Our allowance for loan losses may not be adequate to cover our actual loan losses, which could
adversely affect our earnings.
We maintain an allowance for loan losses in an amount which we believe is appropriate to
provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality
and to identify loans that may become nonperforming, at any time there are loans included in the
portfolio that will result in losses but that have not been identified as nonperforming or
potential problem loans. We cannot be sure that we will be able to identify deteriorating loans
before they become nonperforming assets or that we will be able to limit losses on those loans that
are identified. As a result, future additions to the allowance may be necessary. Additionally,
future additions may be required based on changes in the loans comprising the portfolio and changes
in the financial condition of borrowers, such as may result from changes in economic conditions or
as a result of incorrect assumptions by management in determining the allowance. Additionally,
federal banking regulators, as an integral part of their supervisory function, periodically review
our allowance for loan losses. These regulatory agencies may require us to increase our provision
for loan losses or to recognize further loan charge-offs based upon their judgments, which may be
different from ours. Any increase in the allowance for loan losses could have a negative effect on
our financial condition and results of operations.
Our loan portfolio contains a high percentage of commercial and commercial real estate loans in
relation to our total loans and total assets. Commercial and commercial real estate loans
generally are viewed as having more risk of default than residential real estate loans or other
loans or investments. These types of loans also typically are larger than residential real estate
loans and other consumer loans. Because the loan portfolio contains a significant number of
commercial and commercial real estate loans with relatively large balances, the deterioration of
one or a few of these loans may cause a significant increase in nonperforming assets. An increase
in nonperforming loans could result in: a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact
on our results of operations and financial condition.
Unseasoned loans may increase the risk of credit defaults in the future.
Due to our rapid growth over the past several years, a large portion of the loans in our loan
portfolio and of our lending relationships is of relatively recent origin. In general, loans do
not begin to show signs of credit deterioration or default until they have been outstanding for
some period of time, a process referred to as seasoning. As a result,
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a portfolio of older loans may behave more predictably than a newer portfolio. Because a
significant portion of our loan portfolio is relatively new, the current level of delinquencies and
defaults may not be representative of the level that will prevail when the portfolio becomes more
seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may
be required to increase our provision for loan losses, which would adversely affect our results of
operations and financial condition.
We use wholesale funding sources to supplement our core deposits, which exposes us to
liquidity risk and potential earnings volatility or other adverse effects if we are unable to
secure adequate funding.
We rely on wholesale funding, including FHLB borrowings, federal funds purchased, and brokered
deposits, to supplement core deposits to fund our business. At December 31, 2009, these wholesale
funding sources constituted approximately 15% of our total deposits and other borrowings and
brokered deposits constituted approximately 20% of our total deposits and other borrowings.
Wholesale funding sources are affected by general market conditions and the condition and
performance of the borrower, and the availability of funding from wholesale lenders may be
dependent on the confidence these investors have in our operations. In addition, our agreement
with the OCC requires Stillwater National to obtain prior approval for any increases in brokered
deposits. The continued availability to us of these funding sources cannot be assured, and we may
find it difficult to retain or replace them at attractive rates as they mature. Our liquidity will
be constrained if we are unable to renew our wholesale funding sources or if adequate financing is
not available to us in the future at acceptable rates of interest or at all. We may not have
sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other
assets unexpectedly in order to repay obligations as they mature. If we do not have adequate
sources of liquidity at attractive rates, we may have to restrain the growth of assets or reduce
our asset size, which may adversely affect shareholder value.
Government regulation significantly affects our business.
The banking industry is heavily regulated. Banking regulations are primarily intended to
protect the federal deposit insurance funds and depositors, not shareholders. Stillwater National
is subject to regulation and supervision by the OCC. Bank of Kansas is subject to regulation and
supervision by the FDIC and Kansas Banking authorities. Southwest is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System. The burden imposed by federal
and state regulations puts banks at a competitive disadvantage compared to less regulated
competitors such as finance companies, mortgage banking companies and leasing companies.
Changes in the laws, regulations, and regulatory practices affecting the banking industry may limit
our ability to increase or assess fees for services provided, increase our costs of doing business
or otherwise adversely affect us and create competitive advantages for others. Regulations
affecting banks and financial services companies undergo continuous change, and we cannot predict
the ultimate effect of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may also affect our
ability to attract deposits and other funding sources, make loans and investments, and achieve
satisfactory interest spreads. The FDIC may continue to raise our deposit insurance costs by
increasing regular assessment rates and levying special assessments, which may in the future
significantly and adversely affect our net income.
Our ability to pay dividends is limited by law, contract, and banking agency discretion.
Our ability to pay dividends to our shareholders in the past and over the long term largely depends
on Southwests receipt of dividends from Stillwater National. Bank of Kansas does not currently pay
dividends. The amount of dividends that Stillwater National may pay to Southwest is limited by
federal laws and regulations. In addition, the agreement entered into by Stillwater National
requires prior approval of the OCC for any dividend by Stillwater National, and Southwest has
informally committed to consult with the Federal Reserve Bank of Kansas City prior to declaring or
paying any dividend, including interest payments on subordinated debentures, or receiving any
dividend from Stillwater National or Bank of Kansas. We also have informally committed to submit
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any planned borrowing by the holding company for approval. Federal Reserve dividend policies state
that funds should not be borrowed to pay dividends. We have no plans for any additional holding
company borrowings. The Federal Reserve could, at any time, prevent Southwest from paying some or
all dividends. Such a decision could result in reputation risk to Southwest and could adversely
affect its borrowing costs and liquidity.
We are prohibited from paying dividends on our common stock if the required payments on our
preferred stock and subordinated debentures have not been made. We also may decide to limit the
payment of dividends even when we have the legal ability to pay them in order to retain earnings
for use in our business.
We have entered into formal and informal agreements with the OCC and have informal commitments
to the Federal Reserve that may adversely affect our operations. Failure to comply with these
agreements and commitments could subject Southwest, Stillwater National, and their directors to
additional enforcement actions and could damage our reputation.
Southwest and Stillwater National are committed to compliance with our agreements and
commitments, and are taking aggressive actions to do so. However, we cannot be assured that we
will be able to fully comply with them. The agreements and commitments relate primarily to our
concentration in commercial real estate lending and our high levels of nonperforming and potential
nonperforming loans, most of which are commercial real estate loans. We may not be able to reduce
our commercial real estate loan concentrations or problem and potential problem assets quickly
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, 2009, Stillwater Nationals 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.
Our decisions regarding the fair value of assets acquired could be inaccurate and our
estimated loss share receivable in FDIC-assisted acquisitions may be inadequate, which could
adversely affect our business, financial condition, results of operations, and future prospects.
In accordance with generally accepted accounting principles, we record assets acquired and
liabilities assumed in business combinations at their fair values. The determination of the
initial fair values can be complex and involves a high degree of judgment. Goodwill is initially
recorded as the excess of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired in a business combination, and thereafter is tested for
impairment at least annually. If the current fair value is determined to be less than the carrying
value, an impairment loss is recorded. Our impairment testing of goodwill has not resulted in any
losses to date.
Management makes various assumptions and judgments about the collectibility of acquired loan
portfolios, including the creditworthiness of borrowers and the value of the real estate and other
assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions
that include loss share agreements, we may record a loss share receivable that we consider adequate
to absorb future losses which may occur in the acquired loan portfolio. In determining the size of
the loss share receivable, we analyze the loan portfolio based on historical loss experience,
volume and classification of loans, volume and trends in delinquencies and nonaccruals, local
economic conditions, and other pertinent information.
If our assumptions are incorrect, our current receivable may be insufficient to cover future loan
losses, and increased loss reserves may be needed to respond to different economic conditions or
adverse developments in the acquired loan portfolio. Any increase in future loan losses could have
a negative effect on our operating results.
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The acquisition of banks, bank branches, and other businesses involve risks.
In the future we may acquire additional banks, branches or other financial institutions, or
other businesses. We cannot assure you that we will be able to adequately or profitably manage any
such acquisitions. The acquisition of banks, bank branches, and other businesses involves risk,
including exposure to unknown or contingent liabilities, the uncertainties of asset quality
assessment, the difficulty and expense of integrating the operations and personnel of the acquired
companies with ours, the potential negative effects on our other operations of the diversion of
managements time and attention, and the possible loss of key employees and customers of the banks,
businesses, or branches we acquire. Our failure to execute our internal growth strategy or our
acquisition strategy could adversely affect our business, results of operations, financial
condition, and future prospects.
The market price for our common stock may be highly volatile.
The overall market and the price of our common stock may continue to be volatile. There may
be a significant impact on the market price for our common stock due to, among other things:
| Variations in our anticipated or actual operating results or the results of our competitors; | ||
| Changes in investors or analysts perceptions of the risks and conditions of our business; | ||
| The size of the public float of our common stock; | ||
| Regulatory developments; | ||
| The announcement of acquisitions or new branch locations by us or our competitors; | ||
| Market conditions; and | ||
| General economic conditions. |
Restrictions on unfriendly acquisitions could prevent a takeover.
Our certificate of incorporation and bylaws contain provisions that could discourage takeover
attempts that are not approved by the board of directors. The Oklahoma General Corporation Act
includes provisions that make an acquisition of Southwest more difficult. These provisions may
prevent a future takeover attempt in which our shareholders otherwise might receive a substantial
premium for their shares over then-current market prices.
These provisions include supermajority provisions for the approval of certain business combinations
and certain provisions relating to meetings of shareholders. Our certificate of incorporation also
authorizes the issuance of additional shares without shareholder approval on terms or in
circumstances that could deter a future takeover attempt.
Future sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our board of directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued stock, including shares authorized and
unissued under our stock option plans. In the future, we may issue additional securities, through
public or private offerings, in order to raise additional capital. Any such issuance would dilute
the percentage of ownership interest of existing shareholders and may dilute the per share book
value of the common stock. In addition, option holders may exercise their options at a time when
we would otherwise be able to obtain additional equity capital on more favorable terms.
The sale, or availability for sale, of a substantial number of shares of common stock in the public
market could adversely affect the price of our common stock and could impair our ability to raise
additional capital through the sale of equity securities.
We rely on our management and other key personnel, and the loss of any of them may adversely
affect our operations.
We are and will continue to be dependent upon the services of our executive management team.
In addition, we will continue to depend on our ability to retain and recruit key commercial loan
officers. The unexpected loss of
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services of any key management personnel or the inability to recruit and retain qualified personnel
in the future could have an adverse effect on our business and financial condition. Banking
regulations adopted in connection with federal stimulus legislation may make it more difficult to
retain and recruit senior managers.
Competition may decrease our growth or profits.
We compete for loans, deposits, and investment dollars with other banks and other financial
institutions and enterprises, such as securities firms, insurance companies, savings associations,
credit unions, mortgage brokers, and private lenders, many of which have substantially greater
resources than ours. Credit unions have federal tax exemptions, which may allow them to offer
lower rates on loans and higher rates on deposits than taxpaying financial institutions such as
commercial banks. In addition, non-depository institution competitors are generally not subject to
the extensive regulation applicable to institutions that offer federally insured deposits. Other
institutions may have other competitive advantages in particular markets or may be willing to
accept lower profit margins on certain products. These differences in resources, regulation,
competitive advantages, and business strategy may decrease our net interest margin, may increase
our operating costs, and may make it harder for us to compete profitably.
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Availability of Filings
Southwest provides internet access to Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports through its Investor Relations
section at www.oksb.com (This site is also accessible through Stillwater Nationals website at
www.banksnb.com and Bank of Kansas website at www.bankofkansas.com). Access to these reports is
provided by means of a link to a third party vendor that maintains a database of such filings. In
general, Southwest intends that these reports be available as soon as reasonably practicable after
they are filed with or furnished to the SEC. However, technical and other operational obstacles or
delays caused by the vendor may delay their availability. The SEC maintains a website
(www.sec.gov) where these filings also are available through the SECs EDGAR system. There is no
charge for access to these filings through either Southwests site or the SECs site, although
users should understand that there may be costs associated with electronic access, such as usage
charges from Internet access providers and telephone companies, that they may bear. The public
also may read and copy materials filed by Southwest with the SEC at the SECs Public Reference Room
at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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Properties |
The locations of Southwest and its subsidiaries are shown below:
Southwest Bancorp, Inc. |
||||
Corporate Headquarters |
||||
608 S. Main Street |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-742-1800 | ||
www.oksb.com |
||||
Bank of Kansas Locations |
||||
Corporate Headquarters |
||||
524 N. Main Street |
||||
P.O. Box 1707 South
|
Hutchinson, Kansas 67505 | 620-728-3000 | ||
www.bankofkansas.com |
||||
Anthony |
||||
203 W. Main Street |
||||
P.O. Box 484
|
Anthony, Kansas 67003 | 620-842-1000 | ||
Harper |
||||
1002 Central Street* |
||||
P.O. Box 7
|
Harper, Kansas 67058 | 620-896-1035 | ||
North hutchinson |
||||
100 East 30th Avenue |
||||
P.O. Box 1707
|
Hutchinson, Kansas 67502 | 620-728-3000 | ||
Mayfield |
||||
102 N. Osborn
|
Mayfield, Kansas 67103 | 620-434-5325 | ||
Overland Park |
||||
14435 Metcalf Avenue
|
Overland Park, Kansas 66223 | 913-906-4444 | ||
Wichita East |
||||
8415 E. 21st Street North, Suite 150*
|
Wichita, Kansas 67206 | 316-315-1600 | ||
Wichita West |
||||
10111 W. 21st Street North
|
Wichita, Kansas 67205 | 316-315-1600 | ||
Stillwater National Bank & Trust Company Locations | ||||
Corporate Headquarters |
||||
608 S. Main Street |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-372-2230 | ||
www.banksnb.com |
||||
Drive-in Facility |
||||
308 S. Main Street |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-372-2230 | ||
Operations Center |
||||
1624 Cimarron Plaza* |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-372-2230 |
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19th & Sangre Branch |
||||
1908 S. Sangre |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74074 | 405-372-2230 | ||
OSU Campus Branch Bank |
||||
1102 W. Hall of Fame Avenue* |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-372-2230 | ||
Waterford Branch |
||||
6301 Waterford Blvd., Suite 101*
|
Oklahoma City, Oklahoma 73118 | 405-427-4000 | ||
South OKC Branch |
||||
8101 S. Walker Ave., Suite B
|
Oklahoma City, Oklahoma 73139 | 405-427-4000 | ||
Edmond Branch |
||||
1440 S. Bryant Avenue*
|
Edmond, Oklahoma 73034 | 405-427-4000 | ||
Chickasha Branch |
||||
500 W. Grand Avenue
|
Chickasha, Oklahoma 73018 | 405-427-3100 | ||
Tulsa Utica Branch |
||||
1500 S. Utica Avenue |
||||
P.O. Box 521500
|
Tulsa, Oklahoma 74152 | 918-523-3600 | ||
Tulsa 61st Branch |
||||
2431 E. 61st, Suite 170* |
||||
P.O. Box 521500
|
Tulsa, Oklahoma 74152 | 918-523-3600 | ||
SNB McMullen Bank-Tilden Branch |
||||
205 Elm Street |
||||
P.O. Box 299
|
Tilden, Texas 78072 | 361-274-3391 | ||
SNB Bank of Dallas Frisco |
||||
5300 Town and Country Blvd., Suite 100*
|
Frisco, Texas 75034 | 972-624-2900 | ||
SNB Bank of Dallas-Preston Center |
||||
5950 Berkshire Lane, Suite 350*
|
Dallas, Texas 75225 | 972-624-2900 | ||
SNB Bank of Austin |
||||
3900 N. Capital of Texas HWY, Suite 100*
|
Austin, Texas 78746 | 512-314-6700 | ||
SNB Bank of San Antonio-Stone Oak Branch | ||||
777 E. Sonterra Blvd, Suite 190*
|
San Antonio, Texas 78258 | 210-442-6100 | ||
SNB Bank of San Antonio-Medical Hill Branch | ||||
9324 Huebner Road
|
San Antonio, Texas 78240 | 210-442-6100 | ||
Stillwater National Bank Loan Production Office | ||||
10111 Richmond Avenue Suite 132*
|
Houston, Texas 77042 | 713-268-8900 | ||
Stillwater National Bank Loan Production Office | ||||
11350 Tomahawk Creek Parkway, Suite 100*
|
Leawood, Kansas 66211 | 913-906-4400 |
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OUHSC Loan Production Office |
||||
1106 N. Stonewall*
|
Oklahoma City, Oklahoma 73117 | 405-271-3113 | ||
OSU-Stillwater Marketing Office |
||||
Student Union, Room 150* |
||||
P.O. Box 1988
|
Stillwater, Oklahoma 74076 | 405-744-5962 |
* | Leased from third parties. Other properties are owned. |
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are filed as a part of this
report:
Independent Registered Public Accounting Firms Report for the Years Ended December 31, 2009
and 2008
Consolidated Statements of Financial Condition at December 31, 2009 and 2008
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008, and 2007
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008,
and 2007
Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2009, 2008,
and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements for the Years Ended December 31, 2009, 2008, and
2007
(2) Financial Statement Schedules. All schedules for which provision is made in the
applicable accounting regulations of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.
No. | Exhibit | |
3.1
|
Amended and Restated Certificate of Incorporation of Southwest Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) | |
3.2
|
Bylaws of Southwest Bancorp, Inc., as amended (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed November 19, 2007) | |
4.1
|
Rights Agreement, dated as of April 22, 1999, between Southwest Bancorp, Inc. and Harris Trust & Savings Bank, as rights agent and Form of Certificate of Designations setting forth terms of Class B, Series 1 Preferred Stock of Southwest Bancorp, Inc. referred to in the rights agreement (incorporated by reference to Exhibits 1 and 2 to Current Report on Form 8-K dated April 22, 1999) | |
4.2
|
Amendment No. 1 to Rights Agreement, dated as of December 2, 2008, between Southwest Bancorp, Inc. and Computershare Trust Company, N.A., as rights agent (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed December 8, 2008) | |
4.3
|
Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed December 8, 2008) | |
4.4
|
Letter Agreement, dated as of December 5, 2008, between Southwest Bancorp, Inc. and the United States Department of Treasury (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed December 8, 2008) | |
* 10.1
|
Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-97850)) | |
* 10.2
|
Southwest Bancorp, Inc. and Affiliates Amended and Restated Severance Compensation Plan (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed January 2, 2008) | |
* 10.3
|
Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended December 31, 1993) | |
* 10.4
|
Southwest Bancorp, Inc. 1999 Stock Option Plan as Amended and Restated (incorporated by |
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No. | Exhibit | |
reference to Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007) | ||
* 10.5
|
Stillwater National Bank and Trust Company 2002 and 2003 Deferred Compensation Plans (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002) | |
* 10.6
|
Stillwater National Bank and Trust Company Amended and Restated Supplemental Profit Sharing Plan for Rick Green (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed January 2, 2008) | |
* 10.7
|
Stillwater National Bank and Trust Company Amended and Restated Supplemental Profit Sharing Plan for Kerby E. Crowell (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed January 2, 2008) | |
* 10.8
|
Stillwater National Bank and Trust Company Amended and Restated Supplemental Profit Sharing Plan for Jerry L. Lanier (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed January 2, 2008) | |
10.9
|
Indemnification Agreements by and between Southwest Bancorp, Inc. and James E. Berry II, Thomas D. Berry, Joe Berry Cannon, J. Berry Harrison, Erd M. Johnson, David P. Lambert, Linford R. Pitts, Robert B. Rodgers, Russell W. Teubner, John Cohlmia, and Anthony W. Martin (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended December 31, 2005) | |
10.10
|
Indemnification Agreements by and between Southwest Bancorp, Inc. and Rick Green, Kerby E. Crowell, David Dietz, Allen Glenn, Steve Gobel, Steven N. Hadley, Jerry L. Lanier, Randy Mills, Kimberly Sinclair, Kay Smith, and Charles H. Westerheide (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the fiscal year ended December 31, 2005) | |
10.11
|
Indemnification Agreements by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006) | |
10.12
|
Indemnification Agreements by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006) | |
* 10.13
|
2007 Directors Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10 to Current Report on Form 8-K dated December 28, 2006) | |
* 10.14
|
Amendment to 2007 Directors Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 2, 2008) | |
10.15
|
Audit Committee Financial Expert Agreement by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 2006) | |
* 10.16
|
2008 Directors Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed January 2, 2008) | |
* 10.17
|
Southwest Bancorp, Inc. 2008 Stock Based Award Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) | |
* 10.18
|
Southwest Bancorp, Inc. Form of Restricted Stock Agreement Amendments (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008) | |
* 10.19
|
Southwest Bancorp, Inc. Form of Omnibus Compensation Compliance Agreement and Waivers dated December 5, 2008 (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended December 31, 2008) | |
10.20
|
Written agreement between Stillwater National Bank and Trust Company and the Comptroller of the Currency of the United States dated January 27, 2010 (incorporated by reference to Exhibit 10 to Current Report on Form 8-K filed January 29, 2010) | |
21
|
Subsidiaries of the Registrant | |
23
|
Consent of Independent Registered Public Accounting Firm | |
24
|
Power of Attorney | |
31(a), (b)
|
Rule 13a-14(a)/15d-14(a) Certifications | |
32(a), (b)
|
18 U.S.C. Section 1350 Certifications |
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Table of Contents
No. | Exhibit | |
99(a), (b)
|
Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act of 2008 as amended by the American Recovery and Reinvestment Act of 2009 |
* | Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SOUTHWEST BANCORP, INC. |
||||
March 5, 2010 | by: | /s/ Rick Green | ||
Rick Green | ||||
Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ Rick Green
|
March 5, 2010 | |||
Director and Chief Executive Officer |
||||
(Principal Executive Officer) |
||||
/s/ Kerby E. Crowell
|
March 5, 2010 | |||
Kerby E. Crowell |
||||
Executive Vice President, |
||||
Chief Financial Officer and Secretary |
||||
(Principal Financial and |
||||
Accounting Officer) |
A majority of the directors of Southwest executed a power of attorney appointing Rick Green as
their attorney-in-fact, empowering him to sign this report on their behalf. This power of attorney
has been filed with the Securities and Exchange Commission under Part IV, Exhibit 24 of this Annual
Report on Form 10-K for the year ended December 31, 2009. This report has been signed below by
such attorney-in-fact as of March 5, 2010.
By: | /s/ Rick Green | |||
Rick Green | ||||
Attorney-in-Fact for Majority of the Directors of Southwest |
||||
100