Attached files
file | filename |
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EX-23 - EX-23 - SOUTHWEST BANCORP INC | y90058exv23.htm |
EX-21 - EX-21 - SOUTHWEST BANCORP INC | y90058exv21.htm |
EX-24 - EX-24 - SOUTHWEST BANCORP INC | y90058exv24.htm |
EX-31.A - EX-31.A - SOUTHWEST BANCORP INC | y90058exv31wa.htm |
EX-99.B - EX-99.B - SOUTHWEST BANCORP INC | y90058exv99wb.htm |
EX-32.A - EX-32.A - SOUTHWEST BANCORP INC | y90058exv32wa.htm |
EX-99.A - EX-99.A - SOUTHWEST BANCORP INC | y90058exv99wa.htm |
EX-31.B - EX-31.B - SOUTHWEST BANCORP INC | y90058exv31wb.htm |
EX-32.B - EX-32.B - SOUTHWEST BANCORP INC | y90058exv32wb.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, 2010
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 | 74074 | |
(Address of principal executive office) | (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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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 18,322,516 shares of Common Stock of the registrant
issued and outstanding held by nonaffiliates on June 30, 2010, the last day of the registrants
most recently completed second fiscal quarter, was approximately $243.5 million based on the
closing sales price of $13.29 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 4, 2011, 19,438,290 shares of the registrants Common Stock
were outstanding.
Documents Incorporated by Reference
Part III: Portions of the definitive Proxy Statement relating to registrants Annual Meeting of Shareholders, to be held on April 28, 2011, are incorporated by reference to the extent described therein. |
* | The registrant is required to file reports pursuant to Section 13 of the Act. |
SOUTHWEST BANCORP, INC.
Index | ||||||||
2 | ||||||||
2 | ||||||||
4 | ||||||||
4 | ||||||||
5 | ||||||||
7 | ||||||||
9 | ||||||||
30 | ||||||||
32 | ||||||||
34 | ||||||||
35 | ||||||||
77 | ||||||||
77 | ||||||||
87 | ||||||||
87 | ||||||||
88 | ||||||||
90 | ||||||||
99 | ||||||||
101 | ||||||||
104 | ||||||||
EX-21 | ||||||||
EX-23 | ||||||||
EX-24 | ||||||||
EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32.A | ||||||||
EX-32.B | ||||||||
EX-99.A | ||||||||
EX-99.B |
1
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 90 and Critical Accounting Policies on page 9.
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, the 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 2, About this Report on page 4, and Business on pages 77 through 86. | ||
Item 1A.
|
Risk Factors | Risk Factors on pages 90 through 97. | ||
Item 1B.
|
Unresolved Staff Comments | None. | ||
Item 2.
|
Properties | Properties on pages 99 through 101. | ||
Item 3.
|
Legal Proceedings | Note 16 Commitments and Contingencies on page 72. | ||
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 2010. | ||
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 7. | ||
Item 6.
|
Selected Financial Data | Five Year Summary of Selected Financial Data on pages 5 and 6. | ||
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 9 through 30. | ||
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk | Quantitative and Qualitative Disclosures about Market Risk on pages 30 through 32. | ||
Item 8.
|
Financial Statements and Supplementary Data | Pages 35 through 76. |
2
Table of Contents
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 32. | ||
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 2010. | ||
Part III |
||||
Item 10.
|
Directors, Executive Officers and Corporate Governance | The material labeled Election of Directors on pages 3 through 7, Board Meetings and Committees and Board Leadership, Structure and Role in Oversight on pages 7 through 10, Section 16(a) Beneficial Ownership Reporting Compliance on page 32, Code of Ethics on page 34, Shareholder Proposals and Communications on page 35, and Report of the Audit Committee on page 33 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 27 through 31, Compensation Discussion and Analysis on pages 15 through 23, and Compensation Committee Report on pages 24 through 26 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 8 of this report. | ||
Item 13. |
Certain Relationships and Related Transactions and Director Independence | The material labeled Director Independence on pages 10 and 11 and Certain Transactions on pages 31 and 32 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 32 and 33 of the Proxy Statement is incorporated by reference in this Report. | ||
Part IV |
||||
Item 15.
|
Exhibits, Financial Statement Schedules |
3
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®. We operate six offices in Texas, eleven offices in
Oklahoma, and eight offices in Kansas.
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.
During 2009, Bank of Kansas entered into a purchase and assumption agreement with the Federal
Deposit Insurance Corporation (FDIC) to acquire substantially all loans as well as certain other
related assets of First National Bank of Anthony, Anthony, Kansas (FNBA) in an FDIC-assisted
transaction. 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 transaction. Assets covered under the loss sharing agreements with the FDIC, including the
amounts of expected reimbursements from the FDIC under these agreements, are referred to as
covered assets.
Our area of expertise includes the special financial needs of healthcare and health professionals,
businesses and their managers and owners, and commercial and commercial real estate borrowers. We
established a strategic focus on healthcare in 1974. We provide credit and other services, such as
deposits, cash management, and document imaging for physicians and other healthcare practitioners
to start or develop their practices and finance the development and purchase of medical offices,
clinics, surgical care centers, hospitals, and similar facilities.
We also focus on commercial real estate mortgage and construction credits. We do not focus on
one-to-four family residential development loans or spec residential property credits.
Additionally, subprime lending has never been a part of our business strategy, and our exposure to
subprime loans and subprime lenders is minimal.
Southwests banking 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 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.
Southwest maintains close relationships with businesses, professionals and their principals to
serve 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. 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 is traded on the NASDAQ Global Select Market under the
symbol OKSBP.
About this Report
This report comprises the entire 2010 Form 10-K, other than exhibits, as filed with the SEC.
The 2010 Annual Report to shareholders, including this report, and the annual proxy materials for
the 2011 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 Laura Robertson,
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.
4
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, 2010. The selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements of Southwest, including the
accompanying Notes to the Consolidated Financial Statements, presented elsewhere in this report.
For the Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Operations Data |
||||||||||||||||||||
Interest income |
$ | 142,807 | $ | 150,399 | $ | 162,794 | $ | 177,068 | $ | 169,760 | ||||||||||
Interest expense |
35,476 | 51,708 | 73,075 | 84,471 | 76,808 | |||||||||||||||
Net interest income |
107,331 | 98,691 | 89,719 | 92,597 | 92,952 | |||||||||||||||
Provision for loan losses |
35,560 | 39,176 | 18,979 | 8,947 | 12,187 | |||||||||||||||
Gain on sales of loans and securities, net (1) |
2,736 | 5,888 | 3,566 | 4,923 | 3,689 | |||||||||||||||
Noninterest income (2) |
15,828 | 16,048 | 12,572 | 11,510 | 12,973 | |||||||||||||||
Noninterest expense (3) |
63,633 | 60,858 | 62,488 | 65,108 | 56,021 | |||||||||||||||
Income before taxes |
26,702 | 20,593 | 24,390 | 34,975 | 41,406 | |||||||||||||||
Taxes on income |
9,738 | 7,611 | 9,489 | 13,597 | 15,409 | |||||||||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | $ | 21,378 | $ | 25,997 | ||||||||||
Net income available to common shareholders |
$ | 12,777 | $ | 8,837 | $ | 14,658 | $ | 21,378 | $ | 25,997 | ||||||||||
Dividends |
||||||||||||||||||||
Preferred stock |
$ | 3,500 | $ | 3,500 | $ | 243 | $ | | $ | | ||||||||||
Common stock |
| 1,398 | 5,519 | 5,299 | 4,681 | |||||||||||||||
Ratio of total dividends to net income |
20.63 | % | 37.73 | % | 38.67 | % | 24.79 | % | 18.00 | % | ||||||||||
Per Common Share Data |
||||||||||||||||||||
Basic earnings |
$ | 0.71 | $ | 0.60 | $ | 1.01 | $ | 1.49 | $ | 1.84 | ||||||||||
Diluted earnings |
0.71 | 0.60 | 1.00 | 1.46 | 1.79 | |||||||||||||||
Cash dividends |
| 0.10 | 0.38 | 0.37 | 0.33 | |||||||||||||||
Book value (4) |
15.97 | 16.46 | 16.18 | 15.16 | 13.87 | |||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic, net of unvested restricted stock |
17,848,610 | 14,625,847 | 14,471,242 | 14,291,041 | 14,151,624 | |||||||||||||||
Diluted, net of unvested restricted stock |
17,894,011 | 14,689,517 | 14,641,521 | 14,606,149 | 14,483,941 | |||||||||||||||
Financial Condition Data (4) |
||||||||||||||||||||
Investment securities |
$ | 272,929 | $ | 263,439 | $ | 264,166 | $ | 256,608 | $ | 270,519 | ||||||||||
Noncovered portfolio loans (5) |
2,331,293 | 2,539,294 | 2,494,506 | 2,145,557 | 1,602,726 | |||||||||||||||
Loans held for sale (5) |
35,194 | 43,134 | 56,941 | 66,275 | 188,464 | |||||||||||||||
Total noncovered loans (5) (6) |
2,366,487 | 2,582,428 | 2,551,447 | 2,211,832 | 1,791,190 | |||||||||||||||
Covered portfolio loans (7) |
53,628 | 85,405 | | | | |||||||||||||||
Interest-earning assets |
2,734,062 | 3,015,915 | 2,817,496 | 2,478,429 | 2,079,380 | |||||||||||||||
Total assets |
2,820,541 | 3,108,291 | 2,879,762 | 2,564,298 | 2,170,628 | |||||||||||||||
Interest-bearing deposits |
1,875,546 | 2,267,901 | 1,918,181 | 1,801,512 | 1,511,196 | |||||||||||||||
Total deposits |
2,252,728 | 2,592,730 | 2,180,122 | 2,058,579 | 1,765,611 | |||||||||||||||
Other borrowings |
94,602 | 103,022 | 295,138 | 218,356 | 138,094 | |||||||||||||||
Subordinated debentures |
81,963 | 81,963 | 81,963 | 46,393 | 46,393 | |||||||||||||||
Total shareholders equity (8) |
377,812 | 309,778 | 302,203 | 217,609 | 197,510 | |||||||||||||||
Common shareholders equity |
310,088 | 242,741 | 235,811 | 217,609 | 197,510 | |||||||||||||||
Financial Ratios |
||||||||||||||||||||
Return on average assets |
0.57 | % | 0.43 | % | 0.54 | % | 0.94 | % | 1.18 | % | ||||||||||
Return on average total shareholders equity |
4.72 | 4.20 | 6.40 | 10.19 | 13.99 | |||||||||||||||
Return on average common equity |
4.37 | 3.65 | 6.44 | 10.19 | 13.99 | |||||||||||||||
Net interest margin |
3.67 | 3.38 | 3.36 | 4.20 | 4.42 | |||||||||||||||
Efficiency ratio (9) |
50.54 | 50.45 | 59.03 | 59.72 | 51.11 | |||||||||||||||
Average assets per employee (10) |
$ | 6,942 | $ | 6,411 | $ | 6,206 | $ | 4,661 | $ | 5,117 |
5
Table of Contents
Selected Financial Data (Continued)
At December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Asset Quality |
||||||||||||||||||||
Net loan charge-offs (4) |
$ | 32,744 | $ | 16,536 | $ | 8,790 | $ | 6,656 | $ | 8,706 | ||||||||||
Net loan charge-offs to average portfolio loans |
1.29 | % | 0.63 | % | 0.37 | % | 0.37 | % | 0.59 | % | ||||||||||
Noncovered: |
||||||||||||||||||||
Allowance for loan losses (4) |
$ | 65,229 | $ | 62,413 | $ | 39,773 | $ | 29,584 | $ | 27,293 | ||||||||||
Allowance for loan losses to portfolio loans |
2.80 | % | 2.46 | % | 1.59 | % | 1.38 | % | 1.70 | % | ||||||||||
Nonperforming loans (4) (11) |
$ | 107,083 | $ | 106,197 | $ | 63,983 | $ | 29,571 | $ | 29,357 | ||||||||||
Nonperforming loans to portfolio loans |
4.59 | % | 4.18 | % | 2.56 | % | 1.38 | % | 1.83 | % | ||||||||||
Allowance for loan losses to nonperforming loans |
60.91 | 58.77 | 62.16 | 100.04 | 92.97 | |||||||||||||||
Nonperforming assets (4) (12) |
$ | 144,805 | $ | 124,629 | $ | 70,075 | $ | 32,250 | $ | 31,230 | ||||||||||
Nonperforming assets to portfolio loans and
other real estate |
6.11 | % | 4.87 | % | 2.80 | % | 1.50 | % | 1.95 | % | ||||||||||
Covered: |
||||||||||||||||||||
Nonperforming loans (4) (7) (11) |
$ | 10,806 | $ | 13,458 | $ | | $ | | $ | | ||||||||||
Nonperforming loans to portfolio loans |
20.15 | % | 15.76 | % | | | | |||||||||||||
Nonperforming assets (4) (7) (12) |
$ | 14,993 | $ | 18,206 | $ | | $ | | $ | | ||||||||||
Nonperforming assets to portfolio loans and
other real estate |
25.93 | % | 20.19 | % | | | | |||||||||||||
Capital Ratios |
||||||||||||||||||||
Average shareholders equity to average assets |
||||||||||||||||||||
Total |
11.99 | % | 10.34 | % | 8.49 | % | 9.21 | % | 8.47 | % | ||||||||||
Common |
9.74 | 8.11 | 8.30 | 9.21 | 8.47 | |||||||||||||||
Tier I capital to risk-weighted assets (4) (13) |
17.78 | 13.28 | 13.01 | 9.71 | 12.25 | |||||||||||||||
Total capital to risk-weighted assets (4) (13) |
19.06 | 14.55 | 14.26 | 10.97 | 13.50 | |||||||||||||||
Leverage ratio (13) |
15.55 | 12.42 | 13.06 | 10.23 | 10.91 |
(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. | |
(2) | Noninterest income in 2009 includes $3.3 million resulting from the gain on acquisition related to the FDIC-assisted acquisition. | |
(3) | Noninterest expense in 2007 includes $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. | |
(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 3 in the Notes to the Consolidated Financial Statements. | |
(8) | Reflects the issuance of common stock through an offering in 2010 and preferred stock in 2008. Please see Capital Resources on page 27 and Note 10 in the Notes to the Consolidated Financial Statements. | |
(9) | The efficiency ratio = noninterest expense / (net interest income + total non interest 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 restructured loans not performing in accordance with restructured terms. | |
(12) | Nonperforming assets consist of nonperforming loans and other real estate. | |
(13) | 2010 reflects the effects of capital raised through the public common stock offering and 2008 reflects the effects of capital raised through the sale of preferred securities. Please see Notes 8 and 10 in the Notes to the Consolidated Financial Statements. |
6
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.: Computershare Investor Services, LLC 2 North LaSalle St. Chicago, IL 60602 |
For Southwest Capital Trust II: U.S. Bank Trust National Association 300 East Delaware Avenue Wilmington, DE 19801 |
Recent Stock Prices, Dividends, and Equity Compensation Plan Information
Shareholders received no quarterly cash dividends in 2010 and received quarterly cash dividends
totaling $2.4 million in 2009.
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 include 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 12 Capital Requirements &
Regulatory Matters in the Notes to the Consolidated Financial Statements, Certain Regulatory
Matters on page 29 of this report, and Risk Factors beginning on page 90 of this report.
Shares issued under the employee stock purchase plan, which commenced on January 1, 1996, totaled
6,806 in 2010 and 8,158 in 2009, while issuances pursuant to the stock plans were 64,381 and
164,895 in the respective years.
As of
February 28, 2011, there were approximately 4,600 holders of record of Southwests common
stock. The following table sets forth the common stock dividends declared for each quarter during
2010 and 2009, and the range of high and low closing trade prices for the common stock for those
periods.
2010 | 2009 | |||||||||||||||||||||||
Dividend | Dividend | |||||||||||||||||||||||
High | Low | Declared | High | Low | Declared | |||||||||||||||||||
For the Quarter Ending: |
||||||||||||||||||||||||
March 31 |
$ | 10.00 | $ | 5.96 | $ | | $ | 13.00 | $ | 5.46 | $ | 0.0238 | ||||||||||||
June 30 |
16.20 | 8.16 | | 10.61 | 6.46 | 0.0238 | ||||||||||||||||||
September 30 |
15.61 | 11.08 | | 14.84 | 8.43 | 0.0238 | ||||||||||||||||||
December 31 |
13.61 | 8.91 | | 14.28 | 6.08 | 0.0238 |
7
Table of Contents
Stock Performance
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, 2005 through December 31, 2010, with
the hypothetical cumulative total return on the NASDAQ Stock Market Index (U.S. Companies) and the
NASDAQ Bank Index for the comparable period.
12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||
Southwest |
$ | 100 | $ | 141 | $ | 94 | $ | 69 | $ | 37 | $ | 66 | ||||||||||||
NASDAQ Bank Index |
100 | 112 | 89 | 65 | 54 | 64 | ||||||||||||||||||
NASDAQ Stock
Market Index (U.S.) |
100 | 109 | 119 | 57 | 83 | 98 |
Equity Compensation Plan Information
The following table presents disclosure regarding equity compensation plans in existence at
December 31, 2010, consisting of the 1999 stock option plan, which has expired but has outstanding
options that may still be exercised, and the 2008 stock based award plan, both of which were
approved by the shareholders.
Number of | ||||||||||||
securities | ||||||||||||
available for | ||||||||||||
future issuance | ||||||||||||
Number of | under equity | |||||||||||
securities to be | Weighted average | compensation plans | ||||||||||
issued upon | exercise price of | excluding | ||||||||||
exercise of | outstanding | securities | ||||||||||
outstanding options | options, warrants | reflected in column | ||||||||||
warrants and rights | and rights | (a) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Plans approved by shareholders |
202,215 | $ | 20.98 | 747,994 | ||||||||
Plans not approved by shareholders |
| | | |||||||||
Total |
202,215 | $ | 20.98 | 747,994 |
8
Table of Contents
Managements Discussion and Analysis of Financial Conditions and Results of Operations
The following discussion and analysis presents the more significant factors affecting
Southwests financial conditions as of December 31, 2010 and 2009 and results of operations for
each of the years in the three-year period ended December 31, 2010. This discussion and analysis
should be read in conjunction with Southwests consolidated financial statements, notes thereto,
and other financial information appearing elsewhere in this report.
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 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, estimates, assumptions, and judgments underlying those amounts, management has identified
the 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.
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 mortgage and commercial real estate construction 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 material increases 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 U.S. generally accepted accounting principles, as described in Provision
for Loan Losses on page 15 and in Note 1 of the Notes to the Consolidated Financial Statements.
9
Table of Contents
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, 2010, Southwest has eight reporting units, of which three have goodwill allocated to
them. If the carrying value 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 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 carrying
value may not be recoverable based on a comparison to fair value. Based on Southwests annual
goodwill impairment test as of October 1, 2010 and updated through December 31, 2010, management
does not believe any of its goodwill is impaired as of December 31, 2010.
The step one test includes an analysis of estimated fair value of reporting units to the aggregate
market capitalization of Southwest. Southwest engaged an independent third party to assist in the
step one fair market valuations, using both the customary market approaches and the discounted cash
flow (income) approach, for the Kansas and Texas reporting units, to which $6.6 million of goodwill
has been assigned.
The independent step one valuation indicated that as of the October 1, 2010 annual assessment date,
the fair value of the Kansas reporting unit was less than its carrying amount, indicating a
potential impairment. Consequently, further goodwill impairment testing was required under a step
two hypothetical purchase price allocation and analysis to determine the amount of impairment
existing, if any. The step two market participant discounts and purchase adjustments applied to
the Kansas reporting unit for various categories of loans (such as performing and nonperforming)
and deposits, as well as other assets and liabilities, resulted in an implied fair value of
goodwill greater than the carrying amount of goodwill. Southwest concluded that there was no
goodwill impairment for the Kansas reporting unit as of October 31, 2010 (and as updated through
December 31, 2010). Approximately $5.6 million of Southwests total goodwill of $6.8 million came
from its acquisition of Bank of Kansas during 2007.
The step one fair value of the Texas reporting unit as of the October 1, 2010 annual assessment
date (and as updated through December 31, 2010) was greater than the carrying amount, indicating
goodwill was not impaired and no step two analysis was required for this reporting unit.
While Southwest believes no impairment existed at December 31, 2010, 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.
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.
10
Table of Contents
Executive Overview
In 2010, Southwests loans, deposits, and assets declined. Southwests shareholders equity
increased as a result of the current year common stock offering and results of operations.
Southwests net income increased primarily as a result of increased net interest income, controlled
noninterest expense, and a decrease in the required provision for loan losses.
Southwest is dedicated to the resolution of problem credits, the maintenance of capital and
liquidity, stability in net interest income, and control of operating expenses. Southwest
continues to manage the loan portfolio through the difficult credit climate with an ongoing,
disciplined workout process focused on addressing the challenges of the commercial real estate
construction and commercial mortgage sectors. Southwest is encouraged that the state economic
factors for the principal markets in Oklahoma, Texas, and Kansas continue to outperform most of the
nation. Southwest continues to make loans in each market with an emphasis on healthcare lending
and carefully controlled real estate collateralized credits.
In April 2010, Southwest sold 4,600,000 shares of common stock in a public offering resulting in
net proceeds of approximately $54.3 million. The proceeds of the offering were used to increase
Southwests working capital and for general corporate purposes, including investment in Southwests
banking subsidiaries.
11
Table of Contents
Results of Operations
Net income available to common shareholders totaled $12.8 million, or $0.71 diluted per common
share, in 2010 compared to $8.8 million, or $0.60 diluted per common share, in 2009 and $14.7
million, or $1.00 diluted per common share, in 2008.
The following table presents components of consolidated net income and selected ratios for the
years 2010, 2009, and 2008 and the annual changes between those years.
2010 Change | 2009 Change | |||||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | From 2009 | 2009 | From 2008 | 2008 | |||||||||||||||
Operations Data |
||||||||||||||||||||
Interest income |
$ | 142,807 | $ | (7,592 | ) | $ | 150,399 | $ | (12,395 | ) | $ | 162,794 | ||||||||
Interest expense |
35,476 | (16,232 | ) | 51,708 | (21,367 | ) | 73,075 | |||||||||||||
Net interest income |
107,331 | 8,640 | 98,691 | 8,972 | 89,719 | |||||||||||||||
Provision for loan losses |
35,560 | (3,616 | ) | 39,176 | 20,197 | 18,979 | ||||||||||||||
Noninterest income |
18,564 | (3,372 | ) | 21,936 | 5,798 | 16,138 | ||||||||||||||
Noninterest expense |
63,633 | 2,775 | 60,858 | (1,630 | ) | 62,488 | ||||||||||||||
Income before taxes |
26,702 | 6,109 | 20,593 | (3,797 | ) | 24,390 | ||||||||||||||
Taxes on income |
9,738 | 2,127 | 7,611 | (1,878 | ) | 9,489 | ||||||||||||||
Net income |
$ | 16,964 | $ | 3,982 | $ | 12,982 | $ | (1,919 | ) | $ | 14,901 | |||||||||
Net income available to common shareholders |
$ | 12,777 | $ | 3,940 | $ | 8,837 | $ | (5,821 | ) | $ | 14,658 | |||||||||
Per Common Share Data |
||||||||||||||||||||
Basic earnings |
$ | 0.71 | $ | 0.11 | $ | 0.60 | $ | (0.41 | ) | $ | 1.01 | |||||||||
Diluted earnings |
0.71 | 0.11 | 0.60 | (0.40 | ) | 1.00 | ||||||||||||||
Financial Condition Data Averages |
||||||||||||||||||||
Investment securities |
$ | 261,124 | $ | 15,668 | $ | 245,456 | $ | 6,803 | $ | 238,653 | ||||||||||
Total loans |
2,573,442 | (94,329 | ) | 2,667,771 | 238,642 | 2,429,129 | ||||||||||||||
Interest-earning assets |
2,922,645 | 3,605 | 2,919,040 | 247,404 | 2,671,636 | |||||||||||||||
Total assets |
2,998,744 | 11,274 | 2,987,470 | 244,571 | 2,742,899 | |||||||||||||||
Interest-bearing deposits |
2,112,068 | 3,224 | 2,108,844 | 227,759 | 1,881,085 | |||||||||||||||
Total deposits |
2,443,066 | 49,038 | 2,394,028 | 244,173 | 2,149,855 | |||||||||||||||
Other borrowings |
96,141 | (85,541 | ) | 181,682 | (92,424 | ) | 274,106 | |||||||||||||
Subordinated debentures |
81,963 | | 81,963 | 17,899 | 64,064 | |||||||||||||||
Total shareholders equity |
359,535 | 50,583 | 308,952 | 76,121 | 232,831 | |||||||||||||||
Selected Ratios |
||||||||||||||||||||
Return on average assets |
0.57 | % | 0.14 | % | 0.43 | % | (0.11 | )% | 0.54 | % | ||||||||||
Return on average total shareholders equity |
4.72 | 0.52 | 4.20 | (2.20 | ) | 6.40 | ||||||||||||||
Return on average common equity |
4.37 | 0.72 | 3.65 | (2.79 | ) | 6.44 | ||||||||||||||
Net interest margin |
3.67 | 0.29 | 3.38 | 0.02 | 3.36 |
Net income available to common shareholders for 2010 increased $4.0 million, or 45%, compared
to 2009. The increase was primarily the result of an $8.6 million increase in net interest income
driven by an improved net interest margin and a $3.6 million decrease in the provision for loan
losses, offset in part by a $3.4 million decrease in noninterest income, a $2.8 million increase in
noninterest expense, and a $2.1 million increase in income tax expense. Net income available to
common shareholders for 2009 decreased $5.8 million, or 40%, compared to 2008. The decrease was
primarily due to a $20.2 million increase in the provision for loan losses and a $3.9 million
increase in dividends on the preferred stock that was issued in December 2008, offset in part by a
$9.0 million increase in net interest income, a $5.8 million increase in noninterest income, a $1.9
million decrease in income tax expense, and a $1.6 million decrease in noninterest expense.
Details of the changes in various components of net income are further discussed below.
12
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 interest-bearing liabilities, such as deposits and
borrowings, which are used to fund those assets. Net interest income is Southwests largest source
of revenue representing 85% of total revenue in 2010. 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.
The Federal Reserve Board influences the general market rates of interest, including the deposit
and loan rates offered by many financial institutions. Southwests loan portfolio is significantly
affected by changes in the prime interest rate. The prime interest rate, which is the rate offered
on loans to borrowers with strong credit, began 2008 at 7.25% and decreased 200 basis points in the
first quarter, 25 basis points in the second quarter, and 175 basis points in the fourth quarter to
end the year at 3.25%. During 2009 and 2010, the prime interest rate remained at 3.25% for the
entire year. Southwests loan portfolio is also impacted, to a lesser extent, by changes in the
London Interbank Offered Rate (LIBOR). At December 31, 2010, the one-month and three-month U.S.
dollar LIBOR rates were 0.26% and 0.30%, respectively, while at December 31, 2009, the rates were
0.23% and 0.25%, respectively and at December 31, 2008, the rates were 1.08% and 1.83%,
respectively.
The intended federal fund rate, which is the cost of immediately available overnight funds, dropped
in a similar manner to the prime interest rate. It began 2008 at 4.25% and decreased 200 basis
points in the first quarter, 25 basis points in the second quarter and 175 basis points in the
fourth quarter to the end of the year at 0.25%. During 2009 and 2010, the intended federal funds
rate remained between zero and 0.25% for the entire year.
Net interest income for 2010 was $107.3 million, an increase of $8.6 million, or 9%, from the $98.7
million earned in 2009. Net interest margin was 3.67% for the year ended December 31, 2010, an
increase of twenty-nine basis points from 2009. Included in 2010 net interest income was a net
recovery of $1.0 million from the resolution of nonperforming loans and additional discount
accretion on loans and the loss share receivable, offset in part by interest reversals on
nonaccrual loans. These net recoveries increased net interest margin by 3 basis points.
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. Included in 2009 net interest income was a 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 was the recognition of discount income of $0.8 million 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 interest margin by 3 basis points.
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. The decrease in net interest income and net
interest margin was the result of the competitive pressures and governmental actions that caused
rates on deposits and other funding sources to decrease less than the drop in rates on earning
assets, and our rate sensitivity position. The resulting margin compression produced a drop in net
interest income.
Interest rate spread, which represents the difference between the rate earned on interest-earning
assets and the rate paid on interest-bearing liabilities, was 3.34% for 2010, compared to 2.97% for
2009 and 2.80% for 2008.
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 $331.0 million in 2010 from $285.2 million in
2009 and $268.8 million in 2008.
13
Table of Contents
For further analysis of asset sensitivity please see tables showing the effects of changes in
interest rates and changes in volume of interest related assets and liabilities on page 15 of this
report and the discussion of Quantitative and Qualitative Disclosures about Market Risk on pages 30
through 32 of this report.
The following table 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.
Consolidated Average Balances, Yields and Rates
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
Balance | Interest | Rate (1) | Balance | Interest | Rate (1) | Balance | Interest | Rate (1) | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Total loans (2) (3) |
$ | 2,573,442 | $ | 133,918 | 5.20 | % | $ | 2,667,771 | $ | 141,239 | 5.29 | % | $ | 2,429,129 | $ | 152,719 | 6.29 | % | ||||||||||||||||||
Investment securities |
261,124 | 8,660 | 3.32 | 245,456 | 9,146 | 3.73 | 238,653 | 9,986 | 4.18 | |||||||||||||||||||||||||||
Other interest-earning assets |
88,079 | 229 | 0.26 | 5,813 | 14 | 0.24 | 3,854 | 89 | 2.31 | |||||||||||||||||||||||||||
Total interest-earning assets |
2,922,645 | 142,807 | 4.89 | 2,919,040 | 150,399 | 5.15 | 2,671,636 | 162,794 | 6.09 | |||||||||||||||||||||||||||
Other assets |
76,099 | 68,430 | 71,263 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 2,998,744 | $ | 2,987,470 | $ | 2,742,899 | ||||||||||||||||||||||||||||||
Liabilities and
Shareholders Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 98,589 | $ | 468 | 0.47 | % | $ | 83,813 | $ | 476 | 0.57 | % | $ | 75,950 | $ | 584 | 0.77 | % | ||||||||||||||||||
Money market accounts |
508,583 | 3,911 | 0.77 | 485,383 | 4,954 | 1.02 | 538,148 | 12,620 | 2.35 | |||||||||||||||||||||||||||
Savings accounts |
25,609 | 64 | 0.25 | 21,010 | 78 | 0.37 | 13,930 | 69 | 0.50 | |||||||||||||||||||||||||||
Time deposits |
1,479,287 | 23,824 | 1.61 | 1,518,638 | 36,811 | 2.42 | 1,253,057 | 47,749 | 3.81 | |||||||||||||||||||||||||||
Total interest-bearing deposits |
2,112,068 | 28,267 | 1.34 | 2,108,844 | 42,319 | 2.01 | 1,881,085 | 61,022 | 3.24 | |||||||||||||||||||||||||||
Other borrowings |
96,141 | 2,079 | 2.16 | 181,682 | 4,049 | 2.23 | 274,106 | 7,242 | 2.64 | |||||||||||||||||||||||||||
Subordinated debentures |
81,963 | 5,130 | 6.26 | 81,963 | 5,340 | 6.52 | 64,064 | 4,811 | 7.51 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
2,290,172 | 35,476 | 1.55 | 2,372,489 | 51,708 | 2.18 | 2,219,255 | 73,075 | 3.29 | |||||||||||||||||||||||||||
Noninterest-bearing demand deposits |
330,998 | 285,184 | 268,770 | |||||||||||||||||||||||||||||||||
Other liabilities |
18,039 | 20,845 | 22,043 | |||||||||||||||||||||||||||||||||
Shareholders equity |
359,535 | 308,952 | 232,831 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 2,998,744 | $ | 2,987,470 | $ | 2,742,899 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 107,331 | $ | 98,691 | $ | 89,719 | ||||||||||||||||||||||||||||||
Interest rate spread |
3.34 | % | 2.97 | % | 2.80 | % | ||||||||||||||||||||||||||||||
Net interest margin (4) |
3.67 | % | 3.38 | % | 3.36 | % | ||||||||||||||||||||||||||||||
Ratio of average interest-
earning assets to average
interest-bearing liabilities |
127.62 | % | 123.04 | % | 120.38 | % | ||||||||||||||||||||||||||||||
(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) | Fees included in interest income on loans receivable are not considered material. | |
(3) | Information regarding noncovered and covered loans for the periods shown is not readily available. | |
(4) | Net interest margin = net interest income / total average interest-earning assets. |
14
Table of Contents
The following table analyzes Southwests changes in interest income and interest expense for
the periods indicated. Information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by prior periods rate); and (ii) changes in rates (changes in rate
multiplied by prior periods volume). 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.
Effect of Volume and Rate Changes on Net Interest Income
2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||||||
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) |
$ | (7,321 | ) | $ | (4,937 | ) | $ | (2,384 | ) | $ | (11,480 | ) | $ | 14,095 | $ | (25,575 | ) | ||||||||
Investment securities |
(486 | ) | 560 | (1,046 | ) | (840 | ) | 278 | (1,118 | ) | |||||||||||||||
Other interest-earning assets |
215 | 214 | 1 | (75 | ) | 31 | (106 | ) | |||||||||||||||||
Total interest income |
(7,592 | ) | 186 | (7,779 | ) | (12,395 | ) | 14,203 | (26,598 | ) | |||||||||||||||
Interest paid on: |
|||||||||||||||||||||||||
Interest-bearing demand |
(8 | ) | 77 | (85 | ) | (108 | ) | 56 | (164 | ) | |||||||||||||||
Money market accounts |
(1,043 | ) | 227 | (1,270 | ) | (7,666 | ) | (1,134 | ) | (6,532 | ) | ||||||||||||||
Savings accounts |
(14 | ) | 15 | (29 | ) | 9 | 29 | (20 | ) | ||||||||||||||||
Time deposits |
(12,987 | ) | (903 | ) | (12,084 | ) | (10,938 | ) | 8,728 | (19,666 | ) | ||||||||||||||
Other borrowings |
(1,970 | ) | (1,853 | ) | (117 | ) | (3,193 | ) | (2,181 | ) | (1,012 | ) | |||||||||||||
Subordinated debentures |
(210 | ) | | (210 | ) | 529 | 1,223 | (694 | ) | ||||||||||||||||
Total interest expense |
(16,232 | ) | (1,739 | ) | (14,493 | ) | (21,367 | ) | 4,756 | (26,123 | ) | ||||||||||||||
Net interest income |
$ | 8,640 | $ | 1,925 | $ | 6,714 | $ | 8,972 | $ | 9,447 | $ | (475 | ) | ||||||||||||
(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. | ||
(2) | Information regarding noncovered and covered loans for the periods shown is not readily available. |
Provision for Loan Losses
The provision for loan losses is the amount of expense that, based on Southwest judgment, is
required to maintain the allowance for loan losses at an appropriate level based upon the inherent
risks in the loan portfolio. 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. Net charge-offs for the year ended December 31, 2010
were $32.7 million, an increase of $16.2 million, or 98%, over the $16.5 million recorded for the
year ended December 31, 2009. The provision for loan losses for the year ended December 31, 2010
was $35.6 million, representing a decrease of $3.6 million, or 9%, from the $39.2 million recorded
for the year ended December 31, 2009. See the section captioned Allowance for Loan Losses on
page 25 of this report for further analysis of the provision for loss losses.
15
Table of Contents
Noninterest Income
Noninterest income was $18.6 million for 2010, a 15% decrease when compared with 2009. Noninterest
income in 2009 increased 36% when compared with 2008.
2010 Change | 2009 Change | |||||||||||||||||||
(Dollars in thousands) | 2010 | From 2009 | 2009 | From 2008 | 2008 | |||||||||||||||
Service charges and fees
|
$ | 12,404 | $ | 700 | $ | 11,704 | $ | 678 | $ | 11,026 | ||||||||||
Other noninterest income
|
763 | (3,581 | ) | 4,344 | 2,798 | 1,546 | ||||||||||||||
Gain on sales of loans
|
2,736 | (227 | ) | 2,963 | 299 | 2,664 | ||||||||||||||
Gain on sales/calls of
investment securities
|
2,661 | (264 | ) | 2,925 | 2,023 | 902 | ||||||||||||||
Total noninterest income
|
$ | 18,564 | $ | (3,372 | ) | $ | 21,936 | $ | 5,798 | $ | 16,138 | |||||||||
Service charges and fees Service charges and fees increased $0.7 million, or 6%, in 2010 as
a result of increased interchange service charges, increased brokerage fees, increased loan
servicing fees, and decreased amortization of mortgage servicing rights, which includes the
impairments that occurred in 2009.
Service charges and fees increased $0.7 million, 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.
Other noninterest income Other noninterest income includes consulting income and other
miscellaneous income items. The 2010 decrease of $3.6 million, or 82%, was primarily the result of
decreased consulting income in 2010 and the gain on acquisition that occurred in 2009. The 2009
increase of $2.8 million, or 181%, includes the $3.3 million gain recognized on the FDIC-assisted
acquisition of FNBA.
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 2010, the decrease was the result of reduced sales of student loans and decreased sales of
mortgage loans, while for 2009 the increase was the result of increased sales of mortgage loans,
offset in part by a reduction in sales of student loans.
Gain on sales/calls of investment securities Gain on sales of investment securities includes a
$2.7 million and $2.9 million gain recognized as the result of the sale of investment securities
during 2010 and 2009, respectively. 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 $0.4 million recorded due to the other than temporary impairment of two
investment securities during the year.
Noninterest Expense
Noninterest expense was $63.6 million for 2010, an increase of $2.8 million, or 5%, from 2009.
Noninterest expense decreased $1.6 million, or 3%, in 2009 from 2008.
2010 Change | 2009 Change | |||||||||||||||||||
(Dollars in thousands) | 2010 | From 2009 | 2009 | From 2008 | 2008 | |||||||||||||||
Salaries and employee benefits
|
$ | 29,916 | $ | 617 | $ | 29,299 | $ | (4,031 | ) | $ | 33,330 | |||||||||
Occupancy
|
11,171 | (466 | ) | 11,637 | 765 | 10,872 | ||||||||||||||
FDIC and other insurance
|
5,788 | 243 | 5,545 | 3,457 | 2,088 | |||||||||||||||
Other real estate, net
|
2,218 | 2,088 | 130 | (16 | ) | 146 | ||||||||||||||
Provision for unfunded loan
commitments
|
(1,603 | ) | (1,373 | ) | (230 | ) | (865 | ) | 635 | |||||||||||
Other general and administrative
|
16,143 | 1,666 | 14,477 | (940 | ) | 15,417 | ||||||||||||||
Total noninterest expense
|
$ | 63,633 | $ | 2,775 | $ | 60,858 | $ | (1,630 | ) | $ | 62,488 | |||||||||
Salaries and employee benefits Salaries and employee benefits increased $0.6 million, or
2%, in 2010 primarily as a result of increased employee insurance expense. The number of full-time
equivalent employees decreased from 466 at the beginning of the year to 432 as of December 31,
2010.
16
Table of Contents
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. The number of full-time
equivalent employees increased from 442 at the beginning of the year to 466 as of December 31,
2009.
Occupancy Occupancy expense decreased $0.5 million, or 4%, in 2010 primarily due to decreased
depreciation expense. Occupancy expense increased $0.8 million, or 7%, in 2009 due to increased
building rental expense, depreciation expense, security service expense, and janitorial service
expense. Approximately $0.5 million of the increase in 2009 was the result of the FNBA
acquisition.
FDIC and other insurance Southwests bank subsidiaries pay deposit insurance premiums to the
FDIC based on assessment rates. The increase in FDIC and other insurance expense for 2010 is due
to higher average deposit balances and a decrease in asset quality. The increase in 2009 was 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 was paid on transaction accounts exceeding $250,000 under the Temporary
Liquidity Guaranty Program.
Other real estate, net During 2010, Southwest acquired and sold properties; however, the net
effect of current year transactions caused an increase in other real estate expenses. Other real
estate was $41.9 million at December 31, 2010, compared to $23.2 million at December 31, 2009. The
decreased other real estate expenses in 2009 occurred as Southwest received income from the sales
of previously acquired properties.
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 $1.4 million and $0.9
million decreases in 2010 and 2009, respectively, are due to declines in the level of commitments
when compared to prior years.
Other general and administrative Other general and administrative expenses increased $1.7
million, or 12%, in 2010 after declining $0.9 million, or 6%, in 2009. The increase in 2010 is
primarily the result of increased consulting fees and increased legal fees associated with loan and
other real estate transactions. The decline in 2009 is primarily the result of an increase in
deferred expense recognition related to loan origination costs.
17
Table of Contents
Operating Segments
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Oklahoma banking |
$ | 14,864 | $ | 12,160 | $ | 12,505 | ||||||
Texas banking |
4,523 | 10,722 | 7,551 | |||||||||
Kansas banking |
884 | 424 | (1,122 | ) | ||||||||
Other states banking |
(1,958 | ) | (1,618 | ) | 2,756 | |||||||
Secondary market |
980 | (148 | ) | (144 | ) | |||||||
Other operations |
(2,329 | ) | (8,558 | ) | (6,645 | ) | ||||||
Consolidated net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Oklahoma banking |
$ | 871,393 | $ | 933,150 | $ | 966,243 | ||||||
Texas banking |
982,845 | 1,054,404 | 947,603 | |||||||||
Kansas banking |
289,642 | 359,633 | 304,855 | |||||||||
Other states banking |
241,041 | 277,512 | 275,805 | |||||||||
Secondary market |
35,194 | 43,134 | 56,941 | |||||||||
Consolidated total loans |
$ | 2,420,115 | $ | 2,667,833 | $ | 2,551,447 | ||||||
Oklahoma banking |
$ | 899,269 | $ | 950,355 | $ | 984,298 | ||||||
Texas banking |
976,383 | 1,044,324 | 945,907 | |||||||||
Kansas banking |
389,813 | 441,114 | 310,503 | |||||||||
Other states banking |
231,590 | 275,653 | 272,599 | |||||||||
Secondary market |
37,483 | 45,148 | 61,149 | |||||||||
Other operations |
286,003 | 351,697 | 305,306 | |||||||||
Consolidated total assets |
$ | 2,820,541 | $ | 3,108,291 | $ | 2,879,762 | ||||||
Oklahoma banking |
$ | 1,565,124 | $ | 1,640,839 | $ | 1,394,008 | ||||||
Texas banking |
160,181 | 160,064 | 133,745 | |||||||||
Kansas banking |
270,271 | 283,506 | 146,182 | |||||||||
Secondary market |
1,389 | 1,527 | 1,550 | |||||||||
Other operations |
255,763 | 506,794 | 504,637 | |||||||||
Consolidated total deposits |
$ | 2,252,728 | $ | 2,592,730 | $ | 2,180,122 | ||||||
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 increased $2.7 million, or 22%, in 2010, as a
result of a $7.9 million decrease in the provision for loan losses, offset in part by a $1.7
million increase in noninterest expense, a $1.3 million increase in income taxes, a $1.1 million
decrease in net interest income, and a $1.0 million decrease in other noninterest income. Oklahoma
Banking segment net income decreased $0.3 million, or 3%, in 2009, 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 $0.7 million
in income taxes.
The contribution of the Texas Banking segment decreased $6.2 million, or 58%, in 2010, primarily as
a result of a $10.2 million increase in the provision for loan losses, offset in part by a $3.9
million decrease in income taxes. The contribution of the Texas Banking segment increased $3.2
million, or 42%, in 2009, primarily as a result of an
18
Table of Contents
$8.4 million increase in net interest income and decreased noninterest expense 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.
The contribution of the Kansas Banking segment increased $0.5 million, or 108%, in 2010 as a result
of a $4.4 million decrease in the provision for loan losses and increased net interest income of
$0.9 million, offset in part by a $2.0 million decrease in noninterest income, which included the
$3.3 million recognized gain on the FDIC-assisted acquisition of FNBA in 2009, a $2.5 million
increase in noninterest expense, and an increase in income taxes of $0.4 million. 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 included 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.
The contribution of the Other States Banking segment decreased by $0.3 million, or 21%, in 2010
primarily as a result of decreased net interest income of $1.2 million, offset in part by a $1.4
million decrease in the provision for loan losses. 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.
At December 31, 2010, Southwests eleven Oklahoma offices accounted for $871.4 million in loans, or
37% of total portfolio loans, the six Texas offices accounted for $982.8 million in loans, or 41%
of total portfolio loans, the eight Kansas offices accounted for $289.6 million in loans, or 12% of
total portfolio loans, and the Other States Banking segment accounted for $241.0 million in loans,
or 10% of total portfolio loans.
For 2010, the Secondary Market segment contributed net income of $1.0 million. The Secondary
Market segment incurred a loss of $0.1 million in 2009. The increase occurred primarily as a
result of decreased noninterest expense as a result of the reduction in student loan activities due
to the changes in federal regulation.
For 2010 and 2009, the Other Operations segment, which includes Southwests fund management unit,
incurred a loss of $2.3 million and $8.6 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 17 of the Notes of 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, 2010 accounted for approximately $2.5 billion, or 89%, 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. Capital is assigned to each of the segments using a
risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue
category based on credit risk, interest rate risk, market risk, operational risk, and liquidity
risk.
Taxes on Income
Southwests income tax expense for fiscal years 2010, 2009, and 2008 was $9.7 million, $7.6
million, and $9.5 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.
19
Table of Contents
Financial Condition
Southwests total assets decreased by $287.8 million, or 9%, to $2.8 billion at December 31, 2010,
compared to $3.1 billion at December 31, 2009 after increasing by $228.5 million, or 8%, between
December 31, 2009 and December 31, 2008. The decline in assets in 2010 was primarily attributable
to the $247.7 million, or 9%, decrease in total loans and the $51.4 million, or 43%, decrease in
cash.
Investment Securities Portfolio
Southwest maintains an investment securities portfolio consisting of securities issued by U.S.
Government sponsored entities, state and political subdivisions, and mortgage-backed and other
investments. 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). Investment securities
are held in safekeeping by an independent custodian.
Investment securities assigned to the available for sale portfolio are generally used to supplement
Southwests liquidity, provide a prudent yield, and provide collateral for public deposits and
other borrowing facilities. Unrealized net gains and losses on available for sale securities are
recorded as an adjustment to equity, net of taxes, but are not reflected in the current earnings of
Southwest. If management determines any impairment in any available for sale security is
other-than-temporary, a securities loss will be recognized as a charge to earnings. If a
security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity
adjustment is reversed. At December 31, 2010, Southwest held $248.2 million in securities
classified as available for sale with an unrealized gain of $1.6 million, net of taxes of $0.6
million, related to these securities included in shareholders equity.
Investment securities assigned to the held to maturity portfolio earn a prudent yield, provide
liquidity from maturities and paydowns, and provide collateral to pledge for federal, state, and
local government deposits and other borrowing facilities. The held to maturity investment
portfolio at December 31, 2010 included $14.3 million in fixed-rate securities. If management
determines any impairment in any held to maturity security is other-than-temporary, a securities
loss will be recognized as a charge to earnings.
Southwest had no trading securities at December 31, 2010, 2009, and 2008.
A summary of the investment securities portfolio is as follows for the years ended December 31,
2010, 2009, and 2008.
At December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
U.S. Government obligations |
$ | 1,108 | $ | 1,100 | $ | 999 | ||||||
Federal agency securities |
65,374 | 75,385 | 79,197 | |||||||||
Obligations of states and political subdivisions |
14,537 | 7,523 | 10,098 | |||||||||
Residential mortgage-backed securities |
180,017 | 159,146 | 154,013 | |||||||||
Other investments |
11,893 | 20,285 | 19,859 | |||||||||
Total investment securities |
$ | 272,929 | $ | 263,439 | $ | 264,166 | ||||||
Available for sale (fair value) |
$ | 248,221 | $ | 237,703 | $ | 238,037 | ||||||
Held to maturity (amortized cost) |
14,304 | 6,670 | 7,343 | |||||||||
Other investments (cost) |
10,404 | 19,066 | 18,78 | |||||||||
Total investment securities |
$ | 272,929 | $ | 263,439 | $ | 264,166 | ||||||
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.
20
Table of Contents
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, 2010. 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, 2010.
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 |
$ | 2,470 | 3.22 | % | $ | 5,344 | 1.84 | % | $ | 6,490 | 2.39 | % | $ | | | % | $ | 14,304 | $ | 14,029 | 2.33 | % | ||||||||||||||||||||||||
Total |
$ | 2,470 | 3.22 | % | $ | 5,344 | 1.84 | % | $ | 6,490 | 2.39 | % | $ | | | % | $ | 14,304 | $ | 14,029 | 2.33 | % | ||||||||||||||||||||||||
Available for Sale: |
||||||||||||||||||||||||||||||||||||||||||||||
U.S. government
obligations |
$ | 1,099 | 1.20 | % | $ | | | % | $ | | | % | $ | | | % | $ | 1,099 | $ | 1,108 | 1.20 | % | ||||||||||||||||||||||||
Federal agency securities |
4,010 | 2.24 | 19,341 | 2.63 | 31,600 | 2.57 | 10,571 | 2.27 | 65,522 | 65,374 | 2.52 | |||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions |
150 | 3.88 | 26 | 3.35 | 55 | | | | 231 | 233 | 4.57 | |||||||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
20,995 | 2.70 | 118,004 | 3.09 | 38,989 | 2.87 | 707 | 5.83 | 178,695 | 180,017 | 3.01 | |||||||||||||||||||||||||||||||||||
Other securities |
| | 11,506 | | | | | | 11,506 | 11,893 | | |||||||||||||||||||||||||||||||||||
Total |
$ | 26,254 | 2.58 | % | $ | 148,877 | 2.79 | % | $ | 70,644 | 2.74 | % | $ | 11,278 | 2.49 | % | $ | 257,053 | $ | 258,625 | 2.74 | % | ||||||||||||||||||||||||
Total |
$ | 28,724 | $ | 154,221 | $ | 77,134 | $ | 11,278 | $ | 271,357 | $ | 272,654 | ||||||||||||||||||||||||||||||||||
Note: | Average yields for investments held for sale is based on amortized cost. Yields on tax-exempt securities are shown on a tax-equivalent basis. |
Loan Portfolio
The following table presents the composition of the loan portfolio over the previous five years.
At December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Noncovered: |
||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||
Commercial |
$ | 1,310,464 | $ | 1,212,409 | $ | 1,118,828 | $ | 750,047 | $ | 609,271 | ||||||||||
One-to-four family residential |
89,800 | 114,614 | 113,665 | 111,085 | 91,441 | |||||||||||||||
Real estate construction: |
||||||||||||||||||||
Commercial |
441,265 | 618,078 | 579,795 | 643,656 | 384,072 | |||||||||||||||
One-to-four family residential |
27,429 | 41,109 | 79,565 | 81,273 | 69,678 | |||||||||||||||
Commercial |
452,626 | 520,505 | 564,670 | 521,501 | 424,189 | |||||||||||||||
Installment and consumer: |
||||||||||||||||||||
Guaranteed student loans |
5,843 | 36,163 | 54,057 | 61,555 | 181,458 | |||||||||||||||
Other |
39,060 | 39,550 | 40,867 | 42,715 | 31,081 | |||||||||||||||
2,366,487 | 2,582,428 | 2,551,447 | 2,211,832 | 1,791,190 | ||||||||||||||||
Less: Allowance for loan losses |
(65,229 | ) | (62,413 | ) | (39,773 | ) | (29,584 | ) | (27,293 | ) | ||||||||||
Total noncovered loans, net |
$ | 2,301,258 | $ | 2,520,015 | $ | 2,511,674 | $ | 2,182,248 | $ | 1,763,897 | ||||||||||
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At December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Covered: |
||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||
Commercial |
$ | 30,997 | $ | 39,836 | $ | | $ | | $ | | ||||||||||
One-to-four family residential |
9,122 | 12,630 | | | | |||||||||||||||
Real estate construction: |
||||||||||||||||||||
Commercial |
6,840 | 12,515 | | | | |||||||||||||||
One-to-four family residential |
439 | 5,324 | | | | |||||||||||||||
Commercial |
5,554 | 13,412 | | | | |||||||||||||||
Installment and consumer |
676 | 1,688 | | | | |||||||||||||||
Total covered loans |
$ | 53,628 | $ | 85,405 | $ | | $ | | $ | | ||||||||||
Included in covered loans above are $14.4 million and $23.9 million, respectively, 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, 2010 and December 31, 2009, loans to individuals and businesses in the
healthcare industry totaled $713.7 million, or 30%, and $697.7 million, or 27%, of noncovered
loans, respectively.
The following table sets forth the remaining maturities for certain loan categories (including
loans held for sale) at December 31, 2010. 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.
After one | ||||||||||||||||
One year | year through | After | ||||||||||||||
(Dollars in thousands) | or less | five years | five years | Total | ||||||||||||
Noncovered: |
||||||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
$ | 413,445 | $ | 722,624 | $ | 174,395 | $ | 1,310,464 | ||||||||
One-to-four family residential |
11,385 | 40,931 | 37,484 | 89,800 | ||||||||||||
Real estate construction |
261,397 | 192,264 | 15,033 | 468,694 | ||||||||||||
Commercial |
125,083 | 246,556 | 80,987 | 452,626 | ||||||||||||
Installment and consumer: |
||||||||||||||||
Guaranteed student loans |
5,843 | | | 5,843 | ||||||||||||
Other |
15,939 | 22,079 | 1,042 | 39,060 | ||||||||||||
Total noncovered |
833,092 | 1,224,454 | 308,941 | 2,366,487 | ||||||||||||
Covered: |
||||||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
3,969 | 9,039 | 17,989 | 30,997 | ||||||||||||
One-to-four family residential |
1,864 | 2,279 | 4,979 | 9,122 | ||||||||||||
Real estate construction |
6,204 | 475 | 600 | 7,279 | ||||||||||||
Commercial |
2,478 | 2,823 | 253 | 5,554 | ||||||||||||
Installment and consumer |
181 | 463 | 32 | 676 | ||||||||||||
Total covered |
14,696 | 15,079 | 23,853 | 53,628 | ||||||||||||
Total |
$ | 847,788 | $ | 1,239,533 | $ | 332,794 | $ | 2,420,115 | ||||||||
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Table of Contents
The following table sets forth at December 31, 2010 the dollar amount of all loans due more
than one year after December 31, 2010.
(Dollars in thousands) | Fixed | Variable | Total | |||||||||
Noncovered: |
||||||||||||
Real estate mortgage: |
||||||||||||
Commercial |
$ | 336,030 | $ | 560,989 | $ | 897,019 | ||||||
One-to-four family residential |
31,512 | 46,903 | 78,415 | |||||||||
Real estate construction |
67,562 | 139,735 | 207,297 | |||||||||
Commercial |
81,600 | 245,943 | 327,543 | |||||||||
Installment and consumer |
7,758 | 15,363 | 23,121 | |||||||||
Total noncovered |
524,462 | 1,008,933 | 1,533,395 | |||||||||
Covered: |
||||||||||||
Real estate mortgage: |
||||||||||||
Commercial |
8,205 | 18,823 | 27,028 | |||||||||
One-to-four family residential |
1,198 | 6,060 | 7,258 | |||||||||
Real estate construction |
227 | 848 | 1,075 | |||||||||
Commercial |
1,462 | 1,614 | 3,076 | |||||||||
Installment and consumer |
495 | | 495 | |||||||||
Total covered |
11,587 | 27,345 | 38,932 | |||||||||
Total |
$ | 536,049 | $ | 1,036,278 | $ | 1,572,327 | ||||||
Nonperforming Assets and Potential Problem Loans
The following table shows the amounts of nonperforming assets at the end of the periods indicated.
Please see Note 1 of the Notes to the Consolidated Financial Statements for a description of
Southwests policy for placing loans on nonaccrual status.
At December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Noncovered: |
||||||||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial real estate |
$ | 29,996 | $ | 28,351 | $ | 9,881 | $ | 5,274 | $ | 6,118 | ||||||||||
One-to-four family residential |
1,984 | 9,387 | 474 | 740 | 484 | |||||||||||||||
Real estate construction |
67,571 | 57,586 | 37,346 | 2,910 | 3,398 | |||||||||||||||
Commercial |
6,977 | 10,404 | 11,598 | 10,517 | 16,673 | |||||||||||||||
Other consumer |
38 | 159 | 11 | 93 | 62 | |||||||||||||||
Total nonaccrual loans |
106,566 | 105,887 | 59,310 | 19,534 | 26,735 | |||||||||||||||
Past due 90 days or more: |
||||||||||||||||||||
Commercial real estate |
514 | 100 | 9 | 8,214 | 1,133 | |||||||||||||||
One-to-four family residential |
| 76 | 39 | 74 | 310 | |||||||||||||||
Real estate construction |
| | 4,005 | 3 | 556 | |||||||||||||||
Commercial |
| 18 | 547 | 1,456 | 534 | |||||||||||||||
Other consumer |
3 | 116 | 73 | 290 | 89 | |||||||||||||||
Total past due 90 days or more |
517 | 310 | 4,673 | 10,037 | 2,622 | |||||||||||||||
Total nonperforming loans |
107,083 | 106,197 | 63,983 | 29,571 | 29,357 | |||||||||||||||
Other real estate |
37,722 | 18,432 | 6,092 | 2,679 | 1,873 | |||||||||||||||
Total nonperforming assets |
$ | 144,805 | $ | 124,629 | $ | 70,075 | $ | 32,250 | $ | 31,230 | ||||||||||
Total performing restructured |
$ | 2,177 | $ | | $ | | $ | | $ | | ||||||||||
Nonperforming assets to portfolio loans
and other real estate |
6.11 | % | 4.87 | % | 2.80 | % | 1.50 | % | 1.95 | % | ||||||||||
Nonperforming loans to portfolio loans |
4.59 | 4.18 | 2.56 | 1.38 | 1.83 | |||||||||||||||
Allowance for loan losses to nonperforming loans |
60.91 | 58.77 | 62.16 | 100.04 | 92.97 | |||||||||||||||
Government-guaranteed portion of nonperforming
loans |
$ | 124 | $ | 277 | $ | 1,072 | $ | 1,337 | $ | 1,629 |
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At December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Covered: |
||||||||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial real estate |
$ | 4,391 | $ | 1,847 | $ | | $ | | $ | | ||||||||||
One-to-four family residential |
932 | 2,243 | | | | |||||||||||||||
Real estate construction |
4,897 | 7,525 | | | | |||||||||||||||
Commercial |
581 | 665 | | | | |||||||||||||||
Other consumer |
5 | 42 | | | | |||||||||||||||
Total nonaccrual loans |
10,806 | 12,322 | | | | |||||||||||||||
Past due 90 days or more: |
||||||||||||||||||||
Commercial real estate |
| 542 | | | | |||||||||||||||
Real estate construction |
| 574 | | | | |||||||||||||||
Other consumer |
| 20 | | | | |||||||||||||||
Total past due 90 days or more |
| 1,136 | | | | |||||||||||||||
Total nonperforming loans |
10,806 | 13,458 | | | | |||||||||||||||
Other real estate |
4,187 | 4,748 | | | | |||||||||||||||
Total nonperforming assets |
$ | 14,993 | $ | 18,206 | $ | | $ | | $ | | ||||||||||
Nonperforming assets to portfolio loans
and other real estate |
25.93 | % | 20.19 | % | | | | |||||||||||||
Nonperforming loans to portfolio loans |
20.15 | 15.76 | | | | |||||||||||||||
Government-guaranteed portion of
nonperforming loans |
$ | 6,948 | $ | 3,853 | $ | | $ | | $ | |
At December 31, 2010, nine credit relationships represented 70% of noncovered nonperforming
loans and 52% of noncovered nonperforming assets, while at December 31, 2009, seven credit
relationships represented 66% of noncovered nonperforming loans and 57% of noncovered nonperforming
assets.
Included in noncovered nonaccrual loans as of December 31, 2010 are nine collateral dependent
lending relationships with aggregate principal balances of approximately $75.4 million and related
impairment reserves of $5.9 million which were established based on recent appraisal values
obtained for the respective properties. All nine of these lending relationships are in the
commercial real estate industry and include a residential condominium construction project with two
loans outstanding, a hotel building with two loans outstanding, a retail building project with one
loan outstanding, a lending relationship consisting of two loans that includes two retail
commercial real estate buildings for lease, a lending relationship consisting of three loans for
residential care buildings, and four residential land development lending relationships, one with
two loans and three with one loan.
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 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.
Noncovered nonperforming assets could fluctuate from period to period. The performance of any
individual loan can be affected by external factors such as the interest rate environment, economic
conditions, collateral values, or factors particular to the borrower. No assurance can be given
that additional increases in noncovered nonaccrual loans will not occur in the future.
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 $236.6 million at December 31, 2010,
compared to $267.3 million at December 31, 2009. Included
24
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are $3.5 million and $8.9 million, respectively, of covered potential problem loans, 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.
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.
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 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 of the Notes to the Consolidated Financial Statements for a
description of Southwests allowance for loan losses methodology.
Based upon this methodology, management established an allowance of $65.2 million, or 2.80% of
total noncovered portfolio loans, at December 31, 2010, compared to an allowance of $62.4 million,
or 2.46% of total noncovered portfolio loans, at December 31, 2009. This represents an increase in
the allowance of $2.8 million, or 5%.
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, 2010, the allowance on the $106.6 million in noncovered nonaccrual loans
was $12.9 million (12.1%), compared with an allowance on $105.9 million in noncovered nonaccrual
loans at December 31, 2009 of $13.3 million (12.6%), creating a decrease in the allowance of $0.4
million, or 3%. At December 31, 2010, the allowance for noncovered troubled debt restructured
loans was $7.0 million (11%), creating an increase in the allowance of $7.0 million. At December
31, 2010, the allowance for other noncovered loans was $45.3 million (2.1%), compared to $49.1
million (2.0%) at December 31, 2009, creating a decrease in the allowance of $3.8 million, or 8%.
The decrease in the allowance related to these other noncovered loans mainly resulted from the
decline in loans and consideration of certain trends and qualitative factors. These included
managements assessment of economic risk (particularly with respect to commercial and commercial
real estate loans), and asset quality trends, including levels of potential problem loans and loan
concentrations in commercial real estate mortgage and construction loans, which together comprised
approximately 74% of our noncovered portfolio loans at December 31, 2010, offset in part by an
increase in adjusted loss rates due to increased net loss ratios. Based on its analysis management
believes the amount of the allowance is appropriate. Covered portfolio loans were $53.6 million at
December 31, 2010. These loans are subject to protection under the loss sharing agreements with
the FDIC and currently do not have an allowance for loan losses.
At December 31, 2010, the allowance for loan losses was 60.91% of noncovered nonperforming loans,
compared to 58.77% of noncovered nonperforming loans at December 31, 2009. Noncovered nonaccrual
loans, which comprise the majority of noncovered nonperforming loans, were $106.6 million as of
December 31, 2010, an increase of $0.7 million, or 1%, from December 31, 2009. Noncovered
nonaccrual loans at December 31, 2010 were comprised of 56 relationships and were primarily
concentrated in real estate construction (63%) and commercial real estate (28%) loans. All
noncovered nonaccrual loans are considered impaired and are carried at their estimated collectible
amounts. Noncovered loans 90 days or more past due at December 31, 2010, another component of
noncovered nonperforming loans, increased $0.2 million, or 67%, from December 31, 2009. These
noncovered loans are believed to have sufficient collateral and are in the process of being
collected and are not
25
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considered impaired. Covered nonperforming loans of $10.8 million at December 31, 2010 and $13.4
million at December 31, 2009 are subject to protection under the loss share agreements with the
FDIC.
The following table presents a five-year history of the allocation of the allowance for loan losses
along with the percentage of total noncovered loans in each category.
At December 31, | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 32,508 | 55 | % | $ | 26,670 | 47 | % | $ | 13,200 | 44 | % | $ | 10,126 | 34 | % | $ | 9,641 | 34 | % | ||||||||||||||||||||
One-to-four family residential |
1,597 | 4 | 2,454 | 5 | 1,332 | 4 | 693 | 5 | 492 | 5 | ||||||||||||||||||||||||||||||
Real estate construction |
19,605 | 20 | 22,241 | 25 | 12,795 | 26 | 5,649 | 33 | 1,790 | 25 | ||||||||||||||||||||||||||||||
Commercial |
10,605 | 19 | 10,052 | 20 | 11,401 | 22 | 10,369 | 23 | 12,321 | 24 | ||||||||||||||||||||||||||||||
Installment and consumer: |
||||||||||||||||||||||||||||||||||||||||
Guaranteed student
loans |
| | | 1 | | 2 | 31 | 3 | 90 | 10 | ||||||||||||||||||||||||||||||
Other |
914 | 2 | 996 | 2 | 1,045 | 2 | 804 | 2 | 536 | 2 | ||||||||||||||||||||||||||||||
Unallocated* |
| | | | | | 1,912 | | 2,423 | | ||||||||||||||||||||||||||||||
Total |
$ | 65,229 | 100 | % | $ | 62,413 | 100 | % | $ | 39,773 | 100 | % | $ | 29,584 | 100 | % | $ | 27,293 | 100 | % | ||||||||||||||||||||
* | Under current methodology, allowance is allocated among respective loan types. |
The following table analyzes Southwests allowance for loan losses for the periods indicated.
For the Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Balance at beginning of period |
$ | 62,413 | $ | 39,773 | $ | 29,584 | $ | 27,293 | $ | 23,812 | ||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial real estate |
4,571 | 3,622 | 1,379 | 1,540 | 452 | |||||||||||||||
One-to-four family residential |
2,649 | 1,476 | 746 | 337 | 256 | |||||||||||||||
Real estate construction |
20,910 | 7,464 | 2,209 | 129 | 445 | |||||||||||||||
Commercial |
5,182 | 5,223 | 4,552 | 4,663 | 7,606 | |||||||||||||||
Other consumer |
1,127 | 1,128 | 1,056 | 696 | 788 | |||||||||||||||
Total charge-offs |
34,439 | 18,913 | 9,942 | 7,365 | 9,547 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial real estate |
204 | 438 | 8 | 22 | 387 | |||||||||||||||
One-to-four family residential |
234 | 430 | 49 | 10 | 27 | |||||||||||||||
Real estate construction |
610 | 344 | 2 | | | |||||||||||||||
Commercial |
421 | 893 | 962 | 606 | 403 | |||||||||||||||
Other consumer |
226 | 272 | 131 | 71 | 24 | |||||||||||||||
Total recoveries |
1,695 | 2,377 | 1,152 | 709 | 841 | |||||||||||||||
Net loans charged-off |
32,744 | 16,536 | 8,790 | 6,656 | 8,706 | |||||||||||||||
Provision for loan losses |
35,560 | 39,176 | 18,979 | 8,947 | 12,187 | |||||||||||||||
Balance at end of period |
$ | 65,229 | $ | 62,413 | $ | 39,773 | $ | 29,584 | $ | 27,293 | ||||||||||
Portfolio loans: |
||||||||||||||||||||
Noncovered end of period balance |
$ | 2,331,293 | $ | 2,539,294 | $ | 2,494,506 | $ | 2,145,557 | $ | 1,602,726 | ||||||||||
Total average balance |
2,535,310 | 2,614,045 | 2,359,471 | 1,816,149 | 1,474,884 | |||||||||||||||
Ratio of allowance for loan losses to noncovered
portfolio loans at end of period |
2.80 | % | 2.46 | % | 1.59 | % | 1.38 | % | 1.70 | % | ||||||||||
Ratio of net charge-offs to average
portfolio loans during the period |
1.29 | % | 0.63 | % | 0.37 | % | 0.37 | % | 0.59 | % |
Both the dollar amount of the allowance and the percentage of the allowance to noncovered
loans increased during 2010 and 2009. The increases were primarily the result of decreased loan
balances, increased net charge-offs, an increase in the allowance related to impaired loans, as
well as other risk factors including potential problem loans and national and local economic
trends.
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Short-term Borrowings
Southwests primary source of short-term borrowings is federal funds purchased from correspondent
banks and securities sold under agreements to repurchase. During 2010, 2009, and 2008, no category
of short-term borrowings had an average balance that exceeded 30% of ending shareholders equity.
Off-Balance Sheet Arrangements and Contractual Obligations
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 U.S. generally
accepted accounting principles, 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 15 in the Notes to the Consolidated Financial Statements.
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 8 in the Notes to the Consolidated Financial Statements.
Southwest has various contractual obligations that require future cash payment. The following
table presents, as of December 31, 2010, 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 |
$ | 377,182 | $ | | $ | | $ | | $ | 377,182 | ||||||||||
Interest bearing |
614,502 | | | | 614,502 | |||||||||||||||
Time deposits (2) |
1,085,524 | 176,804 | 11,773 | 28 | 1,274,129 | |||||||||||||||
Other borrowings (2) |
71,742 | 2,649 | 2,657 | 37,013 | 114,061 | |||||||||||||||
Subordinated debentures (2) |
5,246 | 10,491 | 10,491 | 192,636 | 218,864 | |||||||||||||||
Operating leases |
2,380 | 3,526 | 2,219 | 1,019 | 9,144 | |||||||||||||||
Total |
$ | 2,156,576 | $ | 193,470 | $ | 27,140 | $ | 230,696 | $ | 2,607,882 | ||||||||||
(1) | Excludes interest. | |
(2) | Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2010. 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. |
The obligation associated with uncertain tax positions is $6.0 million, net of federal benefit
on state issues. The payment period for this obligation is not estimable at this time.
At December 31, 2010, 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 see Quantitative and
Qualitative Disclosures about Market Risk on page 30 and in the Notes to the Consolidated
Financial Statements in this report, Note 4 Premises and Equipment, Note 7 Deposits and Other
Borrowed Funds, Note 8 Subordinated Debentures, Note 15 Financial Instruments with Off-Balance
Sheet Risk, and Note 16 Commitments and Contingencies.
Capital Resources
At December 31, 2010, total shareholders equity was $377.8 million, compared to $309.8 million at
December 31, 2009. Issuance of common shares through a public stock offering contributed $54.0
million to shareholders
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equity and earnings, net of preferred dividends, contributed $13.5 million to shareholders equity.
Sales of common stock through the employee stock purchase plan and the employee stock option plan
contributed an additional $0.5 million to shareholders equity in 2010, 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 $1.0 million at December 31, 2010, from
$0.9 million at December 31, 2009.
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 $0.9 million at December 31,
2009, from $2.9 million at December 31, 2008.
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, 2010, Southwest exceeded all applicable capital requirements, having a
total risk-based capital ratio of 19.06%, a Tier 1 risk-based capital ratio of 17.78%, and a Tier 1
leverage ratio of 15.55%. 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, 2010,
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 29 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, 2010:
(Dollars in thousands) | Amount | |||
Three months or less (1) |
$ | 34,333 | ||
Over three through six months (1) |
27,995 | |||
Over six through 12 months (1) |
358,642 | |||
Over 12 months |
273,595 | |||
Total |
$ | 694,565 | ||
(1) | The amount of certificates of deposit of $100,000 and more that mature within 12 months is $421.0 million. |
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.
28
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Average assets totaled $3.0 billion in 2010 and 2009 compared to $2.7 billion in 2008.
Percentage of Total Average Assets | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Sources of Funds: |
||||||||||||
Deposits: |
||||||||||||
Noninterest-bearing demand |
11.04 | % | 9.55 | % | 9.80 | % | ||||||
Interest-bearing demand and money market accounts |
20.25 | 19.05 | 22.39 | |||||||||
Time and savings deposits |
50.18 | 51.54 | 46.19 | |||||||||
Other borrowings |
3.21 | 6.08 | 9.99 | |||||||||
Subordinated debentures |
2.73 | 2.74 | 2.34 | |||||||||
Other liabilities |
0.60 | 0.70 | 0.80 | |||||||||
Equity capital |
11.99 | 10.34 | 8.49 | |||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Uses of Funds: |
||||||||||||
Loans |
85.82 | % | 89.30 | % | 88.56 | % | ||||||
Investment securities |
8.71 | 8.22 | 8.70 | |||||||||
Other interest-earning assets |
2.93 | 0.19 | 0.14 | |||||||||
Noninterest-earning assets |
2.54 | 2.29 | 2.60 | |||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Sources and uses of cash are presented in the Consolidated Statements of Cash Flows on page 40
of this report. Total cash and cash equivalents decreased by $51.4 million, or 43%, to $67.5
million in 2010 from $118.8 million at year-end 2009. This decrease was the net result of cash
used in financing activities of $297.9 million, primarily from decreased deposits net of capital
raised, offset by cash provided from investing activities of $152.2 million, primarily from
principal repayments net of loans originated, and cash provided by operating activities of $94.3
million.
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, primarily from increased deposits net of decreased borrowings, and
cash provided by operating activities of $44.4 million, offset by cash used in investing activities
of $12.2 million, primarily from loans originated net of principal repayments.
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.
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 the composition of the
loan portfolio on page 21, Nonperforming Assets and Potential Problem Loans beginning on page 23,
Allowance for Loan Losses beginning on page 25, and Risk Factors beginning on page 90.
Under the terms of a January 27, 2010 Formal 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 as required relating to the following items:
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| 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 above specific thresholds or declaring
dividends.
The compliance committee of the Board of Directors of Stillwater National submits 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 Formal 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%. At December 31,
2010, Stillwater National had a Tier 1 leverage ratio of 13.84%, a Tier 1 risk-based capital ratio
of 15.29%, and a total capital to risk weighted assets ratio of 17.22%. 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.
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. Although Southwest is not currently paying
dividends on its common stock, it has not deferred any dividends on trust preferred securities or
preferred stock. 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 we are
diligently working to reduce levels of nonperforming assets.
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
30
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investment strategies, and oversees the timing and implementation of transactions. Notwithstanding
Southwests 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 or
repricing periods at December 31, 2010:
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 |
$ | 711,504 | $ | 377,014 | $ | 1,072,589 | $ | 259,008 | $ | 2,420,115 | ||||||||||
Investment securities |
15,501 | 4,467 | 28,235 | 224,726 | 272,929 | |||||||||||||||
Due from banks |
41,018 | | | | 41,018 | |||||||||||||||
Total |
768,023 | 381,481 | 1,100,824 | 483,734 | 2,734,062 | |||||||||||||||
Rate-sensitive liabilities: |
||||||||||||||||||||
Money market deposit accounts |
495,253 | | | | 495,253 | |||||||||||||||
Time deposits |
305,222 | 773,701 | 182,096 | 25 | 1,261,044 | |||||||||||||||
Savings accounts |
26,665 | | | | 26,665 | |||||||||||||||
Interest-bearing demand |
92,584 | | | | 92,584 | |||||||||||||||
Other borrowings |
38,102 | 31,500 | | 25,000 | 94,602 | |||||||||||||||
Subordinated debentures |
| | | 81,963 | 81,963 | |||||||||||||||
Total |
957,826 | 805,201 | 182,096 | 106,988 | 2,052,111 | |||||||||||||||
Interest sensitivity gap |
$ | (189,803 | ) | $ | (423,720 | ) | $ | 918,728 | $ | 376,746 | $ | 681,951 | ||||||||
Cumulative interest sensitivity gap |
$ | (189,803 | ) | $ | (613,523 | ) | $ | 305,205 | $ | 681,951 | $ | 681,951 | ||||||||
Percentage of rate-sensitive assets
to rate-sensitive liabilities |
80.18 | % | 47.38 | % | 604.53 | % | 452.14 | % | 133.23 | % | ||||||||||
Percentage of cumulative gap to
total assets |
(6.73 | )% | (21.75 | )% | 10.82 | % | 24.18 | % | 24.18 | % | ||||||||||
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.
31
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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), 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, 2010 |
1.58 | % | (2.77 | )% | (3.30 | )% | ||||||
December 31, 2009 |
1.98 | % | (2.33 | )% | (1.91 | )% |
The current overnight rate as established by the Federal Open Market Committee is in the 0% to
0.25% range. 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 increased in each of the
rising interest rate scenarios when compared to the December 31, 2009 risk position. Southwests
largest exposure to changes in interest rate is in the +100 bp scenario with a decline in net
interest income (3.30)% at December 31, 2010, a decline of 1.39 percentage points from December 31,
2009 level of (1.91)%. 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, 2010 |
(2.15 | )% | (1.35 | )% | (0.47 | )% | ||||||
December 31, 2009 |
(9.55 | )% | (4.78 | )% | (0.27 | )% |
As of December 31, 2010, the economic value of equity measure improved in two of the three
rising interest rate scenarios when compared to December 31, 2009. Southwests largest economic
value of equity exposure is the +300 bp scenario which improved 7.40 percentage points to (2.15)%
on December 31, 2010 from December 31, 2009 value of (9.55)%. The economic value of equity ratio
in all scenarios remains well within Southwests Asset and Liability Management Policy limits.
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, 2010. 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, 2010.
32
Table of Contents
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, 2010. 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, 2010.
The report by Southwests independent registered public accounting firm, Ernst & Young LLP, on
Southwests internal control over financial reporting is included on page 34.
Fourth Quarter 2010 Changes in Internal Control over Financial Reporting
No change occurred during the fourth quarter of 2010 that has materially affected, or is reasonably
likely to materially affect, Southwests internal control over financial reporting.
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Table of Contents
Reports of Independent Registered Public Accounting Firm
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, 2010 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, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the 2010 consolidated financial statements of Southwest Bancorp, Inc. and
our report dated March 7, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
March 7, 2011
Tulsa, Oklahoma
March 7, 2011
34
Table of Contents
Consolidated Financial Statements and Supplementary Data
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, 2010 and 2009 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, 2010. 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, 2010 and
2009 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2010, 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, 2010, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March
7, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
March 7, 2011
Tulsa, Oklahoma
March 7, 2011
35
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SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 67,496 | $ | 118,847 | ||||
Investment securities: |
||||||||
Held to maturity, fair value $14,029 and $6,754, respectively |
14,304 | 6,670 | ||||||
Available for sale, amortized cost $246,649 and $236,199, respectively |
248,221 | 237,703 | ||||||
Other investments at cost |
10,404 | 19,066 | ||||||
Loans held for sale |
35,194 | 43,134 | ||||||
Noncovered loans receivable |
2,331,293 | 2,539,294 | ||||||
Less: Allowance for loan losses |
(65,229 | ) | (62,413 | ) | ||||
Net noncovered loans receivable |
2,266,064 | 2,476,881 | ||||||
Covered loans receivable (includes loss share of $14,370 and $23,945,
respectively) |
53,628 | 85,405 | ||||||
Net loans receivable |
2,319,692 | 2,562,286 | ||||||
Accrued interest receivable |
8,590 | 10,806 | ||||||
Premises and equipment, net |
23,772 | 26,536 | ||||||
Noncovered other real estate |
37,722 | 18,432 | ||||||
Covered other real estate |
4,187 | 4,748 | ||||||
Goodwill |
6,811 | 6,811 | ||||||
Other intangible assets, net |
5,371 | 5,779 | ||||||
Prepaid FDIC insurance premium |
9,883 | 14,581 | ||||||
Other assets |
28,894 | 32,892 | ||||||
Total assets |
$ | 2,820,541 | $ | 3,108,291 | ||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 377,182 | $ | 324,829 | ||||
Interest-bearing demand |
92,584 | 74,201 | ||||||
Money market accounts |
495,253 | 505,521 | ||||||
Savings accounts |
26,665 | 25,730 | ||||||
Time deposits of $100,000 or more |
694,565 | 1,004,439 | ||||||
Other time deposits |
566,479 | 658,010 | ||||||
Total deposits |
2,252,728 | 2,592,730 | ||||||
Accrued interest payable |
1,577 | 3,191 | ||||||
Income tax payable |
2,878 | 4,486 | ||||||
Other liabilities |
8,981 | 13,121 | ||||||
Other borrowings |
94,602 | 103,022 | ||||||
Subordinated debentures |
81,963 | 81,963 | ||||||
Total liabilities |
2,442,729 | 2,798,513 | ||||||
Shareholders equity: |
||||||||
Serial preferred stock $1,000 par value; 2,000,000 shares authorized;
70,000 shares issued |
67,724 | 67,037 | ||||||
Common stock $1 par value; 40,000,000 shares authorized;
19,421,900 and 14,750,713 shares issued, respectively |
19,422 | 14,751 | ||||||
Additional paid-in capital |
98,894 | 49,029 | ||||||
Retained earnings |
190,793 | 178,016 | ||||||
Accumulated other comprehensive income |
979 | 945 | ||||||
Total shareholders equity |
377,812 | 309,778 | ||||||
Total liabilities & shareholders equity |
$ | 2,820,541 | $ | 3,108,291 | ||||
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) | 2010 | 2009 | 2008 | |||||||||
Interest income: |
||||||||||||
Interest and fees on loans |
$ | 133,918 | $ | 141,239 | $ | 152,719 | ||||||
Investment securities: |
||||||||||||
U.S. Government and agency obligations |
2,006 | 1,960 | 3,552 | |||||||||
Mortgage-backed securities |
5,630 | 6,257 | 5,514 | |||||||||
State and political subdivisions |
285 | 299 | 375 | |||||||||
Other securities |
739 | 630 | 545 | |||||||||
Other interest-earning assets |
229 | 14 | 89 | |||||||||
Total interest income |
142,807 | 150,399 | 162,794 | |||||||||
Interest expense: |
||||||||||||
Interest-bearing demand |
468 | 476 | 584 | |||||||||
Money market accounts |
3,911 | 4,954 | 12,620 | |||||||||
Savings accounts |
64 | 78 | 69 | |||||||||
Time deposits of $100,000 or more |
13,372 | 20,864 | 28,214 | |||||||||
Other time deposits |
10,452 | 15,947 | 19,535 | |||||||||
Other borrowings |
2,079 | 4,049 | 7,242 | |||||||||
Subordinated debentures |
5,130 | 5,340 | 4,811 | |||||||||
Total interest expense |
35,476 | 51,708 | 73,075 | |||||||||
Net interest income |
107,331 | 98,691 | 89,719 | |||||||||
Provision for loan losses |
35,560 | 39,176 | 18,979 | |||||||||
Net interest income after provision for loan losses |
71,771 | 59,515 | 70,740 | |||||||||
Noninterest income: |
||||||||||||
Service charges and fees |
12,404 | 11,704 | 11,026 | |||||||||
Other noninterest income |
763 | 1,063 | 1,546 | |||||||||
Gain on acquisition |
| 3,281 | | |||||||||
Gains on sales of loans, net |
2,736 | 2,963 | 2,664 | |||||||||
Gains on sale/call of investment securities, net |
2,661 | 2,925 | 902 | |||||||||
Total noninterest income |
18,564 | 21,936 | 16,138 | |||||||||
Noninterest expense: |
||||||||||||
Salaries and employee benefits |
29,916 | 29,299 | 33,330 | |||||||||
Occupancy |
11,171 | 11,637 | 10,872 | |||||||||
FDIC and other insurance |
5,788 | 5,545 | 2,088 | |||||||||
Other real estate, net |
2,218 | 130 | 146 | |||||||||
General and administrative |
14,540 | 14,247 | 16,052 | |||||||||
Total noninterest expense |
63,633 | 60,858 | 62,488 | |||||||||
Income before taxes |
26,702 | 20,593 | 24,390 | |||||||||
Taxes on income |
9,738 | 7,611 | 9,489 | |||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Net income available to common shareholders |
$ | 12,777 | $ | 8,837 | $ | 14,658 | ||||||
Basic earnings per common share |
$ | 0.71 | $ | 0.60 | $ | 1.01 | ||||||
Diluted earnings per common share |
0.71 | 0.60 | 1.00 | |||||||||
Common dividends declared per share |
| 0.0952 | 0.3800 |
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) | 2010 | 2009 | 2008 | |||||||||
| | | | ||||||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Other comprehensive income: |
||||||||||||
Unrealized holding gain (loss) on available for sale securities |
2,729 | (315 | ) | 4,995 | ||||||||
Reclassification adjustment for net gains realized during the period |
(2,661 | ) | (2,925 | ) | (902 | ) | ||||||
Other comprehensive income (loss), before tax |
68 | (3,240 | ) | 4,093 | ||||||||
Tax benefit (expense) related to items of other comprehensive income |
(34 | ) | 1,264 | (1,580 | ) | |||||||
Other comprehensive income (loss), net of tax |
34 | (1,976 | ) | 2,513 | ||||||||
Comprehensive income |
$ | 16,998 | $ | 11,006 | $ | 17,414 | ||||||
The accompanying notes are an integral part of this statement.
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Table of Contents
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Accumulated | Total | |||||||||||||||||||||||||||||||
Additional | Other | Share- | ||||||||||||||||||||||||||||||
(Dollars in thousands, | Preferred | Common Stock | Paid-in | Retained | Comprehensive | Treasury | holders | |||||||||||||||||||||||||
except per share data) | Stock | Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Equity | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||||||||||
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 | $ | | $ | 309,778 | |||||||||||||||||
Cash dividends: |
||||||||||||||||||||||||||||||||
Preferred |
| | | | (3,500 | ) | | | (3,500 | ) | ||||||||||||||||||||||
Warrant amortization |
687 | | | | (687 | ) | | | | |||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Employee Stock Option Plan |
| 38,100 | 38 | 163 | | | | 201 | ||||||||||||||||||||||||
Employee Stock Purchase Plan |
| 6,806 | 7 | 63 | | | | 70 | ||||||||||||||||||||||||
Restricted Stock |
| 26,281 | 26 | 181 | | | | 207 | ||||||||||||||||||||||||
Public Offering |
| 4,600,000 | 4,600 | 49,418 | | | | 54,018 | ||||||||||||||||||||||||
Tax benefit related to exercise
of stock options |
| | | 40 | | | | 40 | ||||||||||||||||||||||||
Other comprehensive income,
net of tax |
| | | | | 34 | | 34 | ||||||||||||||||||||||||
Net income |
| | | | 16,964 | | | 16,964 | ||||||||||||||||||||||||
Balance, December 31, 2010 |
$ | 67,724 | 19,421,900 | $ | 19,422 | $ | 98,894 | $ | 190,793 | $ | 979 | $ | | $ | 377,812 | |||||||||||||||||
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) | 2010 | 2009 | 2008 | |||||||||
Operating activities: |
||||||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Provision for loan losses |
35,560 | 39,176 | 18,979 | |||||||||
Deferred tax benefit |
(2,808 | ) | (5,843 | ) | (2,788 | ) | ||||||
Asset depreciation |
2,853 | 3,187 | 2,963 | |||||||||
Securities premium amortization (discount accretion), net |
2,018 | 1,732 | 118 | |||||||||
Amortization of intangibles |
1,502 | 1,650 | 1,456 | |||||||||
Stock based compensation expense |
378 | 321 | 512 | |||||||||
Net gain on sales/calls of investment securities |
(2,661 | ) | (2,925 | ) | (902 | ) | ||||||
Net gain on sales of available for sale loans |
(2,736 | ) | (2,963 | ) | (2,664 | ) | ||||||
Net loss on sales of premises/equipment |
132 | 62 | 258 | |||||||||
Net (gain) loss on sales other real estate |
41 | (636 | ) | (571 | ) | |||||||
Gain from FDIC-assisted acquisition |
| (3,281 | ) | | ||||||||
Proceeds from sales of residential mortgage loans |
112,147 | 153,541 | 63,479 | |||||||||
Residential mortgage loans originated for resale |
(107,142 | ) | (154,964 | ) | (61,195 | ) | ||||||
Proceeds from sales of student loans |
50,377 | 88,105 | 104,946 | |||||||||
Student loans originated for resale |
(19,314 | ) | (69,817 | ) | (96,257 | ) | ||||||
Net changes in assets and liabilities: |
||||||||||||
Accrued interest receivable |
2,216 | 706 | 11,605 | |||||||||
Other assets |
10,179 | (17,097 | ) | (5,012 | ) | |||||||
Income taxes payable |
(1,568 | ) | 1,079 | 2,217 | ||||||||
Excess tax benefit from share-based payment arrangements |
(40 | ) | (244 | ) | (339 | ) | ||||||
Accrued interest payable |
(1,614 | ) | (3,827 | ) | (4,423 | ) | ||||||
Other liabilities |
(2,186 | ) | 3,518 | (1,424 | ) | |||||||
Net cash provided by operating activities |
94,298 | 44,462 | 45,859 | |||||||||
Investing activities: |
||||||||||||
Proceeds from sales of available for sale securities |
57,782 | 122,694 | 7,839 | |||||||||
Proceeds from principal repayments, calls and maturities: |
||||||||||||
Held to maturity securities |
2,825 | 1,675 | 1,000 | |||||||||
Available for sale securities |
66,656 | 69,578 | 193,958 | |||||||||
Proceeds from sales of other investments |
9,777 | 1,081 | | |||||||||
Purchases of other investments |
(1,116 | ) | (1,361 | ) | (1,947 | ) | ||||||
Purchases of held to maturity securities |
(6,498 | ) | | (2,500 | ) | |||||||
Purchases of available for sale securities |
(138,205 | ) | (174,343 | ) | (201,031 | ) | ||||||
(Loans originated) and principal repayments, net |
146,187 | (50,572 | ) | (370,558 | ) | |||||||
Acquisitions, net, FDIC-assisted |
| 17,161 | | |||||||||
Investment in subsidiary |
| | 1,070 | |||||||||
Purchases of premises and equipment |
(1,037 | ) | (5,245 | ) | (3,655 | ) | ||||||
Proceeds from sales of premises and equipment |
866 | 90 | 219 | |||||||||
Proceeds from sales of other real estate |
15,032 | 7,050 | 11,595 | |||||||||
Net cash provided from (used in) investing activities |
152,269 | (12,192 | ) | (364,010 | ) | |||||||
Financing activities: |
||||||||||||
Net increase (decrease) in deposits |
(340,002 | ) | 277,601 | 121,543 | ||||||||
Net increase (decrease) in other borrowings |
(8,420 | ) | (213,788 | ) | 76,782 | |||||||
Net proceeds from issuance of preferred stock |
| | 70,000 | |||||||||
Net proceeds from issuance of common stock |
54,315 | 970 | 2,054 | |||||||||
Net proceeds from issuance of subordinated debentures |
| | 34,500 | |||||||||
Excess tax benefit from share-based payment arrangements |
40 | 244 | 339 | |||||||||
Preferred stock dividends paid |
(3,500 | ) | (3,305 | ) | (243 | ) | ||||||
Common stock dividends paid |
(351 | ) | (2,432 | ) | (5,215 | ) | ||||||
Net cash provided from (used in) financing activities |
(297,918 | ) | 59,290 | 299,760 | ||||||||
Net increase (decrease) in cash and cash equivalents |
(51,351 | ) | 91,560 | (18,391 | ) | |||||||
Cash and cash equivalents beginning of period |
118,847 | 27,287 | 45,678 | |||||||||
Cash and cash equivalents end of period |
$ | 67,496 | $ | 118,847 | $ | 27,287 | ||||||
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, 2010, 2009, AND 2008
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, 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, and SNB Capital
Corporation are wholly owned, direct subsidiaries of Southwest. Healthcare Strategic Support,
Inc., a healthcare consulting company, was sold on February 28, 2010, and a management consulting
subsidiary, Business Consulting Group, Inc., became inactive during the first quarter of 2010. All
significant intercompany balances and transactions have been eliminated in consolidation.
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, 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 recognition 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 $41.0 million at December 31, 2010
and $84.6 million at December 31, 2009. Federal funds sold are sold for one-to-four day periods.
Cash paid for interest totaled $37.1 million in 2010, $55.5 million in 2009, and $77.5 million in
2008. Cash paid for income taxes totaled $15.2 million in 2010, $12.4 million in 2009, and $9.8
million in 2008. Noncash
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transactions included transfer of loans to other real estate totaling
$33.9 million in 2010, $23.4 million in 2009, and $1.3 million in 2008.
Stillwater National and Bank of Kansas are required by the Federal Reserve Bank (FRB) to maintain
average reserve balances. Cash and cash equivalents in the consolidated statements of financial
condition include restricted amounts of $1.3 million at both December 31, 2010 and December 31,
2009.
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.
In accordance with authoritative accounting guidance under ASC 320, Debt and Equity Securities,
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. Under this guidance, Southwest evaluates investment
securities for other-than-temporary impairment on at least a quarterly basis, or more frequently
when economic or market conditions warrant such an evaluation. Southwest recognized no
other-than-temporary impairment charges in 2010 or 2009 and $0.4 million in 2008.
Stillwater National and Bank of Kansas are members of their regional FRB and are members of the
Federal Home Loan Bank (FHLB) system. FHLB members are required to own a certain amount of stock
based on the level of borrowings and other factors, and may invest in additional accounts. Both
FRB and FHLB stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends
are reported as income.
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 $0.8
million and $2.1 million at December 31, 2010 and December 31, 2009, respectively. Loans are
reported at the principal balance outstanding net of the unamortized deferred loan fees.
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
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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 nonaccrual 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 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 loan closing at amounts determined by the investor commitment based
upon the pricing of the loan. Southwest provides United States Department of Agriculture (USDA)
government guaranteed commercial real estate lending services to rural healthcare providers. The
loans are available for sale in the secondary market. Prior to 2010, Southwest originated
guaranteed student loans primarily for sale in the secondary market. During the first quarter of
2010, Southwest elected to discontinue the origination of guaranteed student loans for resale,
aside from the previously outstanding commitments. Guaranteed student loans have typically been
sold at the time the student graduates or withdraws from school. Loans classified as held for sale
are carried at lower of cost or market. 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 over the life of the loan on a method that approximates the
level-yield method. 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, 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
impairments. Valuation allowances on these impaired loans reflect only losses incurred after the
acquisition.
Loss Share Receivable Bank of Kansas and the Federal Deposit Insurance Corporation (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 First National Bank of Anthony
(FNBA) FDIC-assisted transaction. 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 are recorded as part of the covered loans in Southwests consolidated statements of
financial condition. 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
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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
portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines
and generally accepted accounting principles and is comprised of two primary components, specific
and general. Allocations of the allowance for loan losses may be made for specific loans, but the
entire allowance is available for any loan that, in managements judgment, should be charged off.
The specific component relates to loans that are individually classified as impaired. 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. Loans for which the terms have been modified resulting in a concession, and for which
the borrower is experiencing financial difficulties, are considered troubled debt restructurings
and classified as impaired or performing restructured as applicable. Charge-offs against the
allowance of impaired loans are made when and to the extent the loan is deemed uncollectible. The
general component 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. The historical loss trend is determined by
loan pool and is based on the actual loss history experienced by Southwest over the most recent
three years. The qualitative risk 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. The following loan pools, or portfolio segments, have
been identified: commercial real estate loans, residential real estate loans, construction loans,
commercial loans, and consumer loans.
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.
Unfunded Loan Commitments Financial instruments include off-balance sheet credit instruments,
such as commitments to make loans and commercial letters of credit, issued to meet customer
financing needs. The face
amount for these items represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
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The reserve for unfunded loan commitments is a liability on Southwests consolidated statement of
financial condition in other liabilities. 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. At December 31, 2010 and December 31, 2009 the balance was $1.9
million and $3.5 million, respectively.
Premises and Equipment Land is carried at cost. 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 Assets acquired through or instead of loan foreclosure are considered other
real estate. Other real estate 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, management obtains independent
appraisals for significant properties. Valuation adjustments are provided, as necessary, by
charges to operations. Profits and losses from operations or sales of foreclosed property are
recognized as incurred. At December 31, 2010 and December 31, 2009, the balances of noncovered
other real estate were $37.7 million and $18.4 million, respectively.
Other real estate covered under the loss sharing agreements with the FDIC is reported exclusive of
expected reimbursement cash flows from the FDIC. Fair value adjustments on covered other real
estate result in a reduction of the covered other real estate carrying amount and a corresponding
increase in the estimated FDIC reimbursement, with the estimated net loss charged against earnings.
At December 31, 2010 and December 31, 2009, the balances of covered other real estate were $4.2
million and $4.7 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.
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. Southwest engaged an independent third
party to assist in the step one fair market valuations, using both the customary market approaches
and the discounted cash flow (income) approach, for the Kansas and Texas reporting units, to which
$6.6 million of goodwill has been assigned. The independent step one valuations indicated that as
of October 1, 2010 and October 1, 2009, the fair values of the Kansas reporting unit were less than
the carrying amounts at those dates. Further goodwill impairment testing was required under a step
two hypothetical purchase price allocation and analysis to determine the amount of impairment
existing, if any. The step two allocations resulted in an implied fair value of goodwill greater
than the carrying amount of goodwill at both assessment dates, October 1, 2010 and October 1, 2009
(and updated through December 31, 2010 and December 31, 2009, respectively). Southwest concluded
that there was no goodwill impairment for the Kansas reporting unit. The step one fair value of
the Texas reporting unit as of the October 1, 2010 and October 1, 2009 annual assessments dates
(and updated
through December 31, 2010 and December 31, 2009, respectively) was greater than the carrying
amount, indicating goodwill was not impaired and no step two analysis was required for this
reporting unit.
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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.
When real estate mortgage loans and other loans are sold with servicing retained, an intangible
servicing right is initially capitalized based on estimated fair value at the point of origination
with the income statement effect recorded in gains on sales of loans. 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, 2010 and December 31, 2009, the fair values of loan servicing rights
were $2.4 million and $1.9 million, which exceeded the book values of $1.8 million and $1.7
million, respectively.
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. Banks were assessed through 2010 according to the risk-based premium schedule adopted in
2009. There are expected changes to the assessment formula in 2011, going from a deposit-based to
an asset-based assessment formula.
Fair Value Measurements ASC 820, Fair Value Measurements and Disclosure, 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.
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.
Earnings per Common Share ASC 260, Earnings Per Share, 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, earnings per common share is computed
using the two-class method prescribed by ASC 260. Using this 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
46
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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 share as they would have been antidilutive. For the years
ended December 31, 2010, December 31, 2009, and December 31, 2008, Southwest had 213,355, 380,390,
and 469,941 antidilutive options to purchase common shares, respectively. An antidilutive warrant
to purchase 703,753 shares of common stock was also outstanding for the years ended December 31,
2010, December 31, 2009, and December 31, 2008.
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 Earnings per
Common Share.
Share-Based Compensation The Southwest Bancorp, Inc. 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 through stock options
or restricted stock awards. Compensation cost is recognized based on the fair value of these
awards at the date of grant. The exercise price of all options granted under the Stock Plans is
the fair market value on the grant date, while the market price of Southwests common stock at the
date of grant is used for restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period. 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 the 1999 Plan, as amended. Options issued under the 1999 Plan will
continue in effect and will be subject to the requirements of that plan, but no new options will be
granted under the plan. 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.
Adoption of New Accounting Standards
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. Southwest
adopted the new guidance under ASC 860 effective January 1, 2010. Adoption of the new guidance did
not have a significant impact on Southwests consolidated 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.
Southwest adopted the new guidance under ASC 810 effective January 1, 2010. Adoption of the new
guidance did not have a significant impact on Southwests consolidated financial statements.
On January 21, 2010, FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures
about Fair Value Measurements (ASU 2010-06), which amends ASC 820, Fair Value Measurements and
Disclosures, to require a number of additional disclosures regarding fair value measurements.
Specifically, entities are required to
disclose: the amount of significant transfers between Level 1 and Level 2 of the fair value
hierarchy and the reasons for these transfers; the reasons for any transfers in or out of Level 3;
and information in the reconciliation
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of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a
gross basis. In addition to these new disclosure requirements, ASU 2010-06 also amends ASC 820 to
clarify certain existing disclosure requirements. Except for the requirement to disclose
information about purchases, sales, issuances, and settlements in the reconciliation of recurring
Level 3 measurements on a gross basis, all the amendments to ASC 820 made by ASU 2010-06 were
effective for Southwest on January 1, 2010, and the required disclosures are reported in Note 6.
The requirement to separately disclose purchases, sales, issuances, and settlements of recurring
Level 3 measurements is effective for Southwest on January 1, 2011 and is not expected to have a
significant impact on Southwests consolidated financial statements.
On July 21, 2010, FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which amends
ASC 830, Receivables, to enhance disclosures about the credit quality of financing receivables and
the allowance for credit losses. ASU 2010-20 requires entities to provide disclosures designed to
facilitate financial statement users evaluation of (i) the nature of credit risk inherent in the
entitys portfolio of financing receivables, (ii) how that risk is analyzed and assessed in
arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in
the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level
at which an entity develops and documents a systematic method for determining its allowance for
credit losses, and class of financing receivable, which is generally a disaggregation of portfolio
segment. The required disclosures include, among other things, the activity in the allowance for
credit losses as well as information about modified, impaired, nonaccrual, and past due loans and
credit quality indicators. ASU 2010-20 is effective for Southwests consolidated financial
statements as of December 31, 2010, as it relates to disclosures required as of the end of a
reporting period, see Note 3. Disclosures that relate to activity during a reporting period will
be required for Southwests consolidated financial statements that include periods beginning on or
after January 1, 2011.
2. Investment Securities
A summary of the amortized cost and fair values of investment securities follows:
Amortized | Gross Unrealized | Fair | ||||||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
At December 31, 2010 |
||||||||||||||||
Held to Maturity: |
||||||||||||||||
Obligations of state and political subdivisions |
$ | 14,304 | $ | 43 | $ | (318 | ) | $ | 14,029 | |||||||
Total |
$ | 14,304 | $ | 43 | $ | (318 | ) | $ | 14,029 | |||||||
Available for Sale: |
||||||||||||||||
U.S. Government obligations |
$ | 1,099 | $ | 9 | $ | | $ | 1,108 | ||||||||
Federal agency securities |
65,522 | 545 | (693 | ) | 65,374 | |||||||||||
Obligations of state and political subdivisions |
231 | 2 | | 233 | ||||||||||||
Residential mortgage-backed securities |
178,695 | 3,535 | (2,213 | ) | 180,017 | |||||||||||
Equity securities |
1,102 | 387 | | 1,489 | ||||||||||||
Total |
$ | 246,649 | $ | 4,478 | $ | (2,906 | ) | $ | 248,221 | |||||||
At December 31, 2009 |
||||||||||||||||
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 | |||||||
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FRB stock, FHLB stock, and certain other investments are not readily marketable and are
carried at cost. Total investments carried at cost were $10.4 million and $19.1 million at
December 31, 2010 and December 31, 2009, respectively. There are no identified events or changes
in circumstances that may have a significant adverse effect on these investments carried at cost.
A comparison of the amortized cost and approximate fair value of Southwests debt securities by
maturity date at December 31, 2010 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 |
$ | 26,254 | $ | 26,525 | $ | 2,470 | $ | 2,481 | ||||||||
More than one year through five years |
138,473 | 141,798 | 5,344 | 5,376 | ||||||||||||
More than five years through ten years |
70,644 | 68,494 | 6,490 | 6,172 | ||||||||||||
More than ten years |
11,278 | 11,404 | | | ||||||||||||
Total |
$ | 246,649 | $ | 248,221 | $ | 14,304 | $ | 14,029 | ||||||||
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.
The proceeds of investment securities sales and the associated gains and losses are listed below.
(Dollars in thousands) | 2010 | 2009 | 2008 | ||||||||||
Proceeds from sales |
$ | 57,782 | $ | 122,694 | $ | 7,839 | |||||||
Gross realized gains |
2,497 | 2,911 | 1,290 | ||||||||||
Gross realized losses |
(3 | ) | | (104 | ) |
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, 2010 and December 31, 2009 are as follows:
Continuous Unrealized Losses Existing for: | ||||||||||||||||||||
Amortized cost of | Fair value of | |||||||||||||||||||
Number of | securities with | Less than | 12 months | securities with | ||||||||||||||||
(Dollars in thousands) | securities | unrealized losses | 12 months | or more | unrealized losses | |||||||||||||||
At December 31, 2010 |
||||||||||||||||||||
Held to Maturity: |
||||||||||||||||||||
Obligations of state and political
subdivisions |
6 | $ | 6,490 | $ | (318 | ) | $ | | $ | 6,172 | ||||||||||
Total |
6 | $ | 6,490 | $ | (318 | ) | $ | | $ | 6,172 | ||||||||||
Available for Sale: |
||||||||||||||||||||
Federal agency securities |
11 | $ | 26,645 | $ | (693 | ) | $ | | $ | 25,952 | ||||||||||
Obligations of state and political
subdivisions |
1 | 55 | | | 55 | |||||||||||||||
Residential mortgage-backed securities |
27 | 62,197 | (2,213 | ) | | 59,984 | ||||||||||||||
Total |
39 | $ | 88,897 | $ | (2,906 | ) | $ | | $ | 85,991 | ||||||||||
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 | ||||||||||
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).
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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, 2010, 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 not more
likely than not that Southwest will 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, 2010, management believes the impairment of these
investments is not deemed to be other-than-temporary.
As required by law, available for sale investment securities are pledged to secure public and trust
deposits, sweep agreements, and borrowings from the FHLB. Securities with an amortized cost of
$216.4 million and $209.0 million were pledged to meet such requirements of $84.1 million and $62.6
million at December 31, 2010 and December 31, 2009, respectively. Any amount overpledged can be
released at any time.
3. Loans and Allowance for Loan Losses
Major classifications of loans are as follows:
At December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | Noncovered | Covered | Noncovered | Covered | ||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
$ | 1,310,464 | $ | 30,997 | $ | 1,212,409 | $ | 39,836 | ||||||||
One-to-four family residential |
89,800 | 9,122 | 114,614 | 12,630 | ||||||||||||
Real estate construction: |
||||||||||||||||
Commercial |
441,265 | 6,840 | 618,078 | 12,515 | ||||||||||||
One-to-four family residential |
27,429 | 439 | 41,109 | 5,324 | ||||||||||||
Commercial |
452,626 | 5,554 | 520,505 | 13,412 | ||||||||||||
Installment and consumer: |
||||||||||||||||
Guaranteed student loans |
5,843 | | 36,163 | | ||||||||||||
Other |
39,060 | 676 | 39,550 | 1,688 | ||||||||||||
2,366,487 | 53,628 | 2,582,428 | 85,405 | |||||||||||||
Less: Allowance for loan losses |
(65,229 | ) | | (62,413 | ) | | ||||||||||
Total loans, net |
$ | 2,301,258 | $ | 53,628 | $ | 2,520,015 | $ | 85,405 | ||||||||
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,
2010 and December 31, 2009, substantially all of Southwests loans were collateralized with real
estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the
United States Government.
As of December 31, 2010, approximately $713.7 million, or 30%, of Southwests noncovered 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.
Southwest had loans which were held for sale of $35.2 million and $43.1 million at December 31,
2010 and December 31, 2009, 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
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servicing rights are sold to four investors. The USDA government guaranteed loans are available
for sale in the secondary market.
The unpaid principal balance of real estate mortgage loans serviced for others totaled $278.1
million, $237.5 million, and $158.1 million at December 31, 2010, December 31, 2009, and December
31, 2008, respectively. Southwest maintained escrow accounts totaling $1.2 million and $0.9
million for real estate mortgage loans serviced for others at December 31, 2010 and December 31,
2009, respectively.
Changes in the carrying and net accretable amounts for the ASC 310.30 loans were as follows for the
years ended December 31, 2010 and December 31, 2009.
2010 | 2009 | |||||||||||||||
Net | Carrying | Net | Carrying | |||||||||||||
accretable | amount | accretable | amount | |||||||||||||
(Dollars in thousands) | amount | of loans | amount | of loans | ||||||||||||
Fair value of acquired loans
at beginning of period
(acquisition date) |
$ | 3,074 | $ | 85,405 | $ | 3,743 | $ | 117,096 | ||||||||
Payments received |
| (27,032 | ) | | (29,134 | ) | ||||||||||
Transfers to other real estate |
(115 | ) | (4,689 | ) | | (3,106 | ) | |||||||||
Charge-offs |
(23 | ) | (304 | ) | (81 | ) | | |||||||||
Amortization |
(248 | ) | 248 | (588 | ) | 549 | ||||||||||
Balance at end of period |
$ | 2,688 | $ | 53,628 | $ | 3,074 | $ | 85,405 | ||||||||
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Beginning balance |
$ | 62,413 | $ | 39,773 | $ | 29,584 | ||||||
Provision for loan losses |
35,560 | 39,176 | 18,979 | |||||||||
Loans charged-off |
(34,439 | ) | (18,913 | ) | (9,942 | ) | ||||||
Recoveries |
1,695 | 2,377 | 1,152 | |||||||||
Total |
$ | 65,229 | $ | 62,413 | $ | 39,773 | ||||||
The following table presents the balance in the allowance for loan losses and the recorded
investment in loans by portfolio segment and based on impairment evaluation method as of December
31, 2010 and December 31, 2009.
Commercial | 1-4 Family | Real Estate | ||||||||||||||||||||||
(Dollars in thousands) | Real Estate | Residential | Construction | Commercial | Other | Total | ||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Allowance for loan losses ending balance: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 10,813 | $ | 197 | $ | 5,313 | $ | 3,643 | $ | 28 | $ | 19,994 | ||||||||||||
Collectively evaluated for impairment |
21,695 | 1,400 | 14,292 | 6,962 | 886 | 45,235 | ||||||||||||||||||
Acquired with deteriorated credit
quality |
| | | | | | ||||||||||||||||||
Total ending allowance balance |
$ | 32,508 | $ | 1,597 | $ | 19,605 | $ | 10,605 | $ | 914 | $ | 65,229 | ||||||||||||
Loans receivable ending balance: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 72,796 | $ | 1,983 | $ | 82,557 | $ | 12,254 | $ | 38 | $ | 169,628 | ||||||||||||
Collectively evaluated for impairment |
1,237,668 | 87,817 | 386,137 | 440,372 | 44,865 | 2,196,859 | ||||||||||||||||||
Acquired with deteriorated credit
quality |
30,997 | 9,122 | 7,279 | 5,554 | 676 | 53,628 | ||||||||||||||||||
Total ending loans balance |
$ | 1,341,461 | $ | 98,922 | $ | 475,973 | $ | 458,180 | $ | 45,579 | $ | 2,420,115 | ||||||||||||
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Commercial | 1-4 Family | Real Estate | ||||||||||||||||||||||
(Dollars in thousands) | Real Estate | Residential | Construction | Commercial | Other | Total | ||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Allowance for loan losses ending
balances: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 5,833 | $ | 1,289 | $ | 3,147 | $ | 2,952 | $ | 120 | $ | 13,341 | ||||||||||||
Collectively evaluated for impairment |
20,837 | 1,165 | 19,094 | 7,100 | 876 | 49,072 | ||||||||||||||||||
Acquired with deteriorated credit
quality |
| | | | | | ||||||||||||||||||
Total ending allowance balance |
$ | 26,670 | $ | 2,454 | $ | 22,241 | $ | 10,052 | $ | 996 | $ | 62,413 | ||||||||||||
Loans receivable ending balance: |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 28,351 | $ | 9,385 | $ | 57,586 | $ | 10,406 | $ | 159 | $ | 105,887 | ||||||||||||
Collectively evaluated for impairment |
1,184,058 | 105,229 | 601,601 | 510,099 | 75,554 | 2,476,541 | ||||||||||||||||||
Acquired with deteriorated credit
quality |
39,836 | 12,630 | 17,839 | 13,412 | 1,688 | 85,405 | ||||||||||||||||||
Total ending loans balance |
$ | 1,252,245 | $ | 127,244 | $ | 677,026 | $ | 533,917 | $ | 77,401 | $ | 2,667,833 | ||||||||||||
The following table presents an aging of the recorded investment in loans past due at the end
of the respective reporting period.
90 days and | Recorded loans | |||||||||||||||||||||||
30-89 days | greater | Total past | Total | > 90 days and | ||||||||||||||||||||
(Dollars in thousands) | past due | past due | due | Current | loans | accruing | ||||||||||||||||||
At December 31, 2010 |
||||||||||||||||||||||||
Noncovered: |
||||||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||||||
Commercial real estate |
$ | 3,793 | $ | 30,510 | $ | 34,303 | $ | 1,276,161 | $ | 1,310,464 | $ | 514 | ||||||||||||
One-to-four family
residential |
1,438 | 1,984 | 3,422 | 86,378 | 89,800 | | ||||||||||||||||||
Real estate construction |
||||||||||||||||||||||||
Commercial real estate |
7,569 | 53,269 | 60,838 | 380,427 | 441,265 | | ||||||||||||||||||
One-to-four family
residential |
| 14,302 | 14,302 | 13,127 | 27,429 | | ||||||||||||||||||
Commercial |
10,707 | 6,977 | 17,684 | 434,942 | 452,626 | | ||||||||||||||||||
Other |
1,236 | 41 | 1,277 | 43,626 | 44,903 | 3 | ||||||||||||||||||
Total noncovered |
24,743 | 107,083 | 131,826 | 2,234,661 | 2,366,487 | 517 | ||||||||||||||||||
Covered: |
||||||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||||||
Commercial real estate |
$ | 227 | $ | 4,391 | $ | 4,618 | $ | 26,379 | $ | 30,997 | $ | | ||||||||||||
One-to-four family
residential |
142 | 932 | 1,074 | 8,048 | 9,122 | | ||||||||||||||||||
Real estate construction |
||||||||||||||||||||||||
Commercial real estate |
| 4,744 | 4,744 | 2,096 | 6,840 | | ||||||||||||||||||
One-to-four family
residential |
108 | 153 | 261 | 178 | 439 | | ||||||||||||||||||
Commercial |
| 581 | 581 | 4,973 | 5,554 | | ||||||||||||||||||
Other |
14 | 5 | 19 | 657 | 676 | | ||||||||||||||||||
Total covered |
491 | 10,806 | 11,297 | 42,331 | 53,628 | | ||||||||||||||||||
Total |
$ | 25,234 | $ | 117,889 | $ | 143,123 | $ | 2,276,992 | $ | 2,420,115 | $ | 517 | ||||||||||||
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Greater | Recorded loans | |||||||||||||||||||||||
30-89 days | than 90 days | Total past | Total | > 90 days and | ||||||||||||||||||||
(Dollars in thousands) | past due | past due | due | Current | loans | accruing | ||||||||||||||||||
At December 31, 2009 |
||||||||||||||||||||||||
Noncovered: |
||||||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||||||
Commercial real estate |
$ | 778 | $ | 28,451 | $ | 29,229 | $ | 1,183,180 | $ | 1,212,409 | $ | 100 | ||||||||||||
One-to-four family
residential |
725 | 9,463 | 10,188 | 104,426 | 114,614 | 76 | ||||||||||||||||||
Real estate construction |
||||||||||||||||||||||||
Commercial real estate |
20 | 39,860 | 39,880 | 578,198 | 618,078 | | ||||||||||||||||||
One-to-four family
residential |
| 17,726 | 17,726 | 23,383 | 41,109 | | ||||||||||||||||||
Commercial |
2,641 | 10,422 | 13,063 | 507,442 | 520,505 | 18 | ||||||||||||||||||
Other |
432 | 275 | 707 | 75,006 | 75,713 | 116 | ||||||||||||||||||
Total noncovered |
4,596 | 106,197 | 110,793 | 2,471,635 | 2,582,428 | 310 | ||||||||||||||||||
Covered: |
||||||||||||||||||||||||
Real estate mortgage: |
||||||||||||||||||||||||
Commercial real estate |
$ | 1,452 | $ | 2,389 | $ | 3,841 | $ | 35,995 | $ | 39,836 | $ | 542 | ||||||||||||
One-to-four family
residential |
372 | 2,243 | 2,615 | 10,015 | 12,630 | | ||||||||||||||||||
Real estate construction |
||||||||||||||||||||||||
Commercial real estate |
212 | 6,215 | 6,427 | 6,088 | 12,515 | 574 | ||||||||||||||||||
One-to-four family
residential |
1,575 | 1,884 | 3,459 | 1,865 | 5,324 | | ||||||||||||||||||
Commercial |
1,231 | 665 | 1,896 | 11,516 | 13,412 | | ||||||||||||||||||
Other |
16 | 62 | 78 | 1,610 | 1,688 | 20 | ||||||||||||||||||
Total covered |
4,858 | 13,458 | 18,316 | 67,089 | 85,405 | 1,136 | ||||||||||||||||||
Total |
$ | 9,454 | $ | 119,655 | $ | 129,109 | $ | 2,538,724 | $ | 2,667,833 | $ | 1,446 | ||||||||||||
The following table presents the recorded investment in loans on nonaccrual status:
At December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
(Dollars in thousands) | Noncovered | Covered | Noncovered | Covered | ||||||||||||
Real estate mortgage: |
||||||||||||||||
Commercial |
$ | 29,996 | $ | 4,391 | $ | 28,351 | $ | 1,847 | ||||||||
One-to-four family residential |
1,984 | 932 | 9,387 | 2,243 | ||||||||||||
Real estate construction: |
||||||||||||||||
Commercial |
53,269 | 4,744 | 39,860 | 5,641 | ||||||||||||
One-to-four family residential |
14,302 | 153 | 17,726 | 1,884 | ||||||||||||
Commercial |
6,977 | 581 | 10,404 | 665 | ||||||||||||
Other consumer |
38 | 5 | 159 | 42 | ||||||||||||
Total nonaccrual loans |
$ | 106,566 | $ | 10,806 | $ | 105,887 | $ | 12,322 | ||||||||
If interest on nonaccrual loans had been accrued, the interest income as reported in the
accompanying consolidated statements of operations would have increased by approximately $5.6
million, $4.8 million, and $2.6 million, for 2010, 2009, and 2008, respectively.
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The following table presents loans individually evaluated for impairment by class of loans at
December 31, 2010 and December 31, 2009.
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
(Dollars in thousands) | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
At December 31, 2010 |
||||||||||||||||||||
Noncovered: |
||||||||||||||||||||
With no specific allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 30,064 | $ | 30,534 | $ | | $ | 23,473 | $ | 16 | ||||||||||
One-to-four family residential |
323 | 368 | | 343 | 19 | |||||||||||||||
Real estate construction |
46,978 | 51,644 | | 36,141 | 741 | |||||||||||||||
Commercial |
3,790 | 5,039 | | 2,075 | (49 | ) | ||||||||||||||
With a specific allowance recorded: |
||||||||||||||||||||
Commercial real estate |
42,732 | 46,192 | 10,813 | 37,191 | | |||||||||||||||
One-to-four family residential |
1,660 | 1,909 | 197 | 1,382 | | |||||||||||||||
Real estate construction |
35,579 | 37,667 | 5,313 | 26,217 | | |||||||||||||||
Commercial |
8,464 | 8,728 | 3,643 | 2,971 | 2 | |||||||||||||||
Other |
38 | 48 | 28 | 34 | | |||||||||||||||
Total noncovered |
$ | 169,628 | $ | 182,129 | $ | 19,994 | $ | 129,827 | $ | 729 | ||||||||||
Covered: |
||||||||||||||||||||
With no specific allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 4,391 | $ | 6,120 | $ | | $ | 35,783 | $ | 15 | ||||||||||
One-to-four family residential |
932 | 1,104 | | 10,848 | 43 | |||||||||||||||
Real estate construction |
4,897 | 6,179 | | 12,079 | | |||||||||||||||
Commercial |
581 | 1,092 | | 8,852 | 8 | |||||||||||||||
Other |
5 | 14 | | 1,144 | | |||||||||||||||
Total covered |
$ | 10,806 | $ | 14,509 | $ | | $ | 68,706 | $ | 66 | ||||||||||
At December 31, 2009 |
||||||||||||||||||||
Noncovered: |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 1,735 | $ | 2,215 | $ | | $ | 692 | $ | | ||||||||||
One-to-four family residential |
1,234 | 1,253 | | 453 | | |||||||||||||||
Real estate construction |
44,670 | 44,886 | | 16,300 | | |||||||||||||||
Commercial |
4,343 | 4,874 | | 5,111 | | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 26,616 | $ | 28,511 | $ | 5,833 | $ | 16,900 | $ | 652 | ||||||||||
One-to-four family residential |
8,153 | 8,151 | 1,289 | 7,299 | 16 | |||||||||||||||
Real estate construction |
12,916 | 15,021 | 3,147 | 11,510 | | |||||||||||||||
Commercial |
6,061 | 6,239 | 2,952 | 3,263 | 1,394 | |||||||||||||||
Other |
159 | 164 | 120 | 65 | | |||||||||||||||
Total noncovered |
$ | 105,887 | $ | 111,314 | $ | 13,341 | $ | 61,593 | $ | 2,062 | ||||||||||
Covered: |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial real estate |
$ | 1,847 | $ | 2,919 | $ | | * | $ | | |||||||||||
One-to-four family residential |
2,243 | 3,324 | | * | | |||||||||||||||
Real estate construction |
7,525 | 9,190 | | * | | |||||||||||||||
Commercial |
665 | 2,228 | | * | | |||||||||||||||
Other |
42 | 46 | | * | | |||||||||||||||
Total covered |
$ | 12,322 | $ | 17,707 | $ | | * | $ | | |||||||||||
* | Information regarding average recorded investment for covered loans is not readily available. |
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Included in the table above is $63.1 million in loans whose terms have been modified in
troubled debt restructurings as of December 31, 2010. Southwest has allocated $7.0 million of
specific reserves to these troubled debt restructured loans and has no significant commitments to
lend additional amounts.
The average recorded investment in impaired loans was $35.2 million for the year ended December 31,
2008 and the interest income recognized on the impaired loans was $0.6 million during 2008.
To assess the credit quality of loans, Southwest categorizes loans into risk categories based on
relevant information about the ability of the borrowers to service their debts such as: current
financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. This analysis is performed on a quarterly basis.
Southwest uses the following definitions for risk ratings:
Special mention Loans classified as special mention have potential weaknesses that
deserve managements close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects for these loans or of the institutions
credit position at some future date.
Substandard Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so
classified have one or more well-defined weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that Southwest will sustain some
loss if the deficiencies are not corrected. These loans are considered potential
nonperforming or nonperforming loans depending on the accrual status of the loans.
Doubtful Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. These loans are considered nonperforming.
Loans not meeting the criteria above that are analyzed as part of the above described process are
considered to be pass rated loans. As of December 31, 2010 and December 31, 2009, and based on the
most recent analysis performed as of those dates, the risk category of loans by class of loans is
as follows:
Commercial | 1-4 Family | Real Estate | ||||||||||||||||||||||
(Dollars in thousands) | Real Estate | Residential | Construction | Commercial | Other | Total | ||||||||||||||||||
At December 31, 2010 | ||||||||||||||||||||||||
Grade: |
||||||||||||||||||||||||
Pass |
$ | 1,190,587 | $ | 93,961 | $ | 276,613 | $ | 399,344 | $ | 44,161 | $ | 2,004,666 | ||||||||||||
Special Mention |
13,854 | 1,840 | 24,023 | 13,436 | 1,340 | 54,493 | ||||||||||||||||||
Substandard |
132,148 | 2,644 | 168,220 | 41,906 | 54 | 344,972 | ||||||||||||||||||
Doubtful |
4,872 | 477 | 7,117 | 3,494 | 24 | 15,984 | ||||||||||||||||||
Total |
$ | 1,341,461 | $ | 98,922 | $ | 475,973 | $ | 458,180 | $ | 45,579 | $ | 2,420,115 | ||||||||||||
At December 31, 2009 | ||||||||||||||||||||||||
Grade: |
||||||||||||||||||||||||
Pass |
$ | 1,096,257 | $ | 113,594 | $ | 445,467 | $ | 485,627 | $ | 76,339 | $ | 2,217,284 | ||||||||||||
Special Mention |
8,689 | 1,188 | 48,901 | 4,880 | 789 | 64,447 | ||||||||||||||||||
Substandard |
147,010 | 12,285 | 179,400 | 42,186 | 271 | 381,152 | ||||||||||||||||||
Doubtful |
289 | 177 | 3,258 | 1,224 | 2 | 4,950 | ||||||||||||||||||
Total |
$ | 1,252,245 | $ | 127,244 | $ | 677,026 | $ | 533,917 | $ | 77,401 | $ | 2,667,833 | ||||||||||||
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4. Premises and Equipment
Year-end premises and equipment were as follows:
At December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Land |
$ | 6,046 | $ | 6,841 | ||||
Buildings and improvements |
17,985 | 17,872 | ||||||
Furniture, fixtures, and equipment |
32,015 | 32,463 | ||||||
Construction/Remodeling in progress |
95 | 139 | ||||||
56,141 | 57,315 | |||||||
Accumulated depreciation |
(32,369 | ) | (30,779 | ) | ||||
Total premises and equipment, net |
$ | 23,772 | $ | 26,536 | ||||
Depreciation of premises and equipment totaled $2.8 million in 2010, $3.1 million in 2009, and
$2.9 million in 2008.
Southwest leases certain equipment and premises 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, 2010 were as follows:
(Dollars in thousands) | ||||
2011 |
$ | 2,380 | ||
2012 |
1,977 | |||
2013 |
1,549 | |||
2014 |
1,124 | |||
2015 |
1,095 | |||
Thereafter |
1,019 | |||
Total |
$ | 9,144 | ||
The total rental expense was $2.8 million, $2.9 million, and $2.7 million in 2010, 2009, and
2008, respectively.
5. Goodwill and Other Intangible Assets
Southwest has recorded goodwill and other identifiable intangible assets associated with purchase
business combinations. Goodwill is not amortized, but is periodically evaluated for impairment.
Southwest did not recognize an impairment during the years ended December 31, 2010 and December 31,
2009. Goodwill totaled $6.8 million at December 31, 2010 and December 31, 2009. As of year-end,
approximately $0.2 million 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 17.
The following table presents the gross carrying amount of other intangible assets and accumulated
amortization.
At December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Core deposit premiums |
$ | 6,353 | $ | 6,353 | ||||
Less accumulated amortization |
2,796 | 2,249 | ||||||
Core deposit premiums, net |
$ | 3,557 | $ | 4,104 | ||||
Loan servicing rights |
$ | 7,781 | $ | 6,687 | ||||
Less accumulated amortization |
5,967 | 5,012 | ||||||
Loan servicing rights, net |
$ | 1,814 | $ | 1,675 | ||||
Other intangible assets, net |
$ | 5,371 | $ | 5,779 | ||||
Core deposit intangibles are amortized using an economic life method based on deposit
attrition. As a result,
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Table of Contents
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 $0.5 million in both 2010 and 2009.
During 2010 and 2009, Southwest had recorded loan servicing right amortization expense of $1.0
million and $0.8 million, respectively.
The estimated aggregate future amortization expense for other intangible assets remaining as of
December 31, 2010 is as follows:
Core Deposit | Loan Servicing | |||||||||||
(Dollars in thousands) | Premiums | Rights | Total | |||||||||
2011 |
527 | 693 | 1,220 | |||||||||
2012 |
488 | 517 | 1,005 | |||||||||
2013 |
484 | 351 | 835 | |||||||||
2014 |
514 | 170 | 684 | |||||||||
2015 |
474 | 70 | 544 | |||||||||
Thereafter |
1,070 | 13 | 1,083 | |||||||||
$ | 3,557 | $ | 1,814 | $ | 5,371 | |||||||
6. 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 securities, residential mortgage-backed debt securities, municipal obligation securities, loans held for sale, certain private equity investments, and other real estate. | |
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities 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 certain impaired loans, certain other real estate, goodwill, and other intangible assets. |
57
Table of Contents
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.
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 a certain
private equity investment is estimated based on Southwests proportionate share of net asset value,
$1.3 million as of December 31, 2010 and $1.1 million as of December 31, 2009. The investee
invests in small and mid-sized U.S. financial institutions and other financial-related companies.
This investment has a quarterly redemption with sixty-five days notice.
The following table summarizes financial assets measured at fair value on a recurring basis as of
December 31, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value:
Fair Value Measurements 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) | ||||||||||||
At December 31, 2010 |
||||||||||||||||
Loans held for sale: |
||||||||||||||||
Student loans |
$ | 5,843 | $ | | $ | 5,843 | $ | | ||||||||
One-to-four family residential |
2,300 | | 2,300 | | ||||||||||||
Other loans held for sale |
27,051 | | 27,051 | | ||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. Government obligations |
1,108 | 1,108 | | | ||||||||||||
Federal agency securities |
65,374 | | 65,374 | | ||||||||||||
Obligations of state and political
subdivisions |
233 | | 233 | | ||||||||||||
Residential mortgage-backed securities |
180,017 | | 180,017 | | ||||||||||||
Equity securities |
1,489 | 222 | 1,267 | | ||||||||||||
Total |
$ | 283,415 | $ | 1,330 | $ | 282,085 | $ | | ||||||||
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Table of Contents
Fair Value Measurements 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) | ||||||||||||
At December 31, 2009 |
||||||||||||||||
Loans held for sale: |
||||||||||||||||
Student loans |
$ | 36,163 | $ | | $ | 36,163 | $ | | ||||||||
One-to-four family residential |
5,612 | | 5,612 | | ||||||||||||
Other loans held for sale |
1,359 | | 1,359 | | ||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. Government obligations |
1,100 | 1,100 | | | ||||||||||||
Federal agency securities |
75,385 | | 75,385 | | ||||||||||||
Obligations of state and political
subdivisions |
853 | | 853 | | ||||||||||||
Residential mortgage-backed securities |
159,145 | | 159,146 | | ||||||||||||
Equity securities |
1,220 | 141 | 1,078 | | ||||||||||||
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 or Level 3 inputs based on customized discounting
criteria. Certain other impaired loans are remeasured and reported at fair value through a
specific valuation allowance allocation of the allowance for loan losses based upon the net present
value of cash flows.
Other real estate Other real estate fair value is based on third-party appraisals for
significant properties less the estimated costs to sell the asset.
Goodwill Fair value of goodwill is based on the fair value of each of Southwests reporting
units to which goodwill is allocated compared with their respective carrying value. There was no
impairment during 2010 or 2009; 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 were no impairments during 2010 or 2009; 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 prepayment 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 at least annually for
changes in market conditions.
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Table of Contents
Assets and liabilities measured at fair value on a nonrecurring basis during the years ended
December 31, 2010 and December 31, 2009 are summarized below:
Fair Value Measurements Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||||||
Fair Value | Identical Assets | Observable Inputs | Unobservable Inputs | Total Gains | ||||||||||||||||
(Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | (Losses) | |||||||||||||||
At December 31, 2010 |
||||||||||||||||||||
Noncovered impaired loans at fair value : |
||||||||||||||||||||
Commercial real estate |
$ | 43,349 | $ | | $ | 43,349 | $ | | $ | (5,003 | ) | |||||||||
One-to-four family residential |
1,660 | | 1,660 | | 1,819 | |||||||||||||||
Real estate construction |
42,577 | | 29,072 | 13,505 | (4,144 | ) | ||||||||||||||
Commercial |
9,727 | | 9,727 | | (1,214 | ) | ||||||||||||||
Other consumer |
38 | | 38 | | 86 | |||||||||||||||
Noncovered other real estate |
37,722 | | 37,722 | (360 | ) | |||||||||||||||
Total |
$ | 135,073 | $ | | $ | 121,568 | $ | 13,505 | $ | (8,816 | ) | |||||||||
At December 31, 2009 |
||||||||||||||||||||
Noncovered impaired loans at fair value : |
||||||||||||||||||||
Commercial real estate |
26,943 | | 26,943 | | (7,780 | ) | ||||||||||||||
One-to-four family residential |
8,151 | | 8,151 | | (2,148 | ) | ||||||||||||||
Real estate construction |
20,414 | | 2,688 | 17,726 | (3,325 | ) | ||||||||||||||
Commercial |
9,838 | | 9,838 | | (635 | ) | ||||||||||||||
Other consumer |
159 | | 159 | | (118 | ) | ||||||||||||||
Mortgage loan servicing rights |
1,850 | | | 1,850 | (329 | ) | ||||||||||||||
Total |
$ | 67,355 | $ | | $ | 47,779 | $ | 19,576 | $ | (14,335 | ) | |||||||||
Noncovered impaired loans measured at fair value with a carrying amount of $125.2 million were
written down to the fair value of $97.4 million at December 31, 2010, resulting in a life-to-date
impairment charge of $27.9 million, of which $8.5 million was included in the provision for loan
losses for the year ended December 31, 2010. As of December 31, 2009, noncovered impaired loans
measured at fair value with a carrying amount of $84.9 million were written down to the 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.
Noncovered other real estate assets were written down to their respective fair value, resulting in
impairment charges of $0.4 million, which was included in noninterest expense for the year ended
December 31, 2010. No impairment of noncovered other real estate was incurred in 2009.
No impairment of mortgage loan servicing rights was incurred in 2010; however, as of December 31,
2009, mortgage loan servicing rights were written down to their fair value, resulting in an
impairment charge of $0.3 million, 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.
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Table of Contents
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. For other investment securities, the carrying amount is
a reasonable estimate of fair value.
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 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 approximates current book value. The fair value of 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.
The carrying values and estimated fair values of Southwests financial instruments follow:
At December 31, 2010 | At December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(Dollars in thousands) | Values | Values | Values | Values | ||||||||||||
Cash and cash equivalents |
$ | 67,496 | $ | 67,496 | $ | 118,847 | $ | 118,847 | ||||||||
Investment securities: |
||||||||||||||||
Held to maturity |
14,304 | 14,029 | 6,670 | 6,754 | ||||||||||||
Available for sale |
248,221 | 248,221 | 237,703 | 237,703 | ||||||||||||
Other investments |
10,404 | 10,404 | 19,066 | 19,066 | ||||||||||||
Total loans, net of allowance |
2,354,886 | 2,279,605 | 2,605,420 | 2,567,369 | ||||||||||||
Accrued interest receivable |
8,590 | 8,590 | 10,806 | 10,806 | ||||||||||||
Deposits |
2,252,728 | 2,119,840 | 2,592,730 | 2,583,691 | ||||||||||||
Accrued interest payable |
1,577 | 1,577 | 3,191 | 3,191 | ||||||||||||
Other liabilities |
8,981 | 8,981 | 13,121 | 13,121 | ||||||||||||
Other borrowings |
94,602 | 100,550 | 103,022 | 103,527 | ||||||||||||
Subordinated debentures |
81,963 | 84,654 | 81,963 | 83,343 |
7. Deposits and Other Borrowed Funds
The following table summarizes deposits as of December 31, 2010 and December 31, 2009.
(Dollars in thousands) | 2010 | 2009 | ||||||
Noninterest-bearing demand |
$ | 377,182 | $ | 324,829 | ||||
Interest-bearing demand |
92,584 | 74,201 | ||||||
Money market accounts |
495,253 | 505,521 | ||||||
Savings accounts |
26,665 | 25,730 | ||||||
Time deposits of $100,000 or more |
694,565 | 1,004,439 | ||||||
Other time deposits |
566,479 | 658,010 | ||||||
Total deposits |
$ | 2,252,728 | $ | 2,592,730 | ||||
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The total amount of overdrawn deposit accounts that were reclassified as loans at December 31,
2010 and December 31, 2009 was $1.3 million and $0.8 million, respectively.
Some of Southwests interest-bearing deposits were obtained through brokered transactions and
Southwests participation in the Certificate of Deposit Account Registry Service (CDARS).
Brokered certificate of deposits totaled $1.0 million at December 31, 2010 and $1.7 million at
December 31, 2009. CDARS deposits totaled $34.3 million at December 31, 2010 and $86.2 million at
December 31, 2009. Capital market certificate of deposits totaled $109.9 million at December 31,
2010 and $329.5 million at December 31, 2009.
Scheduled time deposit maturities as of December 31, 2010 are as follows:
(Dollars in thousands) | ||||
2011 |
$ | 1,078,923 | ||
2012 |
147,112 | |||
2013 |
24,276 | |||
2014 |
5,740 | |||
2015 |
4,968 | |||
Thereafter |
25 | |||
Total time deposits |
$ | 1,261,044 | ||
Southwest has available various forms of other borrowings for cash management and liquidity
purposes. These forms of borrowings include short term federal funds purchased and securities sold
under agreements to repurchase, and advances 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 for the periods indicated:
2010 | 2009 | |||||||||||||||||||||||
Balance at | Weighted Average | Balance at | Weighted Average | |||||||||||||||||||||
(Dollars in thousands) | December 31, | Average Balance | Rate | December 31, | Average Balance | Rate | ||||||||||||||||||
Federal funds purchased |
$ | 10,060 | $ | 6,848 | 0.18 | % | $ | 10,060 | $ | 36,732 | 0.20 | % | ||||||||||||
Securities sold under repurchase agreements |
26,492 | 22,945 | 0.25 | 23,259 | 27,174 | 0.32 | ||||||||||||||||||
Federal Home Loan Bank advances |
56,500 | 64,967 | 3.03 | 68,560 | 103,510 | 3.04 | ||||||||||||||||||
Treasury, tax and loan note
option |
1,550 | 1,381 | | 1,143 | 1,115 | | ||||||||||||||||||
Other |
| | | | 13,151 | 5.36 | ||||||||||||||||||
$ | 94,602 | $ | 103,022 | |||||||||||||||||||||
Southwest has approved federal funds purchase lines totaling $231.9 million with seven
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, 2010 and December 31, 2009, no repurchase agreement exceeded 10% of
equity capital.
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 $529.6 million with a weighted average rate of interest
of 3.36%. 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, 2010 and December 31, 2009, loans pledged under the Agreement were $844.2 million and
$862.4 million, and investment securities pledged (at carrying value) were $85.2 million and $77.5
million, respectively.
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Scheduled minimum future principal payments on the FHLB line of credit as of December 31, 2010
are as follows: $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 $107.3 million. Southwest
also has substantial unused borrowing availability in the form of unsecured brokered certificate of
deposits program from Bank of America Merrill Lynch, Morgan Stanley & Co., Citigroup Global
Markets, Inc., Wells Fargo Bank, NA, UBS Securities LLC, and RBC Capital Markets Corp. In
conjunction with these lines of credit, $110.0 million and $330.0 million in retail certificates of
deposit were included in total deposits at December 31, 2010 and December 31, 2009, respectively.
8. Subordinated Debentures
At December 31, 2010, 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 | Final Maturity | |||||||||||||
(Dollars in thousands) | to Trusts | Trusts | December 31, 2010 | Date | ||||||||||||
OKSB Statutory Trust I |
$ | 20,619 | $ | 20,000 | 3.40 | % | June 26, 2033 | |||||||||
SBI Capital Trust II |
25,774 | 25,000 | 3.14 | % | October 7, 2033 | |||||||||||
Southwest 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 $0.6
million 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.
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 $0.8 million 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, 2010, 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
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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, 2010, $79.5 million of
the Trust Preferred was included in Tier I capital.
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.
9. Income Taxes
The components of taxes on income follow:
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Current tax expense: |
||||||||||||
Federal |
$ | 11,852 | $ | 13,032 | $ | 9,604 | ||||||
State |
694 | 1,134 | 1,961 | |||||||||
Deferred tax benefit: |
||||||||||||
Federal |
(2,455 | ) | (6,158 | ) | (1,747 | ) | ||||||
State |
(353 | ) | (397 | ) | (329 | ) | ||||||
Taxes on income |
$ | 9,738 | $ | 7,611 | $ | 9,489 | ||||||
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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) | 2010 | 2009 | 2008 | |||||||||
Computed tax expense at statutory rates |
$ | 9,346 | $ | 7,207 | $ | 8,537 | ||||||
Increase (decrease) in income taxes resulting from: |
||||||||||||
Benefit of income not subject to U.S. Federal income tax |
(135 | ) | (142 | ) | (174 | ) | ||||||
Expenses not deductible for U.S. Federal income tax |
191 | 178 | 372 | |||||||||
State income taxes, net of Federal income tax benefit |
292 | 165 | 405 | |||||||||
New markets tax credit |
| (151 | ) | (151 | ) | |||||||
Expiration of capital loss carryforward |
| | 37 | |||||||||
Texas tax refund (federally tax affected) |
(559 | ) | | | ||||||||
Other |
603 | 354 | 463 | |||||||||
Taxes on income |
$ | 9,738 | $ | 7,611 | $ | 9,489 | ||||||
Net deferred tax assets of $21.1 million and $19.5 million at December 31, 2010 and December
31, 2009, respectively, are reflected in the accompanying consolidated statements of financial
condition in other assets. There were no valuation allowances at December 31, 2010 or December 31,
2009.
Temporary differences that give rise to the deferred tax assets include the following:
At December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Provision for loan losses |
$ | 25,694 | $ | 24,751 | ||||
Accumulated depreciation |
(3,407 | ) | (3,486 | ) | ||||
Prepaid maintenance |
(384 | ) | (359 | ) | ||||
Nonaccrual loan interest |
1,221 | 792 | ||||||
Deferred compensation accrual |
316 | 261 | ||||||
Mark-to-market adjustments |
| 47 | ||||||
FHLB stock dividends |
(1,093 | ) | (989 | ) | ||||
Write-downs on other real estate |
142 | 10 | ||||||
Amortizable assets |
(262 | ) | (404 | ) | ||||
Stock-based compensation |
174 | 177 | ||||||
Litigation and settlement |
| 2 | ||||||
New markets tax credit |
(460 | ) | (460 | ) | ||||
Dividend equity vs cost method |
(344 | ) | (209 | ) | ||||
Section 597 gain FNBA FDIC-assisted acquisition |
(326 | ) | (589 | ) | ||||
Inside basis difference on acquired loans |
48 | (562 | ) | |||||
Other |
415 | (58 | ) | |||||
21,734 | 18,924 | |||||||
Deferred taxes (payable) receivable on investments securities available for sale |
(593 | ) | 568 | |||||
Net deferred tax asset |
$ | 21,141 | $ | 19,492 | ||||
At the beginning and end of 2010, Southwest had approximately $4.6 million and $5.3 million of
total gross unrecognized tax benefits, respectively. Of these totals, $1.9 million and $1.6
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 years ended December 31, 2010, December 31, 2009, and
December 31, 2008, Southwest recognized approximately $0.7 million, $0.6 million, and $0.6 million
in interest and penalties, respectively. Southwest had approximately $2.6 million and $1.9 million
accrued for interest and penalties at December 31, 2010 and December 31, 2009, respectively.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at January 1 |
$ | 4,597 | $ | 3,966 | ||||
Increases as a result of tax positions taken during current period |
736 | 631 | ||||||
Increases as a result of tax positions taken during prior period |
| | ||||||
Decreases relating to settlements with taxing authorities |
| | ||||||
Reductions due to lapse of the applicable statute of limitations |
| | ||||||
Balance at December 31 |
$ | 5,333 | $ | 4,597 | ||||
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 2007 tax years.
During 2008, Southwest received a Notice of Assessment from the Oklahoma Tax Commission and filed a
formal Notice of Protest. 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.
10. Shareholders Equity
On April 29, 2010, Southwest closed a public offering of 4,600,000 shares of common stock,
including 600,000 shares pursuant to the underwriters over-allotment option, at a price of $12.50
per share resulting in aggregate proceeds of $57.5 million. The net proceeds of the offering were
$54.0 million and were used to increase Southwests working capital and for general corporate
purposes, including investment of $25.0 million in its banking subsidiaries, Stillwater National
and Bank of Kansas.
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
$1,000 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 years ended December 31, 2010 and December 31, 2009 were $0.7 million and $0.6 million,
respectively.
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, subsequent shares issued came from the reserved
shares. At December 31, 2010, 42,756 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, 2010, 275,255 new shares had been issued and 1,622,385 treasury
shares had
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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, 2010, 26,281 new shares had been issued and 25,725 treasury shares
had been reissued by this plan.
11. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
(Dollars in thousands, except earnings per share data) | 2010 | 2009 | 2008 | |||||||||
Numerator: |
||||||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Preferred dividend |
(3,500 | ) | (3,500 | ) | (243 | ) | ||||||
Warrant amortization |
(687 | ) | (645 | ) | | |||||||
Net income available to common shareholders |
12,777 | 8,837 | 14,658 | |||||||||
Earnings allocated to participating securities |
(36 | ) | (26 | ) | (31 | ) | ||||||
Numerator for basic earnings per common share |
12,741 | 8,811 | 14,627 | |||||||||
Effect of reallocating undistributed earnings
of participating securities |
| | | |||||||||
Numerator for diluted earnings per common share |
12,741 | 8,811 | 14,627 | |||||||||
Denominator: |
||||||||||||
Denominator for basic earnings per common share -
Weighted average common shares outstanding |
17,848,610 | 14,625,847 | 14,471,242 | |||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
16,581 | 48,279 | 157,037 | |||||||||
Warrant |
| | | |||||||||
Denominator for diluted earnings per common share |
17,865,191 | 14,674,126 | 14,628,279 | |||||||||
Earnings per common share: |
||||||||||||
Basic |
$ | 0.71 | $ | 0.60 | $ | 1.01 | ||||||
Diluted |
$ | 0.71 | $ | 0.60 | $ | 1.00 | ||||||
12. 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 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, 2010 and December 31, 2009, that Southwest, Stillwater
National, and Bank of Kansas met all capital adequacy requirements to which they are subject.
As of December 31, 2010 and December 31, 2009, Stillwater National and Bank of Kansas were
categorized as well-capitalized under the regulatory framework for prompt corrective action. To be
categorized as well-
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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.
Under the terms of the January 27, 2010 Formal Agreement with the OCC, Stillwater National submits
quarterly reports describing the actions needed to achieve full compliance with the Formal
Agreement, the actions taken to comply, and the results and status of these actions relating to the
following items:
| Establishing and ensuring compliance with a plan to reduce credit risk and improve loan portfolio management; | ||
| Eliminating credit weaknesses in nonperforming and potential problem loans; | ||
| On-going review and grading of the Stillwater 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. |
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, 2010: |
||||||||||||||||||||||||
Total Capital (to risk-weighted
assets) |
||||||||||||||||||||||||
Southwest |
$ | 477,930 | 19.06 | % | N/A | N/A | $ | 200,629 | 8.00 | % | ||||||||||||||
Stillwater National |
392,705 | 17.22 | $ | 228,114 | 10.00 | % | 182,491 | 8.00 | ||||||||||||||||
Bank of Kansas |
34,501 | 16.58 | 20,814 | 10.00 | 16,651 | 8.00 | ||||||||||||||||||
Tier I Capital (to risk-weighted
assets) |
||||||||||||||||||||||||
Southwest |
445,966 | 17.78 | N/A | N/A | 100,315 | 4.00 | ||||||||||||||||||
Stillwater National |
348,685 | 15.29 | 136,868 | 6.00 | 91,245 | 4.00 | ||||||||||||||||||
Bank of Kansas |
31,866 | 15.31 | 12,488 | 6.00 | 8,326 | 4.00 | ||||||||||||||||||
Tier I Leverage (to average assets) |
||||||||||||||||||||||||
Southwest |
445,966 | 15.55 | N/A | N/A | 114,685 | 4.00 | ||||||||||||||||||
Stillwater National |
348,685 | 13.84 | 125,991 | 5.00 | 100,793 | 4.00 | ||||||||||||||||||
Bank of Kansas |
31,866 | 9.60 | 16,605 | 5.00 | 13,284 | 4.00 | ||||||||||||||||||
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 |
The approval of the OCC is required if the total of all dividends declared by Stillwater National in any calendar
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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 $41.2 million at December 31, 2010. No
dividends were declared by Stillwater National for the year ended December 31, 2010 and dividends
declared for the years ended December 31, 2009 and December 31, 2008 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 $4.8 million available for dividend payment at December 31, 2010. No dividends were
declared by Bank of Kansas for the years ended December 31, 2010, December 31, 2009, and December
31, 2008.
13. Employee Benefits
On October 1, 2010, Southwest began sponsoring a 401(k) defined contribution savings plan. 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. This plan
permits participants to make before or after-tax contributions in an amount not exceeding 90% of
eligible compensation and subject to dollar limits from Internal Revenue Service regulations.
Southwest will make an annual nonelective contribution of 3% of eligible compensation. Southwest
made a contribution of $0.2 million in 2010.
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 $1.3 million, $1.0
million, and $1.2 million in 2010, 2009, and 2008, respectively.
Stock Options In accordance with current accounting guidance, Southwest recorded $200, $32,000,
and $222,000 of total share-based compensation expense for the periods ended December 31, 2010,
December 31, 2009, and December 31, 2008, 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 amortization of stock-based
compensation reflects actual forfeitures, and as of December 31, 2010, there was no unrecognized
compensation expense. The deferred tax asset that was recorded related to this compensation
expense was approximately $174,000 for tax year 2010 and $177,000 for tax years 2009 and 2008.
Southwest has computed the estimated fair values of all share-based compensation using the
Black-Scholes option pricing model. No options were granted in 2010 or in 2009. For options
granted in 2008, the expected dividend yield was 2.24%, the expected volatility was 34.26%, the
risk-free interest rate was 2.30%, and the expected option term was 3.0 years. In 2008, Southwest
evaluated the options granted in 2003 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.
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A summary of option activity under the Stock Plans as of December 31, 2010 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, 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 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(38,100 | ) | 5.29 | |||||||||||||
Canceled/expired |
(139,009 | ) | 20.89 | |||||||||||||
Outstanding at December 31, 2010 |
202,215 | $ | 24.00 | 0.78 | | |||||||||||
Total exercisable at December 31, 2008 |
634,451 | $ | 16.85 | |||||||||||||
Total exercisable at December 31, 2009 |
377,657 | $ | 21.00 | |||||||||||||
Total exercisable at December 31, 2010 |
202,215 | $ | 24.00 | 0.78 | |
The total intrinsic value of options exercised during the twelve month periods ended December
31, 2010, December 31, 2009, and December 31, 2008 was $0.3 million, $0.7 million, and $0.7
million, respectively. The amount of cash received from exercises in 2010,2009, and 2008 was $0.2
million, $0.9 million, and $1.9 million, respectively. The fair value of options that became
vested during 2010, 2009, and 2008 was $6,000, $0.2 million, and $0.6 million, respectively.
During 2010, all shares issued in connection with stock option exercises were 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, 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, 2010 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, 2009 |
1,667 | $ | 3.71 | |||||
Granted |
| | ||||||
Vested |
(1,667 | ) | 3.71 | |||||
Forfeited |
| | ||||||
Nonvested Balance at December 31, 2010 |
| | ||||||
Restricted Stock - Restricted shares granted as of December 31, 2010 and December 31, 2009
were 104,198 and 77,917, respectively. For both years 2010 and 2009, Southwest recognized $0.2
million in compensation expense, net of tax, related to all restricted shares outstanding. At
December 31, 2010, there was $0.1 million 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 two years.
The 2010 grant of restricted stock vests upon the first anniversary of the date of grant provided
the director remains a director of Southwest or a subsidiary on that date. The restrictions on the
shares expire one year after
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the award date or upon a change in control of Southwest (subject to the prohibition on parachute payments imposed by the American Reinvestment and Recovery Act) or the
permanent and total disability or death of the participant. Southwest will recognize compensation
expense over the restricted period.
The 2008 and 2009 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 (subject to the prohibition on parachute payments imposed by
the American Reinvestment and Recovery Act) or the permanent and total disability or death of the
participant. Southwest will continue to recognize compensation expense over the restricted
periods.
14. 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 in managements opinion 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 at December 31, 2010 and
at December 31, 2009. During 2010, $3.3 million of new loans and advances on existing loans were
made to these persons and repayments totaled $3.3 million.
At December 31, 2010 and December 31, 2009, directors, officers and other related interest parties
had demand, non-interest bearing deposits of $2.5 million and $5.4 million, respectively, savings
and interest-bearing transaction accounts of $5.7 million and $2.2 million, respectively, and time
certificates of deposit of $0.8 million and $0.7 million, respectively.
15. 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 U.S. 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.
The following table provides a summary of Southwests off-balance sheet financial instruments:
At December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Commitments to extend commercial and real estate mortgage credit |
$ | 219,795 | $ | 387,486 | ||||
Standby and commercial letters of credit |
4,770 | 5,105 | ||||||
Total |
$ | 224,565 | $ | 392,591 | ||||
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.
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16. 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,
2010, 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 $0.5 million.
17. 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 three operating units: one that provides student lending services to post-secondary students in
Oklahoma and several other states, one that provides residential mortgage lending services to
customers in Oklahoma, Texas, and Kansas, and one that provides United States Department of
Agriculture (USDA) government guaranteed commercial real estate lending services to rural
healthcare providers. 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 FHLB advances.
The Other Operations segment also includes SNB Wealth Management and corporate investments.
Southwest identifies reportable segments by type of service provided and geographic location.
Operating results are adjusted for borrowings, allocated service costs, and management fees.
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-five 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.
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
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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.
The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2010 | ||||||||||||||||||||||||||||
Oklahoma | Texas | Kansas | Other States | Secondary | Other | Total | ||||||||||||||||||||||
(Dollars in thousands) | Banking | Banking | Banking | Banking | Market | Operations * | Company | |||||||||||||||||||||
Net interest income |
$ | 43,557 | $ | 42,295 | $ | 15,437 | $ | 8,202 | $ | 1,560 | $ | (3,720 | ) | $ | 107,331 | |||||||||||||
Provision for loan losses |
66 | 22,992 | 3,605 | 8,897 | | | 35,560 | |||||||||||||||||||||
Noninterest income |
7,866 | 1,718 | 4,050 | 362 | 2,319 | 2,249 | 18,564 | |||||||||||||||||||||
Noninterest expense |
27,724 | 13,813 | 14,455 | 2,772 | 2,302 | 2,567 | 63,633 | |||||||||||||||||||||
Income before taxes |
23,633 | 7,208 | 1,427 | (3,105 | ) | 1,577 | (4,038 | ) | 26,702 | |||||||||||||||||||
Taxes on income |
8,769 | 2,685 | 543 | (1,147 | ) | 597 | (1,709 | ) | 9,738 | |||||||||||||||||||
Net income |
$ | 14,864 | $ | 4,523 | $ | 884 | $ | (1,958 | ) | $ | 980 | $ | (2,329 | ) | $ | 16,964 | ||||||||||||
* | Includes externally generated revenue of $8.0 million, primarily from investing services, and an internally generated loss of $9.5 million from the funds management unit |
Fixed asset expenditures |
$ | 161 | $ | 40 | $ | 152 | $ | | $ | 52 | $ | 632 | $ | 1,037 | ||||||||||||||
Total loans at period end |
871,393 | 982,845 | 289,642 | 241,041 | 35,194 | | 2,420,115 | |||||||||||||||||||||
Total assets at period end |
899,269 | 976,383 | 389,813 | 231,590 | 37,483 | 286,003 | 2,820,541 | |||||||||||||||||||||
Total deposits at period end |
1,565,124 | 160,181 | 270,271 | | 1,389 | 255,763 | 2,252,728 |
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 expense |
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 |
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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 expense |
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 |
18. 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) | 2010 | 2009 | ||||||
Statements of Financial Condition |
||||||||
Assets: |
||||||||
Cash and due from banks |
$ | 37,542 | $ | 13,918 | ||||
Investment in subsidiary banks |
406,787 | 361,748 | ||||||
Investments in other subsidiaries |
12,820 | 13,360 | ||||||
Investment securities, available for sale |
1,267 | 1,079 | ||||||
Other assets |
2,254 | 2,560 | ||||||
Total |
$ | 460,670 | $ | 392,665 | ||||
Liabilities: |
||||||||
Subordinated debentures |
$ | 81,963 | $ | 81,963 | ||||
Other liabilities |
895 | 924 | ||||||
Shareholders Equity: |
||||||||
Preferred stock and related accounts |
67,724 | 67,037 | ||||||
Common stock and related accounts |
310,088 | 242,741 | ||||||
Total |
$ | 460,670 | $ | 392,665 | ||||
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For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Statements of Operations |
||||||||||||
Income: |
||||||||||||
Cash dividends from subsidiaries |
$ | 159 | $ | 6,655 | $ | 2,149 | ||||||
Noninterest income |
802 | 1,091 | 995 | |||||||||
Investment income |
352 | 101 | (275 | ) | ||||||||
Security gains (losses) |
13 | | | |||||||||
Total income |
1,326 | 7,847 | 2,869 | |||||||||
Expense: |
||||||||||||
Interest on subordinated debentures |
5,289 | 5,495 | 4,961 | |||||||||
Noninterest expense |
1,263 | 2,273 | 2,001 | |||||||||
Total expense |
6,552 | 7,768 | 6,962 | |||||||||
Total income (loss) before taxes and equity in
undistributed income of subsidiaries |
(5,226 | ) | 79 | (4,093 | ) | |||||||
Taxes on income |
(1,991 | ) | (2,440 | ) | (2,303 | ) | ||||||
Income before equity in undistributed
income of subsidiaries |
(3,235 | ) | 2,519 | (1,790 | ) | |||||||
Equity in undistributed income of subsidiaries |
20,199 | 10,463 | 16,691 | |||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
For the Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Statements of Cash Flows |
||||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 16,964 | $ | 12,982 | $ | 14,901 | ||||||
Equity in undistributed income of subsidiaries |
(19,550 | ) | (10,463 | ) | (16,691 | ) | ||||||
Other, net |
661 | 1,301 | (2,548 | ) | ||||||||
Net cash provided by (used in) operating activities |
(1,925 | ) | 3,820 | (4,338 | ) | |||||||
Investing activities: |
||||||||||||
Available for sale securities: |
||||||||||||
Purchases |
(180 | ) | (156 | ) | (2 | ) | ||||||
Sales / Maturities |
13 | 118 | 12,124 | |||||||||
Capital contribution to Banks |
(25,000 | ) | (8,500 | ) | (77,000 | ) | ||||||
Investment in/capital contribution to other subsidiaries |
| (10,010 | ) | (1,070 | ) | |||||||
Return of capital/advances from other subsidiaries |
70 | 100 | | |||||||||
Net cash used in investing activities |
(25,097 | ) | (18,448 | ) | (65,948 | ) | ||||||
Financing activities: |
||||||||||||
Net increase (decrease) in short-term borrowings |
| (15,000 | ) | 12,500 | ||||||||
Net proceeds from issuance of common stock |
54,497 | 1,193 | 2,380 | |||||||||
Proceeds from issuance of subordinated debentures |
| | 35,570 | |||||||||
Proceeds from issuance of preferred stock |
| | 70,000 | |||||||||
Preferred stock dividend |
(3,851 | ) | (3,940 | ) | (243 | ) | ||||||
Common stock dividends |
| (1,793 | ) | (5,219 | ) | |||||||
Net cash provided by (used in) financing activities |
50,646 | (19,540 | ) | 114,988 | ||||||||
Net increase (decrease) in cash and cash equivalents |
23,624 | (34,168 | ) | 44,702 | ||||||||
Cash and cash equivalents,
Beginning of year |
13,918 | 48,086 | 3,384 | |||||||||
End of year |
$ | 37,542 | $ | 13,918 | $ | 48,086 | ||||||
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19. Selected Quarterly Financial Data (Unaudited)
For the Quarter Ended | ||||||||||||||||
(Dollars in thousands, except per share data) | 12-31-10 | 09-30-10 | 06-30-10 | 03-31-10 | ||||||||||||
| | | | | ||||||||||||||||
Operations Data |
||||||||||||||||
Interest income |
$ | 34,686 | $ | 35,083 | $ | 36,279 | $ | 36,759 | ||||||||
Interest expense |
7,716 | 8,631 | 9,171 | 9,958 | ||||||||||||
Net interest income |
26,970 | 26,452 | 27,108 | 26,801 | ||||||||||||
Provision for loan losses |
7,265 | 11,988 | 7,776 | 8,531 | ||||||||||||
Gain on sales of securities and loans |
697 | 3,258 | 450 | 992 | ||||||||||||
Noninterest income |
3,392 | 3,077 | 3,512 | 3,186 | ||||||||||||
Noninterest expenses |
16,811 | 15,418 | 16,146 | 15,258 | ||||||||||||
Income before taxes |
6,983 | 5,381 | 7,148 | 7,190 | ||||||||||||
Taxes on income |
2,675 | 1,508 | 2,737 | 2,818 | ||||||||||||
Net income |
$ | 4,308 | $ | 3,873 | $ | 4,411 | $ | 4,372 | ||||||||
Net income available to common shareholders |
$ | 3,257 | $ | 2,825 | $ | 3,366 | $ | 3,329 | ||||||||
Per Share Data |
||||||||||||||||
Basic earnings per common share |
$ | 0.17 | $ | 0.15 | $ | 0.19 | $ | 0.23 | ||||||||
Diluted earnings per common share |
0.17 | 0.15 | 0.19 | 0.23 | ||||||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
19,350,482 | 19,342,909 | 17,920,624 | 14,712,594 | ||||||||||||
Diluted |
19,393,034 | 19,386,571 | 17,961,081 | 14,733,599 |
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 | ||||||||
Net income available to common shareholders |
$ | 2,534 | $ | 1,097 | $ | 4,910 | $ | 296 | ||||||||
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 |
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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) loans to small businesses.
Consumer lending services include (i) student loans, (ii) residential real estate loans and
mortgage banking services, and (iii) personal lines of credit and other installment loans.
Southwest also offers deposit and personal banking services, including (i) commercial deposit
services such as SNB Digital Lockbox, commercial checking, money market, and other deposit
accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts,
checking accounts, NOW accounts, savings accounts, and automatic teller machine (ATM) access.
Personal brokerage and credit cards are offered through relationships with independent institutions
and Bank of Kansas.
Strategic Focus
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 use of traditional and specialized financial services. Specialized
services include integrated document imaging and cash management services designed to help our
customers in the healthcare industry and other record-intensive enterprises operate more
efficiently. 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, residential mortgage lending
services, and government guaranteed commercial real estate lending, and an other segment that
includes funds management (investment portfolio and funding). 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; and Kansas Banking, which includes the FNBA division, the
Hutchinson division, the Wichita division, and the Kansas City division. The Stillwater, FNBA, 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 $14.9 million, or 88%, of
consolidated net income. Net income from this segment increased $2.7 million, or 22%, primarily as
a result of decreased provision for loan losses, offset in part by increased noninterest expenses,
increased income taxes, decreased net interest income and decreased noninterest income. During
2010, total assets decreased $51.1 million, or 5%.
Texas Banking Segment The Texas Banking segment accounted for $4.5 million, or 27%, of
consolidated net income. Net income from this segment decreased $6.2 million, or 58%, primarily as
a result of increased provision for loan losses, offset in part by decreased income taxes. During
2010, total assets decreased $67.9 million, or 7%.
Kansas Banking Segment The Kansas Banking segment accounted for $0.9 million, or 5%, of
consolidated net income. Net income from this segment increased $0.5 million, or 108%, primarily
as a result of decreased provision for loan losses and increased net interest income, offset in
part by decreased noninterest income, which included the $3.3 million recognized gain on the
FDIC-assisted acquisition of FNBA, increased noninterest expenses, and increased income taxes.
During 2010, total assets decreased $51.3 million, or 12%.
Other States Banking Segment The Other States Banking segment primarily consists of healthcare
and commercial real estate credits in thirty-five states other than Oklahoma, Texas, and Kansas.
The Other States Banking segment incurred a net loss of $2.0 million for the year. Net loss from
this segment increased $0.3 million, or 21%, primarily as a result of decreased net interest
income, offset in part by decreased provision for loan losses. During 2010, total assets decreased
$44.1 million, or 16%.
Secondary Market Segment Southwest has a long history of student and residential mortgage
lending. In 2010, Southwest began providing United States Department of Agriculture (USDA)
government guaranteed commercial real estate lending services to rural healthcare providers. These
operations comprise the Secondary Market business segment. During 2010, this segment contributed
income of $1.0 million, and had $7.7 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 Student Loan
Marketing Administration (Sallie Mae), which provides substantially all of the servicing for
government guaranteed and
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private student loans and provides liquidity through its purchases of
student loans and lines of credit. Southwest makes governmental guaranteed student loans and
private student loans. At December 31, 2010, all private student loans were self-insured by Sallie
Mae. Due to government regulation, Southwest further reduced its student loan business in 2010.
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 17 Operating
Segments in the Notes to the Consolidated Financial Statements. The total of net income of the
segments discussed above is more than consolidated net income for 2010 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-three full-service banking offices, four located in Stillwater, Oklahoma, two
each located in the Oklahoma City and Tulsa, Oklahoma metropolitan areas, two located in the
Dallas, Texas metropolitan areas, two each located in the Hutchinson area and Wichita, Kansas, one
each in Chickasha and Edmond, Oklahoma, Austin, San Antonio, and Tilden, Texas, and Anthony,
Harper, Mayfield and Overland Park, Kansas. It also operates loan production offices on the campus
of the University of Oklahoma Health Sciences Center and in Houston, Texas. Southwest has
developed and continues to pursue a business strategy that does not rely on an extensive branch
network. National banks headquartered in Oklahoma 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
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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 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
of 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
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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.
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 83
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 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
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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.
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 Formal 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 issue 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 loans 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
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portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear 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 17 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 average 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 2010, 2009, and
2008 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, 2010, 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, 2010, 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 27 of this report, Managements Discussion
and Analysis Certain Regulatory Matters on page 29 of this report, and in the Notes to the
Consolidated Financial Statements in this report, Note 8 Subordinated Debentures and Note 12
Capital Requirements & Regulatory Matters.
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.
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
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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 was 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 institutions and increase the flow of credit to
businesses and consumers. For a description of CPP securities and their terms, see Note 10
Shareholders Equity in the Notes to the Consolidated Financial Statements.
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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: annually 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.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) Dodd-Frank makes
significant changes in laws relating to bank holding companies and banks regarding the structure of
banking regulation, the powers of the Federal Reserve, the handling of troubled institutions,
regulatory capital calculations, and obligations of public companies. Many of the regulations
required to effect these changes are not yet established, and its overall effects on Southwest are
unknown. Dodd-Frank does not significantly change the primary federal regulators of Southwest or
its banking subsidiaries.
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, 2010, Southwest employed 432 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; Owner, Rapid Enterprises | |
Rick Green, Vice Chairman of the Board
|
President and Chief Executive Officer Southwest and Stillwater National | |
James E. Berry II
|
Owner, Pizza Berry, Inc. | |
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; Owner, Rapid Enterprises | |
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 | |
Kathleen Laubhan
|
Assistant Vice President, Wichita Division of Bank of Kansas | |
David Lesperance
|
President, Hutchinson Division of Bank of Kansas | |
Anthony W. Martin
|
Retired Dentist | |
Jon Ott
|
President, Rural Banking Division of Bank of Kansas | |
David W. Pitts
|
Executive Vice President and Regional Director, Bank of Kansas; Senior Vice President of Stillwater National | |
Douglas J. Watts
|
President, Overland Park Division of Bank of Kansas |
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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
|
54 | Executive Vice President, Regulatory Risk Management and Secretary of Southwest and Stillwater National; Executive Vice President, Regulatory Risk Management of Bank of Kansas | ||||
Steven M. Gobel
|
59 | Executive Vice President and Chief Accounting and Controls Officer of Southwest and Stillwater National; Executive Vice President, Chief Accounting Officer, and Assistant Secretary of Bank of Kansas | ||||
Jerry L. Lanier
|
62 | Executive Vice President and Chief Lending Officer of Stillwater National; President and Chief Executive Officer of Bank of Kansas | ||||
Laura Robertson
|
37 | Executive Vice President and Chief Financial Officer of Southwest, Stillwater National, and Bank of Kansas | ||||
Kimberly G. Sinclair
|
55 | Executive Vice President and Chief Administrative Officer of Stillwater National and Bank of Kansas | ||||
Charles H. Westerheide
|
62 | 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 serves as Executive Vice President, Regulatory Risk Management and was appointed
to the role of Secretary in December 2010. She acquired additional management responsibility in
July 2009 when she was placed in charge of Human Resources. Ms. Barnes has 31 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.
Steven M. Gobel serves as Executive Vice President, Chief Accounting and Controls Officer, and
Enterprise Risk Manager. Mr. Gobel currently serves on the Board of Directors, and chairs the
Finance Committee, for the Stillwater Country Club and is a participant in the Leadership
Stillwater Class of XX. 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
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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 was appointed Executive Vice President and Chief Financial Officer in December
2010. She joined Stillwater National in April 2006 and served as the Finance Division Manager 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 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 recently served 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 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 Treasury/Funding Manager. Prior to joining Bank IV, 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.
Risks Relating to our Business
Difficult and unsettled market conditions have affected our profits and loan quality and may
continue to do so for an unknown period.
Unsettled market conditions 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; | ||
| compliance with new banking regulations enacted in connection with stimulus legislation and other new 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 competition and local or regional economic factors. The results of our
interest rate sensitivity simulation model
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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.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Educations
Reconciliations Act of 2010, is expected to have profound effects on the provision of healthcare in
the United States. We have assessed its potential effects on the market for healthcare and our
services for the healthcare industry, and believe it will have a net positive effect on them.
However, the law is complex and implementation requires the adoptions of significant additional
regulations, most of which have not been issued. As a result, our assessment may be wrong, which
could have adverse effects on the growth and profitability of our healthcare business.
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.
Commercial and commercial real estate loans comprise a significant portion of our total loan
portfolio. These types of loans 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.
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The results of our most recent internal credit stress test may not accurately predict the impact on
our financial condition if the economys performance is worse than we expect.
We perform internal assessments of our capital as part of our planning process. Our process
includes stress testing using alternative credit quality assumptions in order to estimate their
effects on loan loss provisions, net income, and regulatory capital ratios. The alternative
assumptions include baseline credit quality assumptions and more adverse credit quality
assumptions.
The results of these stress tests involve assumptions about the economy and future loan losses and
default rates and may not accurately reflect the impact on our earnings or financial condition or
actual future conditions. Actual future economic conditions may result in significantly higher
credit losses than we assume in our stress tests, with a corresponding negative impact on our
earnings, financial condition, and capital than those predicted by our internal stress test.
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 Federal Home Loan Bank, or FHLB, borrowings, federal
funds purchased, and brokered deposits, to supplement core deposits to fund our business.
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, under Stillwater
Nationals formal agreement with the OCC and related OCC guidance it must obtain prior approval for
increases in brokered deposits as a percentage of total deposits above the amount outstanding on
December 31, 2009. We believe, based upon our current levels of brokered deposits and our funding
forecasts, that Stillwater National has funding from other sources sufficient enough to avoid any
increase in brokered deposit usage above that level and do not believe that we will be required to
request approval for any such increase from the OCC. However, our deposit and funding forecasts
may be inaccurate, or market conditions could change which could cause us to ask for approval, and
the OCC might not approve such an increase.
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.
Our earnings and financial condition may be adversely affected by changes in accounting principles
and in tax laws, or the interpretation of them.
Changes in U.S. generally accepted accounting principles could have negative effects on our
reported earnings and financial condition.
Changes in tax laws, rules, and regulations, including changes in the interpretation or
implementation of tax laws, rules, and regulations by the Internal Revenue Service or other
governmental bodies, could affect us in significant and unpredictable ways. Such changes could
subject us to additional costs, among other things. Failure to comply with tax laws, rules, and
regulations could result in sanctions by regulatory agencies, civil money penalties, and reputation
damage.
Additionally, we conduct quarterly assessments of our deferred tax assets. The carrying value of
these assets is dependent upon earnings forecasts and prior period changes, among other things. A
significant change in our assumptions could affect the carrying value of our deferred tax assets on
our balance sheet.
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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. We are 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 insures deposits at insured financial institutions up to certain limits. The FDIC charges
insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic
conditions have increased expectations for bank failures, in which case the FDIC would take control
of failed banks and ensure payment of deposits up to insured limits using the resources of the
Deposit Insurance Fund. In such case, the FDIC may increase 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.
We have entered into formal and informal agreements with the OCC and have made informal commitments
to the Federal Reserve that may adversely affect our operations. Failure to comply with these
agreements and commitments could subject us, Stillwater National, and our directors to additional
enforcement actions and could damage our reputation.
Our agreements and commitments with the OCC and Federal Reserve relate primarily to our
concentrations in commercial real estate lending and our high levels of nonperforming and potential
nonperforming loans, most of which are commercial real estate loans. Although we are committed to
compliance with our agreements and commitments and are taking aggressive actions to comply with
them, we may not be able to reduce our commercial real estate loan concentrations or problem and
potential problem assets 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, 2010, 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.
Examination reports may include significant findings and assessments about our condition and
operations that are not publicly disclosed. Assessments by bank examiners may cause us to increase
our publicly reported problem and potential problem loans, charge-offs, or provisions for loan
losses.
Examinations by federal and state bank regulatory agencies include assessments of risk, financial
health, capital adequacy, loan risk, and other factors that federal banking laws do not allow to be
publicly disclosed. The assignment of loans to credit risk categories involves judgment and the
application of credit policies. In their examinations, federal and state banking examiners may
assign different risk categories to loans than those assigned by our third party loan review firms
or management. In that case, Southwest must amend its risk categorizations to
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match those assigned by the bank examiners, which may result in increases in publicly reported
problem and potential problem loans, charge-offs, or provisions for loan losses.
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.
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.
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 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
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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.
Risks Related to Ownership of Our Common Stock
The market price for our common stock may be highly volatile, which may make it difficult for
investors to resell shares of common stock at times or prices they find attractive.
The overall market and the price of our common stock may continue to be volatile as a result of a
variety of factors, many of which are beyond our control. These factors include, in addition to
those described in these Risk Factors:
| actual or anticipated quarterly fluctuations in our operating results and financial condition; | ||
| changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions; | ||
| speculation in the press or investment community generally or relating to our reputation or the financial services industry; | ||
| the size of the public float of our common stock; | ||
| strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings; | ||
| fluctuations in the stock price and operating results of our competitors; | ||
| future sales of our equity or equity-related securities; | ||
| proposed or adopted regulatory changes or developments; | ||
| anticipated or pending investigations, proceedings, or litigation that involve or affect us; | ||
| domestic and international economic factors unrelated to our performance; and | ||
| general market conditions and, in particular, developments related to market conditions for the financial services industry. |
In addition, in recent years, the stock market in general has experienced extreme price and volume
fluctuations as a result of general economic instability and recession. This volatility has had a
significant effect on the market price of securities issued by many companies, including market
price effects resulting from reasons unrelated to their operations performance. These broad market
fluctuations may adversely affect our stock price, notwithstanding our operating results. We
expect that the market price of our common stock will continue to fluctuate, and there can be no
assurance about the levels of the market prices for our common stock.
There is a limited trading market for our common shares, and you may not be able to resell your
shares at or above the price you paid for them.
Although our common shares are listed for trading on the NASDAQ Global Select Market, the trading
in our common shares has less liquidity than many other companies quoted on the NASDAQ Global
Select Market. A public trading market having the desired characteristics of depth, liquidity, and
orderliness depends on the presence in the market of willing buyers and sellers for our common
shares at any given time. This presence depends on the individual decisions of investors and
general economic and market conditions over which we have no control. We cannot assure you that the
volume of trading in our common shares will increase in the future. Additionally, general market
forces may have a negative effect on our stock price, independent of factors affecting our stock
specifically.
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.
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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.
Additionally, if we raise additional capital by making additional offerings of debt or preferred
equity securities, upon liquidation, holders of our debt securities and shares of preferred stock,
and lenders with respect to other borrowings, will receive distributions of our available assets
prior to the holders of our common stock. Additional equity offerings may dilute the holdings of
our existing stockholders or reduce the market price of our common stock, or both. Holders of our
common stock are not entitled to preemptive rights or other protections against dilution.
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. On December 5, 2008, we sold to the
Treasury Department a warrant to purchase up to 703,753 shares of our common stock at a price of
$14.92 per common share. Our warrant and common shares issued upon the exercise of our warrant may
be sold in the public market or in private transactions.
Our ability to pay dividends is limited by law, contract, and banking agency discretion.
No dividends on our common stock were declared during 2010. Our Board of Directors has not
determined whether to declare dividends on our common stock in the future, and there can be no
assurance that our regulators will allow us to pay dividends.
Our ability to pay dividends to our shareholders in the past and over the long term largely depends
on our receipt of dividends from Stillwater National. Bank of Kansas does not currently pay
dividends. The amount of dividends that Stillwater National may pay to us 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 we have 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 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 us from paying some or all dividends. Such a decision
could result in reputation risk to us and could adversely affect our borrowing costs and liquidity.
We are prohibited from paying dividends on our common stock if the required payments on our Series
B Preferred Stock issued to the Treasury Department and our 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.
Our participation in the Treasury Departments Capital Purchase Program subjects us to additional
restrictions, oversight, and costs, and has other potential consequences that could materially
affect our business, results of operations, and prospects.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA, was signed into
law. Under EESA, the Treasury Department has the authority to, among other things, invest in
financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. Pursuant to this authority, the Treasury Department announced its Capital Purchase
Program, under which it has purchased preferred stock and warrants in eligible institutions,
including us, to increase the flow of credit to businesses and consumers and to support the overall
United States economy.
On December 5, 2008, we issued 70,000 shares of Series B Preferred Stock and a warrant to purchase
up to 703,753 shares of common stock at an exercise price of $14.92 per share to the Treasury
Department for an aggregate price of $70.0 million. As a result of our participation in the Capital
Purchase Program:
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| We are subject to restrictions, oversight, and costs that may have an adverse impact on our financial condition, results of operations, and the price of our common stock. For example, the American Recovery and Reinvestment Act of 2009 and related regulations contain significant limitations on the amount and form of bonus, retention, and other incentive compensation that participants in the Capital Purchase Program may pay to executive officers and highly compensated employees. These provisions may adversely affect our ability to attract and retain executive officers and other key personnel. | ||
| The Capital Purchase Program imposes restrictions on our ability to pay cash dividends on, and to repurchase, our common stock. | ||
| The Treasury Department has the right to appoint two persons to our board of directors if we miss dividend payments for six dividend periods, whether or not consecutive, on the Series B Preferred Stock. | ||
| Future federal statutes may adversely affect the terms of the Capital Purchase Program that are applicable to us, and the Treasury Department may amend the terms of our agreement with them unilaterally if required by future statutes, including in a manner materially adverse to us. | ||
| Compliance with current and potential regulatory initiatives applicable to Capital Purchase Program participants as well as additional scrutiny from regulatory authorities may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. |
The Special Inspector General for the Troubled Asset Relief Program, or TARP, has requested
information from Capital Purchase Program and other TARP participants, including a description of
past and anticipated uses of the TARP funds and compensation paid to management. We, like other
Capital Purchase Program participants, are required to submit monthly reports about our lending and
activities to the Treasury Department. It is unclear at this point what the ramifications of such
disclosure are or may be in the future.
The holders of our Series B Preferred Stock have rights that are senior to those of our common
shareholders.
On December 5, 2008, we sold $70.0 million of our Series B Preferred Stock issued to the Treasury
Department under the Capital Purchase Program, which ranks senior to common stock in the payment of
dividends and on liquidation. The liquidation amount of the Series B Preferred Stock is $1,000 per
share.
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.
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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. Location | ||||
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 67504 | 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 | ||
hutchinson |
||||
100 East 30th Avenue |
||||
P.O. Box 1707 |
Hutchinson, Kansas 67504 | 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 Boulevard |
||||
Suite 101 & 102* |
Oklahoma City, Oklahoma 73118 | 405-427-4000 | ||
South OKC Branch |
||||
8101 S. Walker Avenue |
||||
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 Boulevard |
||||
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-Medical Hill Branch | ||||
9324 Huebner Road |
San Antonio, Texas 78240 | 210-442-6100 | ||
Stillwater National Bank Loan Production Office | ||||
9990 Richmond Avenue |
||||
Suite 140* |
Houston, Texas 77042 | 713-268-8900 |
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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. |
PART IV
Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are filed as part of this
report:
Independent Registered Public Accounting Firms Report for the Years Ended December 31,
2010 and 2009
Consolidated Statements of Financial Condition at December 31, 2010 and 2009
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009, and 2008
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010,
2009, and 2008
Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2010,
2009, and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2010, 2009,
and 2008
(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, 2010) | |
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) |
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No. | Exhibit | |||||
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 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 | 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 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) |
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No. | Exhibit | |||||
*
|
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 | ||||
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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Table of Contents
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 7, 2011 | 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 7, 2011 | |
Director and Chief Executive Officer |
||
(Principal Executive Officer) |
/s/ Laura Robertson
|
March 7, 2011 | |
Executive Vice President, |
||
Chief Financial Officer |
||
(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, 2010. This report has been signed below by
such attorney-in-fact as of March 7, 2011.
By:
|
/s/ Rick Green
|
|||
Rick Green | ||||
Attorney-in-Fact for Majority of the | ||||
Directors of Southwest |
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