SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2009
OR
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|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 001-34110
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
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|
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Oklahoma
(State or other jurisdiction of
incorporation or organization)
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73-1136584
(I.R.S. Employer
Identification Number)
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608 South Main Street
Stillwater, Oklahoma
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74074
(Zip Code)
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(Address of principal executive office)
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Registrants telephone number, including area code: (405) 742-1800
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 whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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|
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
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date.
14,749,732 (11/05/09)
SOUTHWEST BANCORP, INC.
INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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3
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4
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5
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6
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7
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8
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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25
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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41
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ITEM 4. CONTROLS AND PROCEDURES
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43
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44
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45
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EX-31.A
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EX-31.B
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EX-32.A
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EX-32.B
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2
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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September 30,
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December 31,
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(Dollars in thousands)
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2009
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|
2008
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|
Assets
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|
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|
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Cash and due from banks
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$
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32,094
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$
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27,287
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Investment securities:
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Held to maturity, fair value $6,907 (2009) and $7,293 (2008)
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6,795
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|
7,343
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Available for sale, amortized cost $228,723 (2009) and $233,293
(2008)
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233,009
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238,037
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Other investments at cost
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18,986
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18,786
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Loans held for sale
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36,526
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56,941
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Non-covered loans receivable
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2,572,111
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2,494,506
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Less: Allowance for loan losses
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(57,777
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)
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|
(39,773
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)
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Net non-covered loans
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2,514,334
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2,454,733
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Covered loans receivable (includes loss share receivable of $33.3 million)
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103,630
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Net loans receivable
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|
2,617,964
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|
|
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2,454,733
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Accrued interest receivable
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|
|
10,794
|
|
|
|
11,512
|
|
Premises and equipment, net
|
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25,255
|
|
|
|
24,580
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|
Non-covered other real estate
|
|
|
6,389
|
|
|
|
6,092
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|
Covered other real estate
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|
2,598
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|
|
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|
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Goodwill
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6,811
|
|
|
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7,071
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|
Other intangible assets, net
|
|
|
5,872
|
|
|
|
3,764
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Other assets
|
|
|
26,254
|
|
|
|
23,616
|
|
|
Total assets
|
|
$
|
3,029,347
|
|
|
$
|
2,879,762
|
|
|
|
|
|
|
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Liabilities and shareholders equity
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|
|
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Deposits:
|
|
|
|
|
|
|
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Noninterest-bearing demand
|
|
$
|
309,767
|
|
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$
|
261,940
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Interest-bearing demand
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|
|
82,622
|
|
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|
76,027
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Money market accounts
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|
506,196
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|
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454,250
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Savings accounts
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|
25,636
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|
|
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14,135
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Time deposits of $100,000 or more
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888,814
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802,244
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Other time deposits
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660,127
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571,526
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Total deposits
|
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|
2,473,162
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|
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|
2,180,122
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|
Accrued interest payable
|
|
|
4,545
|
|
|
|
7,018
|
|
Income tax payable
|
|
|
3,822
|
|
|
|
3,651
|
|
Other liabilities
|
|
|
10,288
|
|
|
|
9,667
|
|
Other borrowings
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|
146,449
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|
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|
295,138
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Subordinated debentures
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81,963
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|
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|
81,963
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Total liabilities
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|
2,720,229
|
|
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2,577,559
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Shareholders equity:
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Preferred stock, Series B $1,000 par value; 1,250,000 shares
authorized; 70,000 shares issued
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|
66,872
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|
|
|
66,392
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|
Common stock $1 par value; 20,000,000 shares authorized;
14,748,223 and 14,658,042 shares
issued, respectively
|
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|
14,748
|
|
|
|
14,658
|
|
Paid in capital
|
|
|
49,007
|
|
|
|
49,101
|
|
Retained earnings
|
|
|
175,834
|
|
|
|
170,579
|
|
Accumulated other comprehensive income
|
|
|
2,657
|
|
|
|
2,921
|
|
Treasury stock, at cost; 0 (2009) and 80,383 (2008) shares
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|
|
|
|
|
|
(1,448
|
)
|
|
Total shareholders
equity
|
|
|
309,118
|
|
|
|
302,203
|
|
|
Total liabilities &
shareholders
equity
|
|
$
|
3,029,347
|
|
|
$
|
2,879,762
|
|
|
The accompanying notes are an integral part of this statement.
3
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the three months
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For the nine months
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|
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ended September 30,
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ended September 30,
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(Dollars in thousands, except earnings per share data)
|
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2009
|
|
2008
|
|
2009
|
|
2008
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest and fees on loans
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|
$
|
35,607
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|
|
$
|
38,441
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|
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$
|
104,884
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|
|
$
|
116,536
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
|
397
|
|
|
|
818
|
|
|
|
1,370
|
|
|
|
2,733
|
|
Mortgage-backed securities
|
|
|
1,527
|
|
|
|
1,484
|
|
|
|
4,681
|
|
|
|
3,828
|
|
State and political subdivisions
|
|
|
70
|
|
|
|
98
|
|
|
|
234
|
|
|
|
288
|
|
Other securities
|
|
|
128
|
|
|
|
131
|
|
|
|
428
|
|
|
|
444
|
|
Other interest-earning assets
|
|
|
4
|
|
|
|
22
|
|
|
|
13
|
|
|
|
70
|
|
|
Total interest income
|
|
|
37,733
|
|
|
|
40,994
|
|
|
|
111,610
|
|
|
|
123,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
107
|
|
|
|
147
|
|
|
|
410
|
|
|
|
454
|
|
Money market accounts
|
|
|
1,220
|
|
|
|
2,898
|
|
|
|
3,784
|
|
|
|
10,488
|
|
Savings accounts
|
|
|
39
|
|
|
|
17
|
|
|
|
62
|
|
|
|
58
|
|
Time deposits of $100,000 or more
|
|
|
4,822
|
|
|
|
6,879
|
|
|
|
16,524
|
|
|
|
21,795
|
|
Other time deposits
|
|
|
3,909
|
|
|
|
4,457
|
|
|
|
12,449
|
|
|
|
14,964
|
|
Other borrowings
|
|
|
960
|
|
|
|
1,839
|
|
|
|
3,424
|
|
|
|
5,755
|
|
Subordinated debentures
|
|
|
1,276
|
|
|
|
1,569
|
|
|
|
4,063
|
|
|
|
3,080
|
|
|
Total interest expense
|
|
|
12,333
|
|
|
|
17,806
|
|
|
|
40,716
|
|
|
|
56,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
25,400
|
|
|
|
23,188
|
|
|
|
70,894
|
|
|
|
67,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
10,177
|
|
|
|
6,855
|
|
|
|
28,536
|
|
|
|
12,281
|
|
|
Net interest income after provision for loan losses
|
|
|
15,223
|
|
|
|
16,333
|
|
|
|
42,358
|
|
|
|
55,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
2,992
|
|
|
|
2,849
|
|
|
|
8,409
|
|
|
|
8,118
|
|
Other noninterest income
|
|
|
322
|
|
|
|
662
|
|
|
|
806
|
|
|
|
1,349
|
|
Gain on acquisition
|
|
|
|
|
|
|
|
|
|
|
3,281
|
|
|
|
|
|
Gain on sales of loans
|
|
|
386
|
|
|
|
601
|
|
|
|
2,030
|
|
|
|
2,044
|
|
Gain (loss) on sale/call of securities
|
|
|
10
|
|
|
|
(50
|
)
|
|
|
2,922
|
|
|
|
1,198
|
|
|
Total noninterest income
|
|
|
3,710
|
|
|
|
4,062
|
|
|
|
17,448
|
|
|
|
12,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
7,824
|
|
|
|
8,863
|
|
|
|
21,950
|
|
|
|
26,941
|
|
Occupancy
|
|
|
2,958
|
|
|
|
2,968
|
|
|
|
8,478
|
|
|
|
8,028
|
|
FDIC and other insurance
|
|
|
1,134
|
|
|
|
469
|
|
|
|
4,444
|
|
|
|
1,443
|
|
Other real estate, net
|
|
|
90
|
|
|
|
(92
|
)
|
|
|
91
|
|
|
|
115
|
|
General and administrative
|
|
|
3,522
|
|
|
|
4,325
|
|
|
|
9,854
|
|
|
|
12,168
|
|
|
Total noninterest expense
|
|
|
15,528
|
|
|
|
16,533
|
|
|
|
44,817
|
|
|
|
48,695
|
|
|
Income before taxes
|
|
|
3,405
|
|
|
|
3,862
|
|
|
|
14,989
|
|
|
|
19,038
|
|
Taxes on income
|
|
|
1,271
|
|
|
|
1,556
|
|
|
|
5,581
|
|
|
|
7,362
|
|
|
Net income
|
|
$
|
2,134
|
|
|
$
|
2,306
|
|
|
$
|
9,408
|
|
|
$
|
11,676
|
|
|
Net income available to common shareholders
|
|
$
|
1,097
|
|
|
$
|
2,306
|
|
|
$
|
6,303
|
|
|
$
|
11,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
0.43
|
|
|
$
|
0.81
|
|
Diluted earnings per common share
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
0.43
|
|
|
$
|
0.80
|
|
Cash dividends declared per share
|
|
$
|
0.0238
|
|
|
$
|
0.0950
|
|
|
$
|
0.0714
|
|
|
$
|
0.2850
|
|
|
The accompanying notes are an integral part of this statement.
4
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the nine months
|
|
|
ended September 30,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,408
|
|
|
$
|
11,676
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
28,536
|
|
|
|
12,281
|
|
Deferred tax benefit
|
|
|
(4,973
|
)
|
|
|
(2,191
|
)
|
Asset depreciation
|
|
|
2,223
|
|
|
|
2,167
|
|
Securities premium amortization (discount accretion), net
|
|
|
1,283
|
|
|
|
77
|
|
Amortization of intangibles
|
|
|
1,268
|
|
|
|
945
|
|
Stock based compensation
|
|
|
248
|
|
|
|
417
|
|
Net gain on sale/call of investment securities
|
|
|
(2,922
|
)
|
|
|
(1,198
|
)
|
Net gain on sales of available for sale loans
|
|
|
(2,030
|
)
|
|
|
(2,044
|
)
|
Net loss on sales of premises/equipment
|
|
|
15
|
|
|
|
248
|
|
Net gain on other real estate owned
|
|
|
(403
|
)
|
|
|
(558
|
)
|
Gain from FDIC assisted acquisition
|
|
|
(3,281
|
)
|
|
|
|
|
Proceeds from sales of residential mortgage loans
|
|
|
124,358
|
|
|
|
49,830
|
|
Residential mortgage loans originated for resale
|
|
|
(124,867
|
)
|
|
|
(49,147
|
)
|
Proceeds from sales of student loans
|
|
|
81,396
|
|
|
|
74,503
|
|
Student loans originated for resale
|
|
|
(58,116
|
)
|
|
|
(79,768
|
)
|
Net change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
718
|
|
|
|
10,587
|
|
Other assets
|
|
|
2,542
|
|
|
|
(5,645
|
)
|
Income taxes payable
|
|
|
414
|
|
|
|
2,361
|
|
Excess tax expense from share-based payment arrangements
|
|
|
(243
|
)
|
|
|
(306
|
)
|
Accrued interest payable
|
|
|
(2,473
|
)
|
|
|
(1,449
|
)
|
Other liabilities
|
|
|
834
|
|
|
|
2,171
|
|
|
Net cash provided by operating activities
|
|
|
53,935
|
|
|
|
24,957
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales of available for sale securities
|
|
|
123,458
|
|
|
|
7,735
|
|
Proceeds from principal repayments, calls and maturities:
|
|
|
|
|
|
|
|
|
Held to maturity securities
|
|
|
1,550
|
|
|
|
1,500
|
|
Available for sale securities
|
|
|
57,296
|
|
|
|
179,686
|
|
Purchases of other investments
|
|
|
(200
|
)
|
|
|
(299
|
)
|
Purchases of held to maturity securities
|
|
|
|
|
|
|
(2,500
|
)
|
Purchases of available for sale securities
|
|
|
(154,902
|
)
|
|
|
(172,897
|
)
|
Loans originated and principal repayments, net
|
|
|
(81,225
|
)
|
|
|
(310,233
|
)
|
FDIC assisted acquisition, net
|
|
|
17,161
|
|
|
|
|
|
Purchases of premises and equipment
|
|
|
(2,965
|
)
|
|
|
(3,053
|
)
|
Proceeds from sales of premises and equipment
|
|
|
89
|
|
|
|
192
|
|
Proceeds from sales of other real estate owned
|
|
|
6,260
|
|
|
|
11,416
|
|
|
Net cash used in investing activities
|
|
|
(33,478
|
)
|
|
|
(288,453
|
)
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
158,033
|
|
|
|
140,140
|
|
Net increase (decrease) in other borrowings
|
|
|
(170,361
|
)
|
|
|
80,762
|
|
Net proceeds from issuance of common stock
|
|
|
947
|
|
|
|
1,622
|
|
Net proceeds from issuance of subordinated debentures
|
|
|
|
|
|
|
35,570
|
|
Excess tax benefit from share-based payment arrangements
|
|
|
243
|
|
|
|
306
|
|
Preferred stock dividends paid
|
|
|
(2,431
|
)
|
|
|
|
|
Common stock dividends paid
|
|
|
(2,081
|
)
|
|
|
(4,079
|
)
|
|
Net cash provided from (used in) financing activities
|
|
|
(15,650
|
)
|
|
|
254,321
|
|
|
Net change in cash and cash equivalents
|
|
|
4,807
|
|
|
|
(9,175
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
27,287
|
|
|
|
45,678
|
|
|
End of period
|
|
$
|
32,094
|
|
|
$
|
36,503
|
|
|
The accompanying notes are an integral part of this statement.
5
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Preferred
|
|
Common Stock
|
|
Paid in
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
Shareholders
|
(Dollars in thousands)
|
|
Stock
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
|
|
Stock
|
|
Equity
|
|
Balance, December 31, 2008
|
|
$
|
66,392
|
|
|
|
14,658,042
|
|
|
$
|
14,658
|
|
|
$
|
49,101
|
|
|
$
|
170,579
|
|
|
$
|
2,921
|
|
|
$
|
(1,448
|
)
|
|
$
|
302,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,625
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,625
|
)
|
Common, $0.0714 per share,
and other dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
Warrant amortization
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plan
|
|
|
|
|
|
|
89,705
|
|
|
|
90
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
883
|
|
|
|
886
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
61
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
224
|
|
Tax expense related to exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
Stock Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Other comprehensive loss,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(264
|
)
|
|
|
|
|
|
|
(264
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
66,872
|
|
|
|
14,748,223
|
|
|
$
|
14,748
|
|
|
$
|
49,007
|
|
|
$
|
175,834
|
|
|
$
|
2,657
|
|
|
$
|
0
|
|
|
$
|
309,118
|
|
|
The accompanying notes are an integral part of this statement.
6
SOUTHWEST BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
For the nine months
|
|
|
ended September 30,
|
|
ended September 30,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income
|
|
$
|
2,134
|
|
|
$
|
2,306
|
|
|
$
|
9,408
|
|
|
$
|
11,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain (loss) on available
for sale securities
|
|
|
2,947
|
|
|
|
255
|
|
|
|
2,464
|
|
|
|
(1,229
|
)
|
Reclassification adjustment for gains (losses)
arising during the period
|
|
|
(10
|
)
|
|
|
50
|
|
|
|
(2,922
|
)
|
|
|
(1,198
|
)
|
|
Other comprehensive income (loss), before tax
|
|
|
2,937
|
|
|
|
305
|
|
|
|
(458
|
)
|
|
|
(2,427
|
)
|
Tax benefit (expense) related to items of other
comprehensive income (loss)
|
|
|
(1,133
|
)
|
|
|
(124
|
)
|
|
|
194
|
|
|
|
944
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
1,804
|
|
|
|
181
|
|
|
|
(264
|
)
|
|
|
(1,483
|
)
|
|
Comprehensive income
|
|
$
|
3,938
|
|
|
$
|
2,487
|
|
|
$
|
9,144
|
|
|
$
|
10,193
|
|
|
The accompanying notes are an integral part of this statement.
7
SOUTHWEST BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
NOTE 1: GENERAL
The accompanying unaudited consolidated financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a
complete presentation of financial position, results of operations, shareholders equity, cash
flows, and comprehensive income in conformity with accounting principles generally accepted in the
United States. However, the unaudited consolidated financial statements include all adjustments
which, in the opinion of management, are necessary for a fair presentation. Those adjustments
consist of normal recurring adjustments. The results of operations for the three and nine months
ended September 30, 2009, and the cash flows for the nine months ended September 30, 2009, should
not be considered indicative of the results to be expected for the full year. These unaudited
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Southwest Bancorp, Inc. Annual Report on Form 10-K for
the year ended December 31, 2008.
NOTE 2: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of Southwest
Bancorp, Inc. (Southwest), its wholly owned financial institution subsidiaries, Stillwater
National Bank and Trust Company (Stillwater National), and Bank of Kansas, and its management
consulting subsidiaries, Healthcare Strategic Support, Inc. (HSSI), and Business Consulting
Group, Inc. (BCG), and SNB Capital Corporation, a lending and loan workout subsidiary. SNB Bank
of Wichita (SNB Wichita), a wholly owned subsidiary of Southwest, was merged into Bank of Kansas
on January 23, 2009. All significant intercompany transactions and balances have been eliminated
in consolidation.
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 generally accepted accounting principles (GAAP) applicable to all public and
non-public non-governmental entities, superseding existing FASB, American Institute of Certified
Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under the authority of
federal securities laws are also sources of authoritative GAAP for SEC registrants. All other
accounting literature is considered non-authoritative.
ASC 855,
Subsequent Events
(formerly SFAS No. 165) became effective for Southwest for reporting
periods ending after June 15, 2009. This ASC establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC 855.10.05-1 defines (i) the period after the balance sheet
date during which a reporting entitys management should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, (ii) the circumstances
under which an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and (iii) the disclosures an entity should make about events or
transactions that occurred after the balance sheet date. In accordance with ASC 855, Southwest has
evaluated subsequent events for potential recognitions and disclosure through November 5, 2009, the
date the consolidated financial statements included in this Quarterly Report on Form 10-Q were
issued.
NOTE 3: ACQUISITIONS
On June 19, 2009, Bank of Kansas entered into a purchase and assumption agreement with the Federal
Deposit Insurance Corporation (FDIC) to acquire substantially all deposits and loans as well as
certain other liabilities and assets of First National Bank of Anthony, Anthony, Kansas (FNBA),
in an FDIC-assisted transaction. FNBA was a full service commercial bank that had been placed in
receivership with the FDIC. In this transaction, Bank of Kansas acquired the following assets and
liabilities at their respective fair values:
8
|
|
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Cash and cash equivalents
|
|
$
|
6,039
|
|
Loans
|
|
|
117,096
|
|
Investment securities
|
|
|
20,644
|
|
Core deposit intangibles
|
|
|
1,983
|
|
Other real estate owned
|
|
|
2,938
|
|
Other assets
|
|
|
1,141
|
|
|
|
|
|
Total assets acquired
|
|
$
|
149,841
|
|
|
|
|
|
Deposits
|
|
|
135,007
|
|
Borrowings
|
|
|
21,672
|
|
Other liabilities
|
|
|
1,003
|
|
|
|
|
|
Net assets acquired
|
|
$
|
(7,841
|
)
|
Plus: cash received from FDIC
|
|
|
11,122
|
|
|
|
|
|
Gain on acquisition
|
|
$
|
3,281
|
|
|
|
|
|
The acquisition of these assets and liabilities constitute a business as defined by ASC 805,
Business Combinations
(formerly SFAS No. 141(R)) because they are capable of being operated as a
business. Based upon the acquisition date fair values of the net assets acquired, no goodwill was
recorded. The resulting gain of $3.3 million on the acquisition is included in noninterest income
in the Consolidated Statement of Operations.
Bank of Kansas 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. 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 will service the covered assets. The loss sharing
agreements have terms of ten years for one-to-four family residential loans and eight years for all
other loan types. The expected payments from the FDIC under the loss sharing agreements were
recorded as part of the loans acquired at a fair value of $33.1 million as of June 19, 2009. Bank
of Kansas has identified $5.0 million in net losses to submit to the FDIC under such loss sharing
agreement during the period from June 19, 2009 through September 30, 2009.
It is expected that, based upon the analysis performed by the outside valuation firm, Bank of
Kansas will accrete additional discounts into income as Bank of Kansas collects on the assets
covered by the loss share agreements.
Subsequent to September 30, 2009, Bank of Kansas elected to exercise its option to acquire four
former FNBA branch offices from the FDIC. Per the acquisition agreement, acquisition costs of the
branch buildings will be at fair value based on current appraisals.
ASC 310.30,
Loan and Debt Securities Acquired with Deteriorated Credit Quality
(formerly AICPA
Statement of Position 03-3), applies to loans with evidence of deterioration of credit quality
since origination, acquired by completion of a transfer for which it is probable, at acquisition,
that the investor will be unable to collect all contractually required payments receivable. ASC
310.30.30-1 prohibits carrying over or creating an allowance for loan losses upon initial
recognition.
The carrying value of the FDIC covered assets at September 30, 2009 consisted of loans accounted
for in accordance with ASC 310.30 and other assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 310.30
|
|
|
|
|
(Dollars in thousands)
|
|
Loans
|
|
Other
|
|
Total
|
|
Commercial real estate
|
|
$
|
28,500
|
|
|
$
|
|
|
|
$
|
28,500
|
|
1-4 family residential
|
|
|
10,788
|
|
|
|
|
|
|
|
10,788
|
|
Real Estate Construction
|
|
|
15,177
|
|
|
|
|
|
|
|
15,177
|
|
Commercial
|
|
|
13,845
|
|
|
|
|
|
|
|
13,845
|
|
Consumer
|
|
|
2,069
|
|
|
|
|
|
|
|
2,069
|
|
Other real estate owned
|
|
|
|
|
|
|
2,598
|
|
|
|
2,598
|
|
Estimated loss reimbursement from the FDIC
|
|
|
33,251
|
|
|
|
|
|
|
|
33,251
|
|
|
Total covered assets
|
|
$
|
103,630
|
|
|
$
|
2,598
|
|
|
$
|
106,228
|
|
|
9
Changes in the carrying amounts and accretable yield for ASC 310.30 loans were as follows
during the three and nine months ended September 30, 2009 (or from the date of acquisition):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30, 2009
|
|
September 30, 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 (or date of acquisition)
|
|
$
|
3,733
|
|
|
$
|
113,900
|
|
|
$
|
3,744
|
|
|
$
|
117,096
|
|
Payments received
|
|
|
|
|
|
|
(10,559
|
)
|
|
|
|
|
|
|
(13,766
|
)
|
Charge-offs
|
|
|
(38
|
)
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
Amortization
|
|
|
(289
|
)
|
|
|
289
|
|
|
|
(300
|
)
|
|
|
300
|
|
|
Balance at end of period
|
|
$
|
3,406
|
|
|
$
|
103,630
|
|
|
$
|
3,406
|
|
|
$
|
103,630
|
|
|
NOTE 4: INVESTMENT SECURITIES AND OTHER INVESTMENTS
Effective April 1, 2009, Southwest adopted the provisions of new authoritative accounting guidance
under ASC 320,
Debt and Equity Securities
. The provisions (i) change existing guidance for
determining whether an impairment is other than temporary to debt securities and (ii) replace the
existing requirement that the entitys management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert: (a) it does not
have the intent to sell the security; and (b) it is more likely than not it will not have to sell
the security before recovery of its cost basis. Under this section, declines in fair value of
held-to-maturity and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. Adoption of the new guidance did not have a material impact on our financial
condition and results of operations.
A summary of the amortized cost and fair values of investment securities at September 30, 2009 and
December 31, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
(Dollars in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
At September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
6,795
|
|
|
$
|
112
|
|
|
$
|
|
|
|
$
|
6,907
|
|
|
Total
|
|
$
|
6,795
|
|
|
$
|
112
|
|
|
$
|
|
|
|
$
|
6,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
1,098
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
1,101
|
|
Federal agency securities
|
|
|
63,913
|
|
|
|
775
|
|
|
|
(34
|
)
|
|
|
64,654
|
|
Obligations of state and political subdivisions
|
|
|
1,047
|
|
|
|
24
|
|
|
|
|
|
|
|
1,071
|
|
Mortgage-backed securities
|
|
|
161,781
|
|
|
|
3,250
|
|
|
|
(100
|
)
|
|
|
164,931
|
|
Equity securities
|
|
|
884
|
|
|
|
368
|
|
|
|
|
|
|
|
1,252
|
|
|
Total
|
|
$
|
228,723
|
|
|
$
|
4,420
|
|
|
$
|
(134
|
)
|
|
$
|
233,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
(Dollars in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
7,343
|
|
|
$
|
10
|
|
|
$
|
(60
|
)
|
|
$
|
7,293
|
|
|
Total
|
|
$
|
7,343
|
|
|
$
|
10
|
|
|
$
|
(60
|
)
|
|
$
|
7,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
986
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
999
|
|
Federal agency securities
|
|
|
77,543
|
|
|
|
1,663
|
|
|
|
(9
|
)
|
|
|
79,197
|
|
Obligations of state and political subdivisions
|
|
|
2,736
|
|
|
|
19
|
|
|
|
|
|
|
|
2,755
|
|
Mortgage-backed securities
|
|
|
151,130
|
|
|
|
2,897
|
|
|
|
(14
|
)
|
|
|
154,013
|
|
Equity securities
|
|
|
898
|
|
|
|
175
|
|
|
|
|
|
|
|
1,073
|
|
|
Total
|
|
$
|
233,293
|
|
|
$
|
4,767
|
|
|
$
|
(23
|
)
|
|
$
|
238,037
|
|
|
10
Federal Reserve Bank stock, Federal Home Loan Bank stock, and certain other investments are
not readily marketable and are carried at cost. Total investments carried at cost were $19.0
million and $18.8 million at September 30, 2009 and December 31, 2008, respectively. There are no
identified events or changes in circumstances that may have a significant adverse effect on these
investments carried at cost.
Gain or loss on sale of investments is based upon the specific identification method. Sales of
securities available for sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
For the nine months
|
|
|
ended September 30,
|
|
ended September 30,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Proceeds from sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
122,225
|
|
|
$
|
7,790
|
|
Gross realized gains
|
|
|
|
|
|
|
|
|
|
|
2,911
|
|
|
|
1,290
|
|
Gross realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present securities with gross unrealized losses and fair value by length
of time that the individual securities had been in a continuous unrealized loss position at
September 30, 2009 and December 31, 2008. Securities whose market values exceed cost are excluded
from this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Existing for:
|
|
|
|
|
Number of
|
|
Amortized
|
|
Less Than
|
|
More Than
|
|
Fair
|
(Dollars in thousands)
|
|
Securities
|
|
Cost
|
|
12 Months
|
|
12 Months
|
|
Value
|
|
At September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
|
|
4
|
|
|
$
|
15,180
|
|
|
$
|
(34
|
)
|
|
$
|
|
|
|
$
|
15,146
|
|
Mortgage-backed securities
|
|
|
8
|
|
|
|
12,196
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
12,096
|
|
|
Total
|
|
|
12
|
|
|
$
|
27,376
|
|
|
$
|
(134
|
)
|
|
$
|
|
|
|
$
|
27,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Existing for:
|
|
|
|
|
Number of
|
|
Amortized
|
|
Less Than
|
|
More Than
|
|
Fair
|
(Dollars in thousands)
|
|
Securities
|
|
Cost
|
|
12 Months
|
|
12 Months
|
|
Value
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
|
5
|
|
|
$
|
2,875
|
|
|
$
|
(60
|
)
|
|
$
|
|
|
|
$
|
2,815
|
|
|
Total
|
|
|
5
|
|
|
$
|
2,875
|
|
|
$
|
(60
|
)
|
|
$
|
|
|
|
$
|
2,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency securities
|
|
|
2
|
|
|
$
|
5,962
|
|
|
$
|
(9
|
)
|
|
$
|
|
|
|
$
|
5,953
|
|
Obligations of state and political subdivisions
|
|
|
1
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
Mortgage-backed securities
|
|
|
8
|
|
|
|
3,608
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
3,594
|
|
|
Total
|
|
|
11
|
|
|
$
|
10,820
|
|
|
$
|
(23
|
)
|
|
$
|
|
|
|
$
|
10,797
|
|
|
Mortgage-backed securities consist of agency securities underwritten and guaranteed by
Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation
(Freddie Mac), and Federal National Mortgage Association (Fannie Mae).
Southwest evaluates all securities on an individual basis for other-than-temporary impairment on at
least a quarterly basis. Consideration is given to the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term prospects of the issuer,
and the intent and ability of Southwest to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held to maturity in the
table above until they mature, at which time Southwest will receive full value for the securities.
Furthermore, as of September 30, 2009, management does not have the intent to sell any of the
securities classified as available for sale in the table above and believes that it is more likely
than not that Southwest will not have to sell any such securities before a recovery of cost. The
declines in fair value were attributable to increases in market interest rates over the yields
available at the time the underlying securities were purchased or increases in spreads over market
interest rates. Management does not believe any of the securities are impaired
11
due to credit
quality. Accordingly, as of September 30 2009, management believes the impairment of these
investments is not deemed to be other-than-temporary.
A comparison of the amortized cost and approximate fair value of Southwests debt securities by
maturity date at September 30, 2009 follows in the next table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
Held to Maturity
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
(Dollars in thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
One year or less
|
|
$
|
16,672
|
|
|
$
|
16,979
|
|
|
$
|
2,825
|
|
|
$
|
2,867
|
|
More than one year through five years
|
|
|
139,006
|
|
|
|
142,243
|
|
|
|
3,970
|
|
|
|
4,040
|
|
More than five years through ten years
|
|
|
60,113
|
|
|
|
60,717
|
|
|
|
|
|
|
|
|
|
More than ten years
|
|
|
12,932
|
|
|
|
13,070
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
228,723
|
|
|
$
|
233,009
|
|
|
$
|
6,795
|
|
|
$
|
6,907
|
|
|
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 debt securities for this analysis.
NOTE 5: LOANS AND OTHER REAL ESTATE
Southwest extends commercial and consumer credit primarily to customers in the states of Oklahoma,
Texas, and Kansas. Its commercial lending operations are concentrated in Oklahoma City, Dallas,
Tulsa, and other metropolitan markets in Texas, Kansas, and Oklahoma. As a result, the
collectibility of Southwests loan portfolio can be affected by changes in the economic conditions
in those states and markets. At September 30, 2009 and December 31, 2008, 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 or, in the case of
private student loans, insured by a private insurer.
Loans covered under the loss sharing agreements with the FDIC including the amounts of expected
reimbursements from the FDIC under these agreements are reported in loans and are referred to as
covered loans. Covered loans were initially recorded at fair value at the acquisition date.
Subsequent decreases in the amount expected to be collected result in a provision for loan losses
equal to the portion of the loss retained by the bank and an increase in the estimated FDIC
reimbursement equal to the portion of the loss reimbursable by the FDIC. Interest is accrued daily
on the outstanding principal balances. Covered loans which are more than 90 days delinquent with
respect to interest or principal, unless they are well secured and in the process of collection,
and other covered loans on which full recovery of principal or interest is in doubt, are placed on
nonaccrual status. Interest previously accrued on covered loans placed on nonaccrual status is
charged against interest income, net of estimated FDIC reimbursements of such accrued interest.
When the ability to fully collect nonaccrual loan principal is in doubt, payments received are
applied against the principal balance of the loans until such time as full collection of the
remaining recorded balance is expected. Any additional interest payments received after that time
are recorded as interest income on a cash basis.
Other real estate owned covered under the loss sharing agreements with the FDIC is reported
exclusive of expected reimbursement cash flows from the FDIC and are referred to as covered other
real estate. 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.
As of September 30, 2009, approximately $706.1 million, or 27%, of Southwests non-covered
portfolio loans consisted of loans to individuals and businesses in the healthcare industry.
Southwest does not have any other concentrations of loans to individuals or businesses involved in
a single industry totaling 10% or more of total loans.
12
Nonperforming assets and other risk elements of the loan portfolio are shown below as of the
indicated dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008*
|
|
(Dollars in thousands)
|
|
Non-covered
|
|
|
Covered
|
|
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
23,912
|
|
|
$
|
570
|
|
|
$
|
9,881
|
|
One-to-four family residential
|
|
|
10,409
|
|
|
|
4,455
|
|
|
|
474
|
|
Real estate construction
|
|
|
49,623
|
|
|
|
8,975
|
|
|
|
37,346
|
|
Commercial
|
|
|
10,603
|
|
|
|
670
|
|
|
|
11,598
|
|
Other consumer
|
|
|
168
|
|
|
|
16
|
|
|
|
11
|
|
|
|
|
|
|
|
Total nonaccrual loans (1)
|
|
$
|
94,715
|
|
|
$
|
14,686
|
|
|
$
|
59,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
8,010
|
|
|
|
2,794
|
|
|
|
9
|
|
One-to-four family residential
|
|
|
20
|
|
|
|
|
|
|
|
39
|
|
Real estate construction
|
|
|
2,431
|
|
|
|
1,694
|
|
|
|
4,005
|
|
Commercial
|
|
|
72
|
|
|
|
30
|
|
|
|
547
|
|
Other consumer
|
|
|
45
|
|
|
|
26
|
|
|
|
73
|
|
|
|
|
|
|
|
Total past due 90 days or more
|
|
|
10,578
|
|
|
|
4,544
|
|
|
|
4,673
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
105,293
|
|
|
|
19,230
|
|
|
|
63,983
|
|
Other real estate owned
|
|
|
6,389
|
|
|
|
2,598
|
|
|
|
6,092
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
111,682
|
|
|
$
|
21,828
|
|
|
$
|
70,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to portfolio loans receivable
|
|
|
4.09
|
%
|
|
|
18.56
|
%
|
|
|
2.56
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
54.87
|
%
|
|
|
0.00
|
%
|
|
|
62.16
|
%
|
Nonperforming assets to portfolio loans receivable and
other real estate owned
|
|
|
4.33
|
%
|
|
|
20.55
|
%
|
|
|
2.80
|
%
|
|
|
|
(1)
|
|
The government-guaranteed portion of loans included in these totals was $517,000 and $1.1 million, respectively.
|
|
*
|
|
There were no covered nonperforming assets as of December 31, 2008.
|
All of the non-covered nonaccruing assets are subject to regular tests for impairment as part
of Southwests allowance for loan losses methodology (see Note 6).
During the first nine months of 2009, $2.0 million of interest income was received on nonaccruing
loans, primarily from a one-time recovery from a successful resolution of a nonperforming loan in
second quarter. If interest on those loans had been accrued for the nine months ended September
30, 2009, additional interest income of $4.1 million would have been recorded.
Included in non-covered nonaccrual loans as of September 30, 2009, are four collateral dependent
lending relationships with aggregate principal balances of approximately $55.0 million and related
impairment reserves of $6.8 million which were established based on recent appraisal values
obtained for the respective properties. All four of these lending relationships are in the real
estate industry and include a residential condominium construction project with three loans
outstanding, an apartment complex rehabilitation project with three loans outstanding, a lending
relationship consisting of three loans that include a residential land development and two retail
commercial real estate buildings for lease, and a residential land development lending
relationship.
Included in nonaccrual loans as of December 31, 2008, are two collateral dependent lending
relationships with aggregate principal balances of approximately $27.9 million and related
impairment reserves of $1.9 million which were established base on recent appraisal values obtained
for the respective properties. Both of these lending relationships are in the real estate industry
and include a residential condominium construction project with two loans outstanding and an
apartment complex rehabilitation project with two loans outstanding.
Under generally accepted accounting principles and instructions to reports of condition and income
of federal banking regulators, a nonaccrual loan may be returned to accrual status: when none of
its principal and interest is due and unpaid,
repayment is expected and there has been a sustained period (at least six months) of repayment
performance; when the loan is not brought current, but there is a sustained period of performance
and repayment within a reasonable period is reasonably assured; or when the loan otherwise becomes
well secured and in process of collection. Purchased impaired loans also may be returned to
accrual status without becoming fully current. Loans that have been restructured because of
weakened financial positions of the borrowers also may
13
be returned to accrual status
without becoming fully current.
Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status
if repayment
is reasonably assured under the revised terms and there has been a sustained period of repayment
performance.
(Please see Note 3 for information regarding loans acquired in the FDIC-assisted FNBA transaction.)
NOTE 6: ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS
Activity in the allowance for loan losses is shown below for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
For the
|
|
For the nine
|
|
|
months ended
|
|
year ended
|
|
months ended
|
(Dollars in thousands)
|
|
September 30, 2009
|
|
December 31, 2008
|
|
September 30, 2008
|
|
Balance at beginning of period
|
|
$
|
39,773
|
|
|
$
|
29,584
|
|
|
$
|
29,584
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
4,151
|
|
|
|
2,125
|
|
|
|
1,463
|
|
Real estate construction
|
|
|
3,352
|
|
|
|
2,209
|
|
|
|
760
|
|
Commercial
|
|
|
3,656
|
|
|
|
4,552
|
|
|
|
3,866
|
|
Installment and consumer
|
|
|
998
|
|
|
|
1,056
|
|
|
|
599
|
|
|
Total charge-offs
|
|
|
12,157
|
|
|
|
9,942
|
|
|
|
6,688
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
289
|
|
|
|
57
|
|
|
|
43
|
|
Real estate construction
|
|
|
343
|
|
|
|
2
|
|
|
|
2
|
|
Commercial
|
|
|
739
|
|
|
|
962
|
|
|
|
470
|
|
Installment and consumer
|
|
|
254
|
|
|
|
131
|
|
|
|
115
|
|
|
Total recoveries
|
|
|
1,625
|
|
|
|
1,152
|
|
|
|
630
|
|
|
Net loans charged-off
|
|
|
10,532
|
|
|
|
8,790
|
|
|
|
6,058
|
|
Provision for loan losses
|
|
|
28,536
|
|
|
|
18,979
|
|
|
|
12,281
|
|
|
Balance at end of period
|
|
$
|
57,777
|
|
|
$
|
39,773
|
|
|
$
|
35,807
|
|
|
Portfolio loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average (both non-covered and covered)
|
|
$
|
2,595,739
|
|
|
$
|
2,359,471
|
|
|
$
|
2,328,597
|
|
End of period (non-covered)
|
|
|
2,572,111
|
|
|
|
2,494,506
|
|
|
|
2,440,091
|
|
Net charge-offs to average portfolio loans (annualized)
|
|
|
0.54
|
%
|
|
|
0.37
|
%
|
|
|
0.35
|
%
|
Allowance for loan losses to non-covered portfolio loans (end of
period)
|
|
|
2.25
|
%
|
|
|
1.59
|
%
|
|
|
1.47
|
%
|
The allowance for loan losses is a reserve established through a provision for loan losses
charged to operations. Loan amounts which are determined to be uncollectible are charged against
this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the
allowance is based on continuous review and evaluation of the loan portfolio and ongoing, quarterly
assessments of the probable losses inherent in the loan and lease portfolio. The 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.
Management believes the level of the allowance is appropriate to absorb probable losses inherent in
the loan portfolio. The allowance for loan and lease losses is determined in accordance with
regulatory guidelines and generally accepted accounting principles and is comprised of two primary
components. There is no one factor, or group of factors, that produces the amount of an
appropriate allowance for loan losses, as the methodology for assessing the allowance for loan
losses makes use of evaluations of individual impaired loans along with other factors and analysis
of loan categories. This assessment is highly qualitative, and relies upon judgments and estimates
by management.
Each loan deemed to be impaired (all loans on nonaccrual) is evaluated on an individual basis using
the discounted present value of expected cash flows, the fair value of collateral, or the market
value of the loan, and a specific allowance is recorded based on the result consistent with ASC
310.10.35,
Receivables: Subsequent Measurement
(formerly SFAS No. 114).
Collateral dependent loans are evaluated for impairment based upon the fair value of the
collateral. 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 collateral, which may vary from period to period depending on changes in
the financial condition of the borrower or changes in the estimated value of the collateral.
Charge-offs against the allowance of impaired loans are made when and to the extent the loan is
deemed uncollectible. Any portion of a collateral dependent impaired loan in excess of the fair
value of the collateral that is determined to be uncollectible is charged off. The
14
remaining
portion of the allowance is calculated based on ASC 450,
Contingencies
(formerly SFAS No. 5).
Loans not evaluated for specific allowance are segmented into loan pools by type of loan.
Estimated allowances are based on historical loss trends with adjustments factored in based on
qualitative risk factors both internal and external to Southwest. These factors include but are
not limited to, economic and business conditions, changes in lending staff, lending policies and
procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and
recovery trends, asset quality trends, and legal and regulatory considerations.
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 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.
The reserve for unfunded loan commitments was $3.3 million, $3.7 million and $3.3 million at
September 30, 2009, December 31, 2008, and September 30, 2008, respectively. The reserve, which is
included in other liabilities on Southwests statement of financial condition, is computed using a
methodology similar to that used to determine the allowance for loan losses, modified to take into
account the probability of a drawdown on the commitment.
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill totaled $6.8 million and $7.1 million at September 30, 2009 and December 31, 2008,
respectively. During the second quarter of 2009, we discovered an error in the entries made to
record a prior acquisition in 2007 and recorded the correction in that quarter. The adjustment was
recorded to reduce goodwill by $260,000 to properly record other asset balances that were
established at the time of the acquisition. This adjustment is not material to previous fiscal
years, nor is it expected to be material to anticipated results for the full fiscal year and
accordingly, Southwest has included the correction in the period in which it was identified.
Other intangible assets totaled $5.9 million at September 30, 2009, including $4.2 million related
to core deposits and $1.6 million related to mortgage loan servicing rights. Other intangible
assets totaled $3.8 million at December 31, 2008, including $2.6 million related to core deposits
and $1.2 million related to mortgage loan servicing rights. The increase in core deposits is
related to the FNBA acquisition that occurred in second quarter. The changes in mortgage loan
servicing rights as of September 30, 2009, include $1.4 million in additions offset by $597,000 in
amortization and $329,000 in other-than-temporary impairment charges.
NOTE 8: 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,
Fair Value Measurements and Disclosure
(formerly SFAS No.
157), establishes a fair value hierarchy for a valuation inputs that gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
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
|
15
|
|
data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities
include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments. This category
includes U.S. Government and agency mortgage-backed debt
securities, municipal obligation securities, and loans held for
sale.
|
|
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 private equity investments, other real estate
owned, goodwill, and other intangible assets.
|
Effective April 1, 2009, Southwest adopted new authoritative accounting guidance under ASC 820.
This guidance affirms that the objective of fair value when the market for an asset is not active
is the price that would be received to sell the asset in an orderly transaction, and clarifies and
includes additional factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not active. The new accounting guidance
amended prior guidance to expand certain disclosure requirements. Adoption of the new guidance did
not have a significant impact on Southwests financial condition and results of operations.
As of September 30, 2009, assets measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
(Dollars in thousands)
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Loans held for sale
|
|
$
|
36,526
|
|
|
$
|
|
|
|
$
|
36,526
|
|
|
$
|
|
|
Available for sale securities
|
|
|
233,009
|
|
|
|
141
|
|
|
|
231,757
|
|
|
|
1,111
|
|
|
Total
|
|
$
|
269,535
|
|
|
$
|
141
|
|
|
$
|
268,283
|
|
|
$
|
1,111
|
|
|
For the nine months ended September 30, 2009, the following table presents a reconciliation of
all assets measured at fair value on a recurring basis using significant unobservable inputs (Level
3). There were no changes in unrealized gains and losses recorded in earnings for the period for
Level 3 assets and liabilities.
|
|
|
|
|
|
|
Available for
|
(Dollars in thousands)
|
|
Sale Securities
|
|
Balance at December 31, 2008
|
|
$
|
888
|
|
Total gains or losses (realized/unrealized)
|
|
|
|
|
Included in earnings
|
|
|
|
|
interest income
|
|
|
12
|
|
noninterest income
|
|
|
(26
|
)
|
Included in other comprehensive income
|
|
|
237
|
|
Purchases, issuances, and settlements
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
1,111
|
|
|
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). Assets
measured on a nonrecurring basis include impaired loans, other real estate owned, goodwill, core
deposit premiums, and mortgage loan servicing rights. At September 30, 2009, assets measured at
fair value on a nonrecurring basis are summarized below:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
September 30,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Total
|
(Dollars in thousands)
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Losses
|
|
Non-covered impaired loans at fair value
|
|
$
|
74,594
|
|
|
$
|
|
|
|
$
|
74,594
|
|
|
$
|
|
|
|
$
|
(14,139
|
)
|
Mortgage loan servicing rights
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
|
|
1,678
|
|
|
|
(329
|
)
|
|
Total
|
|
$
|
76,272
|
|
|
$
|
|
|
|
$
|
74,594
|
|
|
$
|
1,678
|
|
|
$
|
(14,468
|
)
|
|
Non-covered impaired loans measured at fair value with a carrying amount of $94.1 million were
written down to their fair value of $74.6 million, resulting in a life-to-date impairment of $19.5
million, of which $14.1 million was included in the provision for loan losses for the nine months
ended September 30, 2009.
Mortgage loan servicing rights were written down to their fair value, resulting in an impairment
charge of $329,000, which was included in noninterest income for the nine months ended September
30, 2009. The impairment charges were incurred in first and second quarters of 2009. There is no
active trading market for mortgage loan servicing rights. The fair value 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 for changes in market conditions.
Effective June 30, 2009, Southwest adopted new authoritative accounting guidance under ASC 825,
Financial Instruments,
which requires an entity to provide disclosures about fair value of
financial instruments in interim financial information and amends prior guidance to require those
disclosures in summarized financial information at interim reporting periods. The new interim
disclosures required under ASC 825 are included below.
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.
Cash and cash equivalents
- For cash and cash equivalents, the carrying amount is a reasonable
estimate of fair value.
Investment 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.
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 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 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, securities sold under agreements to repurchase,
treasury tax and loan demand notes and FHLB borrowings.
Subordinated debentures
- Two subordinated debentures have floating rates that reset quarterly
and the third subordinated debenture has a fixed rate. The fair value of the floating rate
subordinated debentures is based on current book value. The 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.
17
Commitments
- Commitments to extend credit, standby letters of credit, and financial
guarantees written or other items have short maturities and therefore have no significant fair
values.
The carrying values and estimated fair values of Southwests financial instruments follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
At December 31, 2008
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Dollars in thousands)
|
|
Values
|
|
Values
|
|
Values
|
|
Values
|
|
Cash and cash equivalents
|
|
$
|
32,094
|
|
|
$
|
32,094
|
|
|
$
|
27,287
|
|
|
$
|
27,287
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
6,795
|
|
|
|
6,907
|
|
|
|
7,343
|
|
|
|
7,293
|
|
Available for sale
|
|
|
233,009
|
|
|
|
233,009
|
|
|
|
238,037
|
|
|
|
238,037
|
|
Other investments
|
|
|
18,986
|
|
|
|
18,986
|
|
|
|
18,786
|
|
|
|
18,786
|
|
Total loans
|
|
|
2,654,490
|
|
|
|
2,688,204
|
|
|
|
2,511,674
|
|
|
|
2,541,424
|
|
Accrued interest receivable
|
|
|
10,794
|
|
|
|
10,794
|
|
|
|
11,512
|
|
|
|
11,512
|
|
Deposits
|
|
|
2,473,162
|
|
|
|
2,480,753
|
|
|
|
2,180,122
|
|
|
|
2,190,988
|
|
Accrued interest payable
|
|
|
4,545
|
|
|
|
4,545
|
|
|
|
7,018
|
|
|
|
7,018
|
|
Other liabilities
|
|
|
10,288
|
|
|
|
10,288
|
|
|
|
9,667
|
|
|
|
9,667
|
|
Other borrowings
|
|
|
146,449
|
|
|
|
146,449
|
|
|
|
295,138
|
|
|
|
295,138
|
|
Subordinated debentures
|
|
|
81,963
|
|
|
|
83,619
|
|
|
|
81,963
|
|
|
|
82,653
|
|
NOTE 9: SHARE-BASED COMPENSATION
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan (the Stock Plans)
provided directors and selected key employees with the opportunity to acquire common stock through
grants of options exercisable for common stock and other stock based awards.
The Southwest Bancorp, Inc. 2008 Stock Based Award Plan (the 2008 Stock Plan) replaced the
Southwest Bancorp, Inc. 1999 Stock Option Plan, as amended (the 1999 Plan). Options issued under
the 1999 Plan and Southwests 1994 Stock Option Plan continue in effect and are subject to the
requirements of those plans, but no new options will be granted under them. The 2008 Stock Plan
authorizes awards for up to 800,000 shares of Southwest common stock over its ten-year term.
Stock Options
The exercise price of all stock options granted under the Stock Plans and the 2008 Stock Plan is
the fair market value on the grant date. Depending upon terms of the stock option agreements,
stock options generally become exercisable on an annual basis and expire from five to ten years
after the date of grant.
In accordance with the provisions of ASC 718,
Stock Compensation
(formerly SFAS No. 123(R)),
Southwest recorded approximately $30,000 of share-based compensation expense for the nine month
period ended September 30, 2009 related to outstanding stock options.
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. This charge
had no impact on Southwests reported cash flows. The cumulative deferred tax asset that was
recorded related to compensation expense was approximately $177,000.
For purposes of the disclosure in the following table and for purposes of determining estimated
fair value under the provisions of ASC 718, Southwest has computed the estimated fair values of all
share-based compensation using the Black-Scholes option pricing model and has applied the
assumptions set forth in the table below. 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.
Share-based employee compensation expense for stock options under the fair value method was
measured using the following quarterly assumptions for options granted during the respective
quarters. No options have been granted in 2009.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
|
|
|
Risk-Free
|
|
Expected
|
|
|
|
|
|
Option
|
|
|
Interest
|
|
Dividend
|
|
Expected
|
|
Term
|
|
|
Rate
|
|
Yield
|
|
Volatility
|
|
(in years)
|
|
Third quarter 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Second quarter 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
First quarter 2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Third quarter 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Second quarter 2008
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
First quarter 2008
|
|
|
2.30
|
%
|
|
|
2.24
|
%
|
|
|
34.36
|
%
|
|
|
3.00
|
|
A summary of options outstanding under the Stock Plans and the 2008 Stock Plan as of September
30, 2009, and changes during the nine 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, 2008
|
|
|
691,111
|
|
|
$
|
17.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(138,720
|
)
|
|
|
6.38
|
|
|
|
|
|
|
|
|
|
Canceled/expired
|
|
|
(158,717
|
)
|
|
|
18.09
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
393,674
|
|
|
$
|
20.47
|
|
|
|
1.43
|
|
|
$
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable at September 30, 2009
|
|
|
379,990
|
|
|
$
|
20.91
|
|
|
|
1.42
|
|
|
$
|
350
|
|
A summary of the status of Southwests nonvested stock options as of September 30, 2009 and
changes during the nine month period then ended is presented below.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
|
|
|
Issuable
|
|
Average
|
|
|
Upon Exercise
|
|
Grant Date
|
|
|
of Options
|
|
Fair Value
|
|
|
|
Nonvested Balance at December 31, 2008
|
|
|
56,660
|
|
|
$
|
4.36
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(42,976
|
)
|
|
|
5.06
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Balance at September 30, 2009
|
|
|
13,684
|
|
|
$
|
2.18
|
|
|
|
|
|
|
The fair value of options that became vested during the nine month period was $217,000.
As of September 30, 2009, there was $2,000 of total unrecognized compensation expense related to
stock option arrangements granted under the Stock Plans and the 2008 Stock Plan. This unrecognized
expense is expected to be recognized during the next year.
Restricted Stock
Restricted shares granted as of September 30, 2009 and 2008 were 78,095 and 52,192, respectively.
For the nine months ended September 30, 2009 and September 30, 2008, Southwest recognized $133,000
in compensation expense, net of tax, related to all restricted shares outstanding. As of September
30, 2009, there was $347,000 of total unrecognized compensation expense related to restricted
shares granted under the Stock Plans and the 2008 Stock Plan. This unrecognized expense is
expected to be recognized during the next three years.
The restricted stock grants vest one-third on the first, second and third anniversaries of the date
of grant provided the director or employee remains a director or employee of Southwest or a
subsidiary on those dates. The restrictions on the shares expire three years after the award date
provided that all restrictions will end, and the awards will be fully vested, upon a change in
19
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.
NOTE 10: TAXES ON INCOME
In accordance with ASC 740,
Income Taxes
(formerly Financial Accounting Standards Board
Interpretation No. 48)
,
the balance of unrecognized tax benefits at September 30, 2009 was $2.9
million (net of federal benefit on state issues), that if recognized, would favorably affect the
effective tax rate in any future periods.
Southwest recognizes interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expenses. As of September 30, 2009, an additional $446,000 has been accrued
in interest and penalties. Southwest had approximately $1.8 million accrued for interest and
penalties at September 30, 2009.
Southwest and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, Southwest is no longer subject to U.S. federal or state
tax examinations for years before 2003.
Southwest is currently under audit by the State of Oklahoma for the 2002 through 2006 tax years.
During 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.
NOTE 11: EARNINGS PER SHARE
Effective January 1, 2009, Southwest adopted new authoritative accounting guidance under ASC 260,
Earnings Per Share
, which provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. Southwest has determined that its unvested restricted stock awards are
participating securities. Accordingly, effective January 1, 2009, earnings per common share is
computed using the two-class method prescribed by ASC 260. All previously reported earnings per
share data has been retroactively adjusted to conform to the new computation method and no
previously reported earnings per share amounts changed as a result of adoption.
Using the two-class method, basic earnings per common share is computed based upon net income
available to common shareholders divided by the weighted average number of common shares
outstanding during each period, which exclude the outstanding unvested restricted stock. Diluted
earnings per share is computed using the weighted average number of common shares determined for
the basic earnings per common share computation plus the dilutive effect of stock options using the
treasury stock method. Stock options and warrants, where the exercise price was greater than the
average market price of common shares, were not included in the computation of earnings per diluted
share as they would have been antidilutive. On September 30, 2009 and 2008, there were 375,083 and
403,950 antidilutive stock options to purchase common shares, respectively. An antidilutive
warrant to purchase 703,753 shares of common stock was also outstanding on September 30, 2009.
20
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
For the nine months
|
|
|
|
ended September 30,
|
|
|
ended September 30,
|
|
(Dollars in thousands, except earnings per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,134
|
|
|
$
|
2,306
|
|
|
$
|
9,408
|
|
|
$
|
11,676
|
|
Preferred dividend
|
|
|
(875
|
)
|
|
|
|
|
|
|
(2,625
|
)
|
|
|
|
|
Warrant amortization
|
|
|
(162
|
)
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
1,097
|
|
|
$
|
2,306
|
|
|
$
|
6,303
|
|
|
$
|
11,676
|
|
Earnings allocated to participating securities
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per common share
|
|
$
|
1,094
|
|
|
$
|
2,301
|
|
|
$
|
6,285
|
|
|
$
|
11,651
|
|
Effect of reallocating undistributed earnings
of participating securities
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per common share
|
|
$
|
1,092
|
|
|
$
|
2,299
|
|
|
$
|
6,270
|
|
|
$
|
11,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share -
Weighted average common shares outstanding
|
|
|
14,649,061
|
|
|
|
14,496,871
|
|
|
|
14,598,693
|
|
|
|
14,458,325
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
49,363
|
|
|
|
148,189
|
|
|
|
58,604
|
|
|
|
165,316
|
|
Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
14,698,424
|
|
|
|
14,645,060
|
|
|
|
14,657,297
|
|
|
|
14,623,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
0.43
|
|
|
$
|
0.81
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
$
|
0.43
|
|
|
$
|
0.80
|
|
|
NOTE 12: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Southwest makes use of a number of different financial
instruments to help meet the financial needs of its customers. In accordance with generally
accepted accounting principles, these transactions are not presented in the accompanying
consolidated financial statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend 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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
Commitments to extend commercial and real estate mortgage credit
|
|
$
|
447,204
|
|
|
$
|
649,830
|
|
Standby and commercial letters of credit
|
|
|
4,335
|
|
|
|
7,752
|
|
|
Total
|
|
$
|
451,539
|
|
|
$
|
657,582
|
|
|
A loan commitment is a binding contract to lend up to a maximum amount for a specified period
of time provided there is no violation of any financial, economic, or other terms of the contract.
A standby letter of credit obligates Southwest to honor a financial commitment to a third party
should Southwests customer fail to perform. Many loan commitments and most standby letters of
credit expire unfunded, and, therefore, commitments do not necessarily represent future outstanding
loans or payments. Loan commitments and letters of credit are made under normal credit terms,
including interest rates and collateral prevailing at the time. 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. Please see Note 6.
NOTE 13: 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, the Texas
Banking segment, and the Kansas Banking segment provide deposit and lending 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
21
Market segment consists of two operating units: one
that provides student lending services to post-secondary students in Oklahoma and several other
states and the other that provides residential mortgage lending services to customers in Oklahoma,
Texas, and Kansas. Other Operations includes Southwests funds management unit.
The primary purpose of the funds management unit is to manage Southwests overall internal
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 used in the funds
transfer pricing curve is a blend of rates based on the volume usage of retail and brokered
certificates of deposit and Federal Home Loan Bank advances.
The Other Operations segment also includes SNB Wealth Management, corporate investments, and
consulting subsidiaries; these operations are discussed more fully in the 2008 Annual Report.
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 States Banking segment are
portfolio loans attributable to thirty-seven states other than Oklahoma, Texas, or Kansas, and
primarily consist of healthcare and commercial real estate credits. These out of state loans are
administered by offices in Oklahoma, Texas, or Kansas.
The accounting policies of each reportable segment are the same as those of Southwest. Expenses
for consolidated back-office operations are allocated to operating segments based on estimated uses
of those services. General overhead expenses such as executive administration, accounting, and
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.
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.
The following table summarizes financial results by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2009
|
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Other States
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations
|
|
Company
|
|
Net interest income
|
|
$
|
10,736
|
|
|
$
|
10,586
|
|
|
$
|
4,107
|
|
|
$
|
2,279
|
|
|
$
|
171
|
|
|
$
|
(2,479
|
)
|
|
$
|
25,400
|
|
Provision for loan losses
|
|
|
2,193
|
|
|
|
2,956
|
|
|
|
3,279
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
10,177
|
|
Noninterest income
|
|
|
2,170
|
|
|
|
430
|
|
|
|
682
|
|
|
|
49
|
|
|
|
312
|
|
|
|
67
|
|
|
|
3,710
|
|
Noninterest expenses
|
|
|
6,390
|
|
|
|
3,487
|
|
|
|
3,533
|
|
|
|
518
|
|
|
|
815
|
|
|
|
785
|
|
|
|
15,528
|
|
|
Income (loss) before taxes
|
|
|
4,323
|
|
|
|
4,573
|
|
|
|
(2,023
|
)
|
|
|
61
|
|
|
|
(332
|
)
|
|
|
(3,197
|
)
|
|
|
3,405
|
|
Taxes on income
|
|
|
1,794
|
|
|
|
1,887
|
|
|
|
(843
|
)
|
|
|
4
|
|
|
|
(131
|
)
|
|
|
(1,440
|
)
|
|
|
1,271
|
|
|
Net income (loss)
|
|
$
|
2,529
|
|
|
$
|
2,686
|
|
|
$
|
(1,180
|
)
|
|
$
|
57
|
|
|
$
|
(201
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008
|
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Other States
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations
|
|
Company
|
|
Net interest income
|
|
$
|
12,603
|
|
|
$
|
8,228
|
|
|
$
|
2,360
|
|
|
$
|
2,579
|
|
|
$
|
343
|
|
|
$
|
(2,925
|
)
|
|
$
|
23,188
|
|
Provision for loan losses
|
|
|
1,190
|
|
|
|
2,300
|
|
|
|
2,956
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
6,855
|
|
Noninterest income
|
|
|
2,124
|
|
|
|
709
|
|
|
|
(103
|
)
|
|
|
56
|
|
|
|
454
|
|
|
|
822
|
|
|
|
4,062
|
|
Noninterest expenses
|
|
|
7,984
|
|
|
|
4,310
|
|
|
|
1,207
|
|
|
|
743
|
|
|
|
1,047
|
|
|
|
1,242
|
|
|
|
16,533
|
|
|
Income (loss) before taxes
|
|
|
5,553
|
|
|
|
2,327
|
|
|
|
(1,906
|
)
|
|
|
1,483
|
|
|
|
(250
|
)
|
|
|
(3,345
|
)
|
|
|
3,862
|
|
Taxes on income
|
|
|
2,258
|
|
|
|
995
|
|
|
|
(570
|
)
|
|
|
635
|
|
|
|
(101
|
)
|
|
|
(1,661
|
)
|
|
|
1,556
|
|
|
Net income (loss)
|
|
$
|
3,295
|
|
|
$
|
1,332
|
|
|
$
|
(1,336
|
)
|
|
$
|
848
|
|
|
$
|
(149
|
)
|
|
$
|
(1,684
|
)
|
|
$
|
2,306
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2009
|
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Other States
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
|
Banking
|
|
Banking
|
|
Banking**
|
|
Banking
|
|
Market
|
|
Operations*
|
|
Company
|
|
Net interest income
|
|
$
|
33,470
|
|
|
$
|
31,625
|
|
|
$
|
9,258
|
|
|
$
|
7,142
|
|
|
$
|
907
|
|
|
$
|
(11,508
|
)
|
|
$
|
70,894
|
|
Provision for loan losses
|
|
|
5,684
|
|
|
|
10,114
|
|
|
|
3,702
|
|
|
|
9,036
|
|
|
|
|
|
|
|
|
|
|
|
28,536
|
|
Noninterest income
|
|
|
6,677
|
|
|
|
1,375
|
|
|
|
5,044
|
|
|
|
161
|
|
|
|
1,457
|
|
|
|
2,734
|
|
|
|
17,448
|
|
Noninterest expenses
|
|
|
19,587
|
|
|
|
10,524
|
|
|
|
7,708
|
|
|
|
1,554
|
|
|
|
2,605
|
|
|
|
2,839
|
|
|
|
44,817
|
|
|
Income (loss) before taxes
|
|
|
14,876
|
|
|
|
12,362
|
|
|
|
2,892
|
|
|
|
(3,287
|
)
|
|
|
(241
|
)
|
|
|
(11,613
|
)
|
|
|
14,989
|
|
Taxes on income
|
|
|
5,853
|
|
|
|
4,895
|
|
|
|
1,069
|
|
|
|
(1,292
|
)
|
|
|
(96
|
)
|
|
|
(4,848
|
)
|
|
|
5,581
|
|
|
Net income (loss)
|
|
$
|
9,023
|
|
|
$
|
7,467
|
|
|
$
|
1,823
|
|
|
$
|
(1,995
|
)
|
|
$
|
(145
|
)
|
|
$
|
(6,765
|
)
|
|
$
|
9,408
|
|
|
|
|
|
*
|
|
Includes externally generated revenue of $8.1 million, primarily from investing services, and
an internally generated loss of $16.9 million from the funds management unit
|
|
**
|
|
Noninterest income includes the $3.3 million gain on acquisition previously described.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed asset expenditures
|
|
$
|
2,026
|
|
|
$
|
3
|
|
|
$
|
505
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
431
|
|
|
$
|
2,965
|
|
Total loans at period end
|
|
|
943,982
|
|
|
|
1,042,369
|
|
|
|
400,710
|
|
|
|
288,680
|
|
|
|
36,526
|
|
|
|
|
|
|
|
2,712,267
|
|
Total assets at period end
|
|
|
960,519
|
|
|
|
1,029,604
|
|
|
|
508,007
|
|
|
|
286,020
|
|
|
|
39,409
|
|
|
|
205,788
|
|
|
|
3,029,347
|
|
Total deposits at period end
|
|
|
1,578,457
|
|
|
|
161,455
|
|
|
|
276,344
|
|
|
|
|
|
|
|
8,563
|
|
|
|
448,343
|
|
|
|
2,473,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008
|
|
|
Oklahoma
|
|
Texas
|
|
Kansas
|
|
Other States
|
|
Secondary
|
|
Other
|
|
Total
|
(Dollars in thousands)
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Banking
|
|
Market
|
|
Operations*
|
|
Company
|
|
Net interest income
|
|
$
|
35,562
|
|
|
$
|
24,528
|
|
|
$
|
7,426
|
|
|
$
|
7,257
|
|
|
$
|
1,085
|
|
|
$
|
(8,553
|
)
|
|
$
|
67,305
|
|
Provision for loan losses
|
|
|
3,358
|
|
|
|
4,463
|
|
|
|
3,979
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
12,281
|
|
Noninterest income
|
|
|
6,351
|
|
|
|
1,479
|
|
|
|
107
|
|
|
|
129
|
|
|
|
1,211
|
|
|
|
3,432
|
|
|
|
12,709
|
|
Noninterest expenses
|
|
|
24,192
|
|
|
|
12,396
|
|
|
|
4,781
|
|
|
|
2,166
|
|
|
|
2,764
|
|
|
|
2,396
|
|
|
|
48,695
|
|
|
Income (loss) before taxes
|
|
|
14,363
|
|
|
|
9,148
|
|
|
|
(1,227
|
)
|
|
|
4,739
|
|
|
|
(468
|
)
|
|
|
(7,517
|
)
|
|
|
19,038
|
|
Taxes on income
|
|
|
5,641
|
|
|
|
3,633
|
|
|
|
(309
|
)
|
|
|
1,894
|
|
|
|
(185
|
)
|
|
|
(3,312
|
)
|
|
|
7,362
|
|
|
Net income (loss)
|
|
$
|
8,722
|
|
|
$
|
5,515
|
|
|
$
|
(918
|
)
|
|
$
|
2,845
|
|
|
$
|
(283
|
)
|
|
$
|
(4,205
|
)
|
|
$
|
11,676
|
|
|
|
|
|
*
|
|
Includes externally generated revenue of $7.2 million, primarily from investing services, and
an internally generated loss of $12.3 million from the funds management unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed asset expenditures
|
|
$
|
1,555
|
|
|
$
|
613
|
|
|
$
|
63
|
|
|
$
|
29
|
|
|
$
|
|
|
|
$
|
793
|
|
|
$
|
3,053
|
|
Total loans at period end
|
|
|
962,611
|
|
|
|
892,998
|
|
|
|
288,268
|
|
|
|
296,214
|
|
|
|
72,248
|
|
|
|
|
|
|
|
2,512,339
|
|
Total assets at period end
|
|
|
971,055
|
|
|
|
890,741
|
|
|
|
295,302
|
|
|
|
294,785
|
|
|
|
77,498
|
|
|
|
302,990
|
|
|
|
2,832,371
|
|
Total deposits at period end
|
|
|
1,345,710
|
|
|
|
136,694
|
|
|
|
148,269
|
|
|
|
|
|
|
|
2,802
|
|
|
|
565,244
|
|
|
|
2,198,719
|
|
NOTE 14: ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
New authoritative accounting guidance (Accounting Standards Update 2009-05) under ASC 820,
Fair
Value Measurements and Disclosures
, provides guidance for measuring the fair value of a liability
in circumstances in which a quoted price in an active market for the identical liability is not
available. In such instances, a reporting entity is required to measure fair value utilizing a
valuation technique that uses (i) the quoted price of the identical liability when traded as an
asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or
(iii) another valuation technique that is consistent with the existing principles of ASC 820, such as an income approach or market approach. The new
authoritative accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability. The
forgoing new authoritative accounting guidance under ASC 820 is effective for Southwest on October
1, 2009 and is not expected to have a significant impact on Southwests financial statements.
New authoritative accounting guidance under ASC 860,
Transfers and Servicing
, amends prior
accounting guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks related to transferred
financial assets. The new guidance eliminates the concept of a qualifying special-purpose entity
(SPE) and changes the requirements for derecognizing financial assets. It also requires
additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC 860 is effective for Southwest on January 1, 2010 and
is not expected to have a significant impact on Southwests financial statements.
23
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 affect on the entitys financial statements.
The new authoritative accounting guidance under ASC 810 is effective for Southwest on January 1,
2010 and is not expected to have a significant impact on Southwests financial statements.
NOTE 15: VISA USA SHARES
Stillwater National and other VISA USA member banks are obligated to share in costs resulting from
litigation against VISA USA, including the costs of the November 9, 2007 settlement of an antitrust
lawsuit brought by American Express and potential costs of certain other pending litigation. In
March 2008, Visa, Inc. (Visa) completed an initial public offering. This transaction allowed Visa
to place part of the cash proceeds into an escrow account that will be utilized to pay litigation
and settlement expenses. Stillwater National previously estimated the settlement costs of such
litigation and recorded its proportionate share of that estimated liability, reduced by its
proportionate share of the escrow account established by Visa. In the second quarter of 2009, Visa
announced another deposit into the litigation escrow account. As a result of this funding,
Stillwater National reduced their estimated settlement costs by approximately $340,000. As of
September 30, 2009, Stillwater National has a payable of $6,000 recorded on the books based on our
review of the outstanding litigation. This amount is an estimate and further adjustments may be
required.
As a result of Visas public offering, in March 2008, Stillwater National recorded a gain of $1.2
million before tax expense for the redemption for cash of 29,212 shares of VISA USA shares owned by
Stillwater National and carried at a zero dollar basis. Stillwater National owns an additional
46,348 shares of Class B Visa stock carried at a zero dollar basis. These remaining shares will be
held in escrow by Visa until the latter of the third anniversary of the public offering date or the
final resolution of the litigation discussed above.
24
SOUTHWEST BANCORP, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements
. This managements discussion and analysis of financial condition and
results of operations, the notes to Southwests unaudited consolidated financial statements, and
other portions of this report include forward-looking statements such as: 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 market or 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,
regulations, and accounting principles; and a variety of other matters. These other matters,
include, among other things, the direct and indirect effects of the continuing, unsettled national
and international economic conditions on interest rates, credit quality, loan demand, liquidity,
and monetary and supervisory policies of banking regulators. 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.
Managements discussion and analysis of Southwests consolidated financial condition and results of
operations should be read in conjunction with Southwests unaudited consolidated financial
statements and the accompanying notes.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies followed by Southwest conform, in all material respects, to
accounting principles generally accepted in the United States and to general practices within the
financial services industry. The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying
notes. While Southwest bases estimates on historical experience, current information, and other
factors deemed to be relevant, actual results could differ from those estimates.
Southwest considers accounting estimates to be critical to reported financial results if (i) the
accounting estimate requires management to make assumptions about matters that are highly uncertain
and (ii) different estimates that management reasonably could have used for the accounting estimate
in the current period, or changes in the accounting estimate that are reasonable likely to occur
from period to period, could have a material impact on Southwests financial statements.
Accounting policies related to the allowance for loan losses are considered to be critical, as
these policies involve considerable subjective judgment and estimation by management.
For additional information regarding critical accounting policies, refer to Note 1: Summary of
Significant Accounting and Reporting Policies in the notes to the consolidated financial
statements and the sections captioned Critical Accounting Policies and Provision and Allowance
for Loan Losses in Managements Discussion and Analysis of Financial Condition and Results of
Operations included in the 2008 Form 10-K. There have been no significant changes in Southwests
application of critical accounting policies related to the allowance for loan losses since December
31, 2008.
Southwest considers that the determination of the initial fair value of loans and other real estate
acquired in the June 19, 2009, FDIC-assisted transaction and the initial fair value of the related
FDIC indemnification asset involve a high degree of judgment and complexity. The carrying value of
the acquired loans and other real estate and the FDIC indemnification asset reflect managements
best estimate of the amount to be realized on each of these assets. Southwest determined current
fair value accounting estimates of the assumed assets and liabilities in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805,
Business
Combinations
(formerly Statement of Financial Accounting Standards (SFAS) No. 141(R)). However,
the amount that Southwest realizes on these assets could differ materially from the carrying value
reflected in these financial statements, based upon the timing and amount of collections on the
acquired loans in future periods. Southwests losses on these assets will be mitigated by payments
under the loss-sharing agreements with the FDIC. To the extent that actual values realized for the
acquired loans are different from the estimate, the indemnification asset will generally be
affected in an offsetting manner due to the loss-sharing support from the FDIC.
25
GENERAL
Southwest Bancorp, Inc. (Southwest) is a financial holding company for Stillwater National Bank
and Trust Company (Stillwater National), Bank of Kansas, Healthcare Strategic Support, Inc.
(HSSI), Business Consulting Group, Inc. (BCG), and SNB Capital Corporation. Through its
subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services,
and specialized cash management, consulting and other financial services from offices in Oklahoma
City, Tulsa, Stillwater, Edmond, and Chickasha, Oklahoma; Dallas, Austin, San Antonio, Houston, and
Tilden, Texas; and Anthony, Harper, Hutchinson, Mayfield, Overland Park, South Hutchinson, and
Wichita, Kansas; and on the Internet, through
SNB DirectBanker
®
. SNB Bank of Wichita (SNB
Wichita), a wholly owned subsidiary of Southwest, was merged into Bank of Kansas on January 23,
2009.
Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered
in 1894. Southwest has established and pursued a strategy of independent operation for the benefit
of all of its shareholders. Southwest became a public company in late 1993 with assets of
approximately $434 million. At September 30, 2009, Southwest had total assets of $3.0 billion,
deposits of $2.5 billion, and shareholders equity of $309.1 million.
Southwests banking philosophy has led to the development of a line of deposit, lending, and other
financial products that respond to professional and commercial customers needs for speed,
efficiency, and information, and complement more traditional banking products. Such specialized
financial services include integrated document imaging and cash management services designed to
help our customers in the healthcare industry and other record-intensive enterprises operate more
efficiently, and management consulting services through Southwests management consulting
subsidiaries: HSSI, which serves physicians, hospitals, and healthcare groups, and BCG, which
serves commercial enterprises. Information regarding Southwest is available on line at
www.oksb.com. Information regarding the products and services of Southwests financial institution
subsidiaries is available on line at www.banksnb.com, and www.bankofkansas.com. The information on
these websites is not a part of this report on Form 10-Q.
Southwests strategic focus includes expansion in carefully selected geographic markets. This
geographic expansion is based on identification of markets providing the opportunity for gathering
deposits or 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.
At September 30, 2009, the Texas Banking segment accounted for $1.0 billion in loans, the Oklahoma
Banking segment accounted for $944.0 million, the Kansas Banking segment accounted for $400.7
million in loans and the Other States Banking segment accounted for $288.7 million in loans.
Southwest offers products to the student and residential mortgage lending markets. These
operations comprise the Secondary Market business segment. During the first nine months of 2009,
this segment recorded a net loss of $145,000. Secondary Market loans decreased $20.4 million, or
36% to $36.5 million. Southwest engages in residential mortgage lending, but residential mortgages
have not been a significant element of Southwests strategy. Please see Financial Condition:
Loans below for additional information.
For additional information on Southwests operating segments, please see Note 12: Operating
Segments, in the Notes to Unaudited Consolidated Financial Statements. The total of net income of
the segments discussed above does not equal consolidated net income for the first nine months of
2009 due to losses from the Other Operations segment, which provides funding and liquidity services
to the rest of the organization.
FINANCIAL CONDITION
FDIC-Assisted Acquisition of Certain Assets and Liabilities of First National Bank of Anthony
On June 19, 2009, Bank of Kansas entered into a purchase and assumption agreement with loss share
with the Federal Deposits Insurance Corporation (FDIC) to acquire deposits, loans, and certain
other liabilities and assets of First National Bank of Anthony, Anthony, Kansas (FNBA), in an
FDIC-assisted transaction. FNBA was a full service commercial bank that had been placed in
receivership with the FDIC. Bank of Kansas acquired assets with a fair value of approximately
$149.8 million, including $84.0 million of loans, $20.6 million of investment securities, $6.0
million of cash and cash equivalents, $2.9 million in other real estate owned (OREO), and $157.7
million in liabilities, including $135.0 million of deposits and $21.7 million of FHLB advances.
Bank of Kansas recorded a core deposit intangible asset of $2.0 million and received a cash payment
from the FDIC of approximately $11.1 million. Bank of Kansas entered into loss share agreements
with the FDIC and recorded a loss share receivable of $33.1 million, which is classified as part of
covered loans in the accompanying statement of financial condition. Based upon the acquisition
date fair values of the net assets acquired, no
26
goodwill was recorded. The transaction resulted in a gain on acquisition of $3.3 million, which is
included in noninterest income in the September 30, 2009 Consolidated Statement of Operations.
This transaction provides Southwest with five additional banking offices in Kansas. This expansion
in our Kansas market is consistent with our established consumer banking strategy.
Please see Note 3: Acquisitions, in the Notes to Unaudited Consolidated Financial Statements for
additional information related to the details of the transaction.
Investment Securities
Southwests investment security portfolio decreased $5.4 million, or 2%, from $264.2 million at
December 31, 2008, to $258.8 million at September 30, 2009. The decrease is primarily the result
of a $14.4 million (18%) decrease in U.S. government and agency securities and a $2.2 million (22%)
decrease in tax-exempt securities offset by a $10.9 million (7%) increase in mortgage-backed
securities during the first nine months of 2009.
Loans
Total loans, including loans held for sale, were $2.7 billion at September 30, 2009 a 6% increase
from December 31, 2008. Real estate mortgage, commercial real estate construction, and other
consumer loans increased, while one-to-four family residential construction, commercial, and
student loans decreased.
The following table presents the trends in the composition of the loan portfolio at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
2008*
|
|
$ Change
|
|
% Change
|
(Dollars in thousands)
|
|
Non-covered
|
|
Covered
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,221,739
|
|
|
$
|
37,820
|
|
|
$
|
1,118,828
|
|
|
$
|
140,731
|
|
|
|
12.58
|
%
|
One-to-four family residential
|
|
|
125,034
|
|
|
|
17,246
|
|
|
|
113,665
|
|
|
|
28,615
|
|
|
|
25.17
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
612,905
|
|
|
|
14,178
|
|
|
|
579,795
|
|
|
|
47,288
|
|
|
|
8.16
|
|
One-to-four family residential
|
|
|
39,009
|
|
|
|
9,936
|
|
|
|
79,565
|
|
|
|
(30,620
|
)
|
|
|
(38.48
|
)
|
Commercial
|
|
|
538,757
|
|
|
|
21,475
|
|
|
|
564,670
|
|
|
|
(4,438
|
)
|
|
|
(0.79
|
)
|
Installment and consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
30,949
|
|
|
|
|
|
|
|
54,057
|
|
|
|
(23,108
|
)
|
|
|
(42.75
|
)
|
Other
|
|
|
40,244
|
|
|
|
2,975
|
|
|
|
40,867
|
|
|
|
2,352
|
|
|
|
5.76
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,608,637
|
|
|
$
|
103,630
|
|
|
$
|
2,551,447
|
|
|
$
|
160,820
|
|
|
|
6.30
|
|
|
|
|
|
|
|
|
|
*
|
|
There were no covered loans as of December 31, 2008.
|
The composition of loans held for sale and reconciliation to total loans is shown in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
$
|
30,949
|
|
|
$
|
54,057
|
|
|
$
|
(23,108
|
)
|
|
|
(42.75
|
)%
|
One-to-four family residential
|
|
|
4,158
|
|
|
|
1,790
|
|
|
|
2,368
|
|
|
|
132.29
|
|
Other loans held for sale
|
|
|
1,419
|
|
|
|
1,094
|
|
|
|
325
|
|
|
|
29.71
|
|
|
|
|
|
|
Total loans held for sale
|
|
|
36,526
|
|
|
|
56,941
|
|
|
|
(20,415
|
)
|
|
|
(35.85
|
)
|
Non-covered portfolio loans
|
|
|
2,572,111
|
|
|
|
2,494,506
|
|
|
|
77,605
|
|
|
|
3.11
|
|
Covered portfolio loans
|
|
|
103,630
|
|
|
|
|
|
|
|
103,630
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,712,267
|
|
|
$
|
2,551,447
|
|
|
$
|
160,820
|
|
|
|
6.30
|
|
|
|
|
|
|
Management determines the appropriate level of the allowance for loan losses using an
established methodology. (See Note 6: Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments, in the Notes to Unaudited Consolidated Financial Statements.) The allowance for loan
losses is comprised of two primary components. Loans deemed to be impaired (all loans on
nonaccrual) are evaluated on an individual basis using the discounted present value of expected cash
27
flows, the fair value of collateral, or the market value of the loan and a specific allowance
is recorded based upon the result. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. Any
portion of a collateral dependent impaired loan in excess of the fair value of the collateral that
is determined to be uncollectible is charged off. Loans other than impaired loans are segmented
into loan pools by type of loan. The allowance on these other loans is determined by use of
historical loss ratios adjusted for qualitative internal and external risk factors.
At September 30, 2009, the allowance for loan losses was $57.8 million, an increase of $18.0
million, or 45%, from the allowance for loan losses at December 31, 2008. Changes in the amount of
the allowance resulted from the application of the methodology, which is designed to estimate
inherent losses on total portfolio loans, including nonperforming loans. At September 30, 2009,
the allowance on the $94.8 million in non-covered impaired loans was $13.6 million (14.4%),
compared with an allowance on $59.3 million in non-covered impaired loans at December 31, 2008 of
$5.4 million (9.1%), creating an increase in the allowance of $8.2 million, or 152%. At September
30, 2009, the allowance for other non-covered loans was $44.2 million (1.76%), compared to $34.4
million (1.41%) at December 31, 2008, creating an increase in the allowance of $9.8 million, or
29%. The increase in the allowance related to these other non-covered loans mainly resulted from
consideration of certain trends and qualitative factors. These included increases in adjusted loss
rates made due to increased net loss ratios, managements assessment of increased economic risk
(particularly with respect to commercial and commercial real estate loans), asset quality trends,
including increased levels of potential nonperforming loans, loan growth, and loan concentrations
in commercial real estate and construction loans, which together comprised approximately 73% of our
non-covered portfolio loans at September 30, 2009. The total allowance was 2.25% and 1.59% of
total non-covered portfolio loans at September 30, 2009 and December 31, 2008, respectively.
Management believes the amount of the allowance is appropriate. Covered portfolio loans of $103.6
million of loans were acquired in the FNBA transaction, but based upon applicable accounting rules
no allowance has been established for these loans as these loans were recorded at fair value which
includes an estimate of projected losses. (See Note 3: Acquisitions, in the Notes to Unaudited
Consolidated Financial Statements.)
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 first nine months of 2009 were $10.5 million, an increase of $4.5
million (74%) over the $6.1 million recorded for the first nine months of 2008. The provision for
loan losses for the first nine months of 2009 was $28.5 million, representing an increase of $16.3
million (132%) over the $12.3 million recorded for the first nine months of 2008.
At September 30, 2009, the allowance for loan losses was 54.81% of non-covered nonperforming loans,
compared to 62.16% of nonperforming loans, at December 31, 2008 (see Results of
Operations-Provision for Loan Losses). Non-covered nonaccrual loans, which comprise the majority
of non-covered nonperforming assets, were $94.8 million as of September 30, 2009, an increase of
$35.5 million or 60% from year end. All non-covered nonaccrual loans are considered impaired, and
are carried at their estimated collectible amounts. Non-covered impaired loans at September 30,
2009 were comprised of 53 relationships and were primarily concentrated in real estate construction
(52%), commercial real estate (26%), and commercial loans (11%). Non-covered loans 90 days or more
past due, another component of non-covered nonperforming assets, increased $5.9 million, or 126%,
from December 31, 2008. These non-covered loans are believed to have sufficient collateral and are
in the process of being collected. Covered nonperforming assets of $21.8 million were acquired
from FNBA and are subject to protection under the loss share agreements with the FDIC. At
September 30, 2009 and December 31, 2008, seven and six credit relationships represented 70% and
82% of non-covered nonperforming loans and 66% and 75% of non-covered nonperforming assets,
respectively. As of September 30, 2009, these credit relationships include four collateral
dependent real estate lending relationships with aggregate principal balances of $52.6 million.
The associated loss reserves for these four relationships of $6.8 million were established based on
the estimated fair value of the supporting collateral. All four of these lending relationships are
in the real estate industry and include a residential condominium construction project, an
apartment complex rehabilitation project, and a two lending relationships that include residential
land development. A table showing the composition of non-covered and covered nonperforming loans
by category is included in Note 5: Loans and Other Real Estate, in the Notes to Unaudited
Consolidated Financial Statements.
28
Performing loans considered potential problem loans (loans that are not included in the past due or
nonaccrual categories, but for which known information about possible credit problems cause
management to have concerns as to the ability of the borrowers to comply with the present loan
repayment terms and which may become problems in the future) amounted to approximately $259.5
million at September 30, 2009, compared to $131.5 million at December 31, 2008. Included are $4.4
million of potential problem loans acquired from FNBA, which are subject to protection under the
loss share agreements with the FDIC. Loans may be monitored by management and reported as
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 continuing management attention and are considered by management in
determining the level of the allowance for loan losses.
At September 30, 2009, the reserve for unfunded loan commitments was $3.3 million, a $377,000, or
10%, decrease from the amount at December 31, 2008. Management believes the amount of the reserve
is appropriate and the decreased amount is the result of application of our methodology. (See
Note 6: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments, in the Notes to
Unaudited Consolidated Financial Statements.)
Deposits and Other Borrowings
Southwests deposits were $2.5 billion at September 30, 2009 and $2.2 billion at December 31, 2008.
Increases occurred in all deposit categories.
The following table presents the trends in the composition of deposits at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
Noninterest-bearing demand
|
|
$
|
309,767
|
|
|
$
|
261,940
|
|
|
$
|
47,827
|
|
|
|
18.26
|
%
|
Interest-bearing demand
|
|
|
82,622
|
|
|
|
76,027
|
|
|
|
6,595
|
|
|
|
8.67
|
|
Money market accounts
|
|
|
506,196
|
|
|
|
454,250
|
|
|
|
51,946
|
|
|
|
11.44
|
|
Savings accounts
|
|
|
25,636
|
|
|
|
14,135
|
|
|
|
11,501
|
|
|
|
81.37
|
|
Time deposits of $100,000 or more
|
|
|
888,814
|
|
|
|
802,244
|
|
|
|
86,570
|
|
|
|
10.79
|
|
Other time deposits
|
|
|
660,127
|
|
|
|
571,526
|
|
|
|
88,601
|
|
|
|
15.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,473,162
|
|
|
$
|
2,180,122
|
|
|
$
|
293,040
|
|
|
|
13.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stillwater National has substantial unused borrowing availability in the form of unsecured
brokered certificate of deposits from Merrill Lynch & Co., Citigroup Global Markets, Inc., Wachovia
Bank NA, UBS Securities LLC, RBC Capital Markets Corp., and Morgan Stanley & Co., Inc., in
connection with its retail certificate of deposit program. At September 30, 2009, $274.9 million
in these retail certificates of deposit were included in time deposits of $100,000 or more, a
decrease of $81.8 million, or 23%, from year-end 2008.
Stillwater National has other brokered certificates of deposit totaling $349,000 and $4.1 million
as of September 30, 2009 and December 31, 2008, respectively, included in time deposits of $100,000
or more in the above table. In addition, Stillwater National has brokered certificates of deposit
issued in amounts under $100,000 totaling $199,000 and $3.4 million as of September 30, 2009 and
December 31, 2008, respectively, included in other time deposits in the above table.
Other borrowings, which includes federal funds purchased, FHLB borrowings, and repurchase
agreements, decreased $148.7 million, or 50%, to $146.4 million during the first nine months of
2009. The decrease reflects the changes in the need for funding based on deposit activities for
the period. Core funding, which includes all non-brokered time deposits and sweep repurchase
agreements, grew $366.4 million, or 20%, to $2.2 billion during the first nine months of 2009.
Shareholders Equity
Shareholders equity increased $6.9 million, or 2%, due primarily to earnings of $9.4 million,
offset in part by preferred dividends declared totaling $2.6 million and common dividends declared
$1.0 million for the first nine months of 2009. Issuance of common stock through the employee
stock purchase plan and share based compensation plans, including tax benefits realized,
contributed an additional $1.4 million to shareholders equity in the first nine months of 2009.
At September 30, 2009, Southwest, Stillwater National, and Bank of Kansas continued to exceed all
applicable regulatory capital requirements. See Capital Resources on page 41.
29
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2009 and 2008
Net income available to common shareholders for the third quarter of 2009 of $1.1 million
represented a decrease of $1.2 million, or 52%, from the $2.3 million earned in the third quarter
of 2008. Diluted earnings per share were $0.07 compared to $0.16, a 56% decrease. The decrease in
quarterly net income available to common shareholders was the result of a $3.3 million, or 48%, increase in the provision for loan losses and $1.0 million in quarterly dividends
on preferred stock, offset in part by a $2.2 million, or 10%, increase in net interest income and a
$1.0 million, or 6%, decrease in noninterest expense.
Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan
losses to an appropriate level at period end after charge-offs for the period. The necessary
provision for third quarter of 2009 was $3.3 million more than the provision required for third
quarter of 2008. (See Note 6: Allowance for Loan Losses and Unfunded Loan Commitments, in the
Notes to Unaudited Consolidated Financial Statements and Provision for Loan Losses and for
Unfunded Loan Commitments on page 34.)
The decrease in noninterest expense primarily consists of a $1.0 million decrease in salaries and
employee benefits and an $803,000 decrease in general and administrative expenses, offset in part
by a $665,000 increase in FDIC and other insurance.
On an operating segment basis, the decrease in net income was the result of a $791,000 decrease in
net income from the Other States Banking, a $766,000 decrease in net income from the Oklahoma
Banking segment, a $73,000 increased loss from the Other Operations segment, and a $52,000
increased loss from the Secondary Market segment, offset by a $1.4 million increase in income from
the Texas Banking segment and a $156,000 decreased loss from the Kansas segment.
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
35,607
|
|
|
$
|
38,441
|
|
|
$
|
(2,834
|
)
|
|
|
(7.37
|
)%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
|
397
|
|
|
|
818
|
|
|
|
(421
|
)
|
|
|
(51.47
|
)
|
Mortgage-backed securities
|
|
|
1,527
|
|
|
|
1,484
|
|
|
|
43
|
|
|
|
2.90
|
|
State and political subdivisions
|
|
|
70
|
|
|
|
98
|
|
|
|
(28
|
)
|
|
|
(28.57
|
)
|
Other securities
|
|
|
128
|
|
|
|
131
|
|
|
|
(3
|
)
|
|
|
(2.29
|
)
|
Other interest-earning assets
|
|
|
4
|
|
|
|
22
|
|
|
|
(18
|
)
|
|
|
(81.82
|
)
|
|
|
|
|
|
|
|
Total interest income
|
|
|
37,733
|
|
|
|
40,994
|
|
|
|
(3,261
|
)
|
|
|
(7.95
|
)
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
107
|
|
|
|
147
|
|
|
|
(40
|
)
|
|
|
(27.21
|
)
|
Money market accounts
|
|
|
1,220
|
|
|
|
2,898
|
|
|
|
(1,678
|
)
|
|
|
(57.90
|
)
|
Savings accounts
|
|
|
39
|
|
|
|
17
|
|
|
|
22
|
|
|
|
129.41
|
|
Time deposits of $100,000 or more
|
|
|
4,822
|
|
|
|
6,879
|
|
|
|
(2,057
|
)
|
|
|
(29.90
|
)
|
Other time deposits
|
|
|
3,909
|
|
|
|
4,457
|
|
|
|
(548
|
)
|
|
|
(12.30
|
)
|
Other borrowings
|
|
|
960
|
|
|
|
1,839
|
|
|
|
(879
|
)
|
|
|
(47.80
|
)
|
Subordinated debentures
|
|
|
1,276
|
|
|
|
1,569
|
|
|
|
(293
|
)
|
|
|
(18.67
|
)
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
12,333
|
|
|
|
17,806
|
|
|
|
(5,473
|
)
|
|
|
(30.74
|
)
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
25,400
|
|
|
$
|
23,188
|
|
|
$
|
2,212
|
|
|
|
9.54
|
%
|
|
|
|
|
|
|
|
Net interest income is the difference between the interest income Southwest earns on its
loans, investments, and other interest-earning assets, and the interest paid 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 changes in market interest rates. When interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net
interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest could reduce net
interest income.
30
Yields on Southwests interest-earning assets decreased 95 basis points, while the rates paid
on Southwests interest-bearing liabilities decreased 109 basis points, resulting in an increase in
the interest rate spread to 2.99% for the third quarter of 2009 from 2.85% for the third quarter of
2008. During the same periods, annualized net interest margin was 3.39% and the ratio of average
interest-earning assets to average interest-bearing liabilities increased to 123.73% from 120.38%.
The decrease in interest income was the result of a decrease in the yield earned on
interest-earning assets, which was offset in part by the effects of a $248.7 million, or 9%,
increase in average interest-earning assets. Southwests average loans increased $234.2 million,
or 9%; however, the related yield decreased to 5.19% for the third quarter of 2009 from 6.15% in
2008. During the same period, average investment securities increased $8.2 million, or 3%, and the
related yield decreased to 3.46% from 4.28% in 2008.
The decrease in total interest expense can be attributed to the decrease in rates paid on
interest-bearing liabilities, offset in part by a $139.6 million, or 6%, increase in average
interest-bearing liabilities. Southwests average total interest-bearing deposits increased $248.8
million, or 13%; however, the related yield decreased to 1.86% for the third quarter of 2009 from
3.00% in 2008.
UNAUDITED RATE VOLUME TABLE
The following table analyzes changes in interest income and interest expense of Southwest for the
periods indicated. For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by the prior periods rate); and (ii) changes in rates (changes in rate multiplied by
the prior periods volume). Changes in rate-volume (changes in rate multiplied by the changes in
volume) are allocated between changes in rate and changes in volume in proportion to the relative
contribution of each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2009 vs. 2008
|
|
|
|
Increase
|
|
|
Due to Change
|
|
|
|
Or
|
|
|
In Average:
|
|
(Dollars in thousands)
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
(1) (2)
|
|
$
|
(2,834
|
)
|
|
$
|
3,411
|
|
|
$
|
(6,245
|
)
|
Investment securities
|
|
|
(409
|
)
|
|
|
85
|
|
|
|
(494
|
)
|
Other interest-earning assets
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(3,261
|
)
|
|
|
3,526
|
|
|
|
(6,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
(40
|
)
|
|
|
15
|
|
|
|
(55
|
)
|
Money market accounts
|
|
|
(1,678
|
)
|
|
|
(230
|
)
|
|
|
(1,448
|
)
|
Savings accounts
|
|
|
22
|
|
|
|
17
|
|
|
|
5
|
|
Time deposits
|
|
|
(2,605
|
)
|
|
|
2,094
|
|
|
|
(4,699
|
)
|
Other borrowings
|
|
|
(879
|
)
|
|
|
(663
|
)
|
|
|
(216
|
)
|
Subordinated debentures
|
|
|
(293
|
)
|
|
|
16
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(5,473
|
)
|
|
|
1,041
|
|
|
|
(6,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,212
|
|
|
$
|
2,485
|
|
|
$
|
(273
|
)
|
|
|
|
|
|
|
(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 non-covered and covered loans for the periods shown is not readily available.
|
31
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth average interest-earning assets and interest-bearing liabilities and
the average yields and rates thereon for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (2)
|
|
$
|
2,719,835
|
|
|
$
|
35,607
|
|
|
|
5.19
|
%
|
|
$
|
2,485,617
|
|
|
$
|
38,441
|
|
|
|
6.15
|
%
|
Investment securities
|
|
|
243,604
|
|
|
|
2,122
|
|
|
|
3.46
|
|
|
|
235,428
|
|
|
|
2,531
|
|
|
|
4.28
|
|
Other interest-earning assets
|
|
|
10,442
|
|
|
|
4
|
|
|
|
0.15
|
|
|
|
4,113
|
|
|
|
22
|
|
|
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
2,973,881
|
|
|
|
37,733
|
|
|
|
5.03
|
|
|
|
2,725,158
|
|
|
|
40,994
|
|
|
|
5.98
|
|
Other assets
|
|
|
62,160
|
|
|
|
|
|
|
|
|
|
|
|
72,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,036,041
|
|
|
|
|
|
|
|
|
|
|
$
|
2,797,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
84,031
|
|
|
$
|
107
|
|
|
|
0.51
|
%
|
|
$
|
75,436
|
|
|
$
|
147
|
|
|
|
0.78
|
%
|
Money market accounts
|
|
|
498,842
|
|
|
|
1,220
|
|
|
|
0.97
|
|
|
|
545,520
|
|
|
|
2,898
|
|
|
|
2.11
|
|
Savings accounts
|
|
|
26,101
|
|
|
|
39
|
|
|
|
0.59
|
|
|
|
14,285
|
|
|
|
17
|
|
|
|
0.47
|
|
Time deposits
|
|
|
1,547,192
|
|
|
|
8,731
|
|
|
|
2.24
|
|
|
|
1,272,097
|
|
|
|
11,336
|
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,156,166
|
|
|
|
10,097
|
|
|
|
1.86
|
|
|
|
1,907,338
|
|
|
|
14,398
|
|
|
|
3.00
|
|
Other borrowings
|
|
|
165,327
|
|
|
|
960
|
|
|
|
2.30
|
|
|
|
275,365
|
|
|
|
1,839
|
|
|
|
2.66
|
|
Subordinated debentures
|
|
|
81,963
|
|
|
|
1,276
|
|
|
|
6.23
|
|
|
|
81,122
|
|
|
|
1,569
|
|
|
|
7.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
2,403,456
|
|
|
|
12,333
|
|
|
|
2.04
|
|
|
|
2,263,825
|
|
|
|
17,806
|
|
|
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
299,235
|
|
|
|
|
|
|
|
|
|
|
|
278,565
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
22,365
|
|
|
|
|
|
|
|
|
|
|
|
24,250
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
310,985
|
|
|
|
|
|
|
|
|
|
|
|
231,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,036,041
|
|
|
|
|
|
|
|
|
|
|
$
|
2,797,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$
|
25,400
|
|
|
|
2.99
|
%
|
|
|
|
|
|
$
|
23,188
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
123.73
|
%
|
|
|
|
|
|
|
|
|
|
|
120.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net interest margin = annualized net
interest income / average interest-earning
assets
|
|
(2)
|
|
Information regarding non-covered and covered loans for the periods shown is not readily available.
|
32
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges
|
|
$
|
2,688
|
|
|
$
|
2,408
|
|
|
$
|
280
|
|
|
|
11.63
|
%
|
Other fees
|
|
|
304
|
|
|
|
441
|
|
|
|
(137
|
)
|
|
|
(31.07
|
)
|
Other noninterest income
|
|
|
322
|
|
|
|
662
|
|
|
|
(340
|
)
|
|
|
(51.36
|
)
|
Gain on sales of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan sales
|
|
|
(4
|
)
|
|
|
208
|
|
|
|
(212
|
)
|
|
|
(101.92
|
)
|
Mortgage loan sales
|
|
|
390
|
|
|
|
262
|
|
|
|
128
|
|
|
|
48.85
|
|
All other loan sales
|
|
|
|
|
|
|
131
|
|
|
|
(131
|
)
|
|
|
(100.00
|
)
|
Gain (loss) on investment securities
|
|
|
10
|
|
|
|
(50
|
)
|
|
|
60
|
|
|
|
(120.00
|
)
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
3,710
|
|
|
$
|
4,062
|
|
|
$
|
(352
|
)
|
|
|
(8.67
|
)%
|
|
|
|
|
|
|
|
The increase in other service charges is the result of increases in commercial account service
charges due to a reduction in earnings credits on balances caused by decreases in interest rates.
Other fees decreased primarily as a result of decreased brokerage fees and increased amortization
of mortgage servicing rights.
The decrease in other noninterest income is the result of decreased consulting fee income and
decreased losses on the sale of fixed assets.
Gain on sales of loans is a reflection of the activity in the student, mortgage and commercial
lending areas discussed elsewhere in this report.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
7,824
|
|
|
$
|
8,863
|
|
|
$
|
(1,039
|
)
|
|
|
(11.72
|
)%
|
Occupancy
|
|
|
2,958
|
|
|
|
2,968
|
|
|
|
(10
|
)
|
|
|
(0.34
|
)
|
FDIC and other insurance
|
|
|
1,134
|
|
|
|
469
|
|
|
|
665
|
|
|
|
141.79
|
|
Other real estate (net)
|
|
|
90
|
|
|
|
(92
|
)
|
|
|
182
|
|
|
|
(197.83
|
)
|
Unfunded loan commitment reserve
|
|
|
(79
|
)
|
|
|
90
|
|
|
|
(169
|
)
|
|
|
(187.78
|
)
|
Other general and administrative
|
|
|
3,601
|
|
|
|
4,235
|
|
|
|
(634
|
)
|
|
|
(14.97
|
)
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
15,528
|
|
|
$
|
16,533
|
|
|
$
|
(1,005
|
)
|
|
|
(6.08
|
)%
|
|
|
|
|
|
|
|
Salaries and employee benefits decreased primarily as a result of a decrease in the profit
sharing contribution, a decrease in salaries expense, and a decrease in accrued bonus expense. The
number of full-time equivalent employees for the quarter decreased from 478 at the beginning of the
quarter to 471 as of September 30, 2009. For the third quarter of 2008, the number of full-time
equivalent employees for the quarter decreased from 463 at the beginning of the quarter to 458 as
of September 30, 2008.
Southwests bank subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates.
The increase from prior year is primarily due the FDIC raising the current assessment rates
uniformly by 7 basis points for the 2009 assessment, and an additional 10 basis point assessment is
paid on covered transaction accounts exceeding $250,000 under the Temporary Liquidity Guaranty
Program.
In February 2009, the FDIC issued final rules that changed the risk-based assessment system and set
assessment rates to begin in the second quarter of 2009. Four risk categories (I-IV), each subject
to different premium rates, were established, based upon an institutions status as well
capitalized, adequately capitalized or undercapitalized, and the institutions supervisory rating.
Until April 1, 2009, insured depository institutions paid deposit insurance premiums that ranged
from 5 to 7 basis points on an institutions assessment base for institutions in Risk Category I
(well capitalized institutions perceived as posing the least risk to the insurance fund), and 10,
28, and 43 basis points for institutions in Risk Categories II, III, and
33
IV. Stillwater National and Bank of Kansas are in Risk Category I. Beginning on April 1, 2009,
three new factors can result in adjustments to an institutions initial base assessment rate: (1)
a potential decrease for long-term unsecured debt, including senior and subordinated debt and, for
small institutions, a portion of Tier I capital; (2) a potential increase for secured liabilities
above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for
brokered deposits above a threshold amount, other than those received through a deposit placement
network on a reciprocal basis. Beginning April 1, 2009, the adjusted premium rates increased to
range from 7 to 24 basis points for Risk Category I and from 17 to 77.5 for Risk Categories II
through IV.
On May 22, 2009, the FDIC adopted a final rule levying a special assessment on insured institutions
as part of the agencys efforts to rebuild the Deposit Insurance Fund and help maintain public
confidence in the banking system. The final rule established a special assessment of 5 basis
points on each FDIC-insured depository institution. The assessment was paid on September 30, 2009
and was accrued as of June 30, 2009.
On September 29, 2009, the FDIC proposed insured institutions 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 proposal, on December 30, 2009, Stillwater National and Bank of
Kansas will prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011, and 2012. Under the plan, banks will be assessed through 2010 according
to the risk-based premium schedule adopted earlier this year. However, beginning, January 1, 2011,
the base rate will increase by 3 basis points.
The unfunded loan commitment reserve expense decreased due to a decline in the level of commitments
when compared to the same period of the prior year.
The decrease in other general and administrative expenses is the result of an increase in deferred
expense recognition related to loan origination costs, decreased deposit losses, and decreased
miscellaneous expense offset in part by an increase in other loan costs and increased legal fees.
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
Net income available to common shareholders for the nine months ended September 30, 2009 of $6.3
million represented a decrease of $5.4 million, or 46%, from the $11.7 million earned in the nine
months ended September 30, 2008. Diluted earnings per share were $0.43 compared to $0.80, a 46%
decrease. The decline in net income available to common shareholders was primarily the result of a
$16.3 million, or 132%, increase in the provision for loan losses and $3.1 million in dividends on
preferred stock, offset in part by a $4.7 million, or 37%, increase in noninterest income, a $3.6
million, or 5%, increase in net interest income, a $3.9 million, or 8%, decrease in noninterest
expense, and a $1.8 million, or 24%, decrease in income taxes.
The $3.6 million increase in net interest income includes a one-time recovery of $1.9 million from
the successful resolution of a nonperforming loan, which occurred in the second quarter.
Provisions for loan losses are booked in the amounts necessary to increase the allowance for loan
losses to an appropriate level at period end after charge-offs for the period. The necessary
provision for 2009 was $16.3 million more than the provision required for 2008. (See Note 6:
Allowance for Loan Losses and Unfunded Loan Commitments, in the Notes to Unaudited Consolidated
Financial Statements.)
The increase in noninterest income was mainly the result of a $3.3 million gain on the
FDIC-assisted acquisition and increased gains on securities of $1.7 million. The decrease in
noninterest expense consists of a $5.0 million decrease in salaries and employee benefits and a
$2.3 million decrease in general and administrative expenses offset by a $3.0 million increase in
FDIC and other insurance and a $450,000 increase in occupancy expense.
On an operating segment basis, the decrease in net income was the result of a $4.8 million decrease
from the Other States Banking segment and a $2.6 million increased loss from the Other Operations
segment, offset by a $2.7 million increase in net income from the Kansas Banking segment, which
includes the $3.3 million gain on acquisition previously described, a $2.0 million increase in net
income from the Texas Banking segment, a $301,000 increase in net income from the Oklahoma Banking
segment, and a $138,000 decreased loss from the Secondary Market segment.
34
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
104,884
|
|
|
$
|
116,536
|
|
|
$
|
(11,652
|
)
|
|
|
(10.00
|
)%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
|
1,370
|
|
|
|
2,733
|
|
|
|
(1,363
|
)
|
|
|
(49.87
|
)
|
Mortgage-backed securities
|
|
|
4,681
|
|
|
|
3,828
|
|
|
|
853
|
|
|
|
22.28
|
|
State and political subdivisions
|
|
|
234
|
|
|
|
288
|
|
|
|
(54
|
)
|
|
|
(18.75
|
)
|
Other securities
|
|
|
428
|
|
|
|
444
|
|
|
|
(16
|
)
|
|
|
(3.60
|
)
|
Other interest-earning assets
|
|
|
13
|
|
|
|
70
|
|
|
|
(57
|
)
|
|
|
(81.43
|
)
|
|
|
|
|
|
|
|
Total interest income
|
|
|
111,610
|
|
|
|
123,899
|
|
|
|
(12,289
|
)
|
|
|
(9.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
410
|
|
|
|
454
|
|
|
|
(44
|
)
|
|
|
(9.69
|
)
|
Money market accounts
|
|
|
3,784
|
|
|
|
10,488
|
|
|
|
(6,704
|
)
|
|
|
(63.92
|
)
|
Savings accounts
|
|
|
62
|
|
|
|
58
|
|
|
|
4
|
|
|
|
6.90
|
|
Time deposits of $100,000 or more
|
|
|
16,524
|
|
|
|
21,795
|
|
|
|
(5,271
|
)
|
|
|
(24.18
|
)
|
Other time deposits
|
|
|
12,449
|
|
|
|
14,964
|
|
|
|
(2,515
|
)
|
|
|
(16.81
|
)
|
Other borrowings
|
|
|
3,424
|
|
|
|
5,755
|
|
|
|
(2,331
|
)
|
|
|
(40.50
|
)
|
Subordinated debentures
|
|
|
4,063
|
|
|
|
3,080
|
|
|
|
983
|
|
|
|
31.92
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
40,716
|
|
|
|
56,594
|
|
|
|
(15,878
|
)
|
|
|
(28.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
70,894
|
|
|
$
|
67,305
|
|
|
$
|
3,589
|
|
|
|
5.33
|
%
|
|
|
|
|
|
|
|
Net interest income is the difference between the interest income Southwest earns on its
loans, investments, and other interest-earning assets, and the interest paid on interest-bearing
liabilities, such as deposits and borrowings. Because different types of assets and liabilities
may react differently, and at different times, to changes in market interest rates, net interest
income is affected by changes in market interest rates. When interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net
interest income. Similarly, when interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase of market rates of interest could reduce net
interest income.
Yields on Southwests interest-earning assets decreased 112 basis points, while the rates paid on
Southwests interest-bearing liabilities decreased 114 basis points, resulting in an increase in
the interest rate spread to 2.85% for the first nine months of 2009 from 2.83% for the first nine
months of 2008. During the same periods, annualized net interest margin was 3.27% and 3.41%,
respectively, and the ratio of average interest-earning assets to average interest-bearing
liabilities increased to 122.68% from 120.10%. Included in net interest income is a one-time
recovery of $1.9 million in interest as a nonperforming loan was resolved. Net interest margin
would have been 8 basis points lower without this recovery.
The decrease in interest income was the result of a decrease in the yield earned on
interest-earning assets, which was offset in part by the effects of a $260.7 million, or 10%,
increase in average interest-earning assets. Southwests average loans increased $254.0 million,
or 11%; however, the related yield decreased to 5.28% for the first nine months of 2009 from 6.48%
in 2008. During the same period, average investment securities increased $4.2 million, or 2%, and
the related yield decreased to 3.75% from 4.15% in 2008.
The decrease in total interest expense can be attributed to the decrease in the rates paid on
interest-bearing liabilities, offset in part by a $166.2 million, or 8%, increase in average
interest-bearing liabilities.
35
UNAUDITED RATE VOLUME TABLE
The following table analyzes changes in interest income and interest expense of Southwest for the
periods indicated. For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by the prior periods rate); and (ii) changes in rates (changes in rate multiplied by
the prior periods volume). Changes in rate-volume (changes in rate multiplied by the changes in
volume) are allocated between changes in rate and changes in volume in proportion to the relative
contribution of each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2009 vs. 2008
|
|
|
|
Increase
|
|
|
Due to Change
|
|
|
|
Or
|
|
|
In Average:
|
|
(Dollars in thousands)
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
(1)(2)
|
|
$
|
(11,652
|
)
|
|
$
|
11,496
|
|
|
$
|
(23,148
|
)
|
Investment securities
|
|
|
(580
|
)
|
|
|
130
|
|
|
|
(710
|
)
|
Other interest-earning assets
|
|
|
(57
|
)
|
|
|
30
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(12,289
|
)
|
|
|
11,456
|
|
|
|
(23,745
|
)
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
(44
|
)
|
|
|
59
|
|
|
|
(103
|
)
|
Money market accounts
|
|
|
(6,704
|
)
|
|
|
(1,153
|
)
|
|
|
(5,551
|
)
|
Savings accounts
|
|
|
4
|
|
|
|
20
|
|
|
|
(16
|
)
|
Time deposits
|
|
|
(7,786
|
)
|
|
|
6,660
|
|
|
|
(14,446
|
)
|
Other borrowings
|
|
|
(2,331
|
)
|
|
|
(1,272
|
)
|
|
|
(1,059
|
)
|
Subordinated debentures
|
|
|
983
|
|
|
|
1,197
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(15,878
|
)
|
|
|
4,016
|
|
|
|
(19,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
3,589
|
|
|
$
|
7,440
|
|
|
$
|
(3,851
|
)
|
|
|
|
|
|
|
(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 beacause it is not considered
material.
|
|
(2)
|
|
Information regarding non-covered and covered loans for the periods shown is not readily available.
|
36
UNAUDITED AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth average interest-earning assets and interest-bearing liabilities and
the average yields and rates thereon for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (2)
|
|
$
|
2,655,156
|
|
|
$
|
104,884
|
|
|
|
5.28
|
%
|
|
$
|
2,401,162
|
|
|
$
|
116,536
|
|
|
|
6.48
|
%
|
Investment securities
|
|
|
239,134
|
|
|
|
6,713
|
|
|
|
3.75
|
|
|
|
234,894
|
|
|
|
7,293
|
|
|
|
4.15
|
|
Other interest-earning assets
|
|
|
5,877
|
|
|
|
13
|
|
|
|
0.30
|
|
|
|
3,430
|
|
|
|
70
|
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
2,900,167
|
|
|
|
111,610
|
|
|
|
5.15
|
|
|
|
2,639,486
|
|
|
|
123,899
|
|
|
|
6.27
|
|
Other assets
|
|
|
66,254
|
|
|
|
|
|
|
|
|
|
|
|
72,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,966,421
|
|
|
|
|
|
|
|
|
|
|
$
|
2,711,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
86,576
|
|
|
$
|
410
|
|
|
|
0.63
|
%
|
|
$
|
75,813
|
|
|
$
|
454
|
|
|
|
0.80
|
%
|
Money market accounts
|
|
|
479,700
|
|
|
|
3,784
|
|
|
|
1.05
|
|
|
|
546,560
|
|
|
|
10,488
|
|
|
|
2.56
|
|
Savings accounts
|
|
|
19,535
|
|
|
|
62
|
|
|
|
0.42
|
|
|
|
13,780
|
|
|
|
58
|
|
|
|
0.56
|
|
Time deposits
|
|
|
1,496,193
|
|
|
|
28,973
|
|
|
|
2.59
|
|
|
|
1,237,196
|
|
|
|
36,759
|
|
|
|
3.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,082,004
|
|
|
|
33,229
|
|
|
|
2.13
|
|
|
|
1,873,349
|
|
|
|
47,759
|
|
|
|
3.41
|
|
Other borrowings
|
|
|
199,982
|
|
|
|
3,424
|
|
|
|
2.29
|
|
|
|
266,367
|
|
|
|
5,755
|
|
|
|
2.89
|
|
Subordinated debentures
|
|
|
81,963
|
|
|
|
4,063
|
|
|
|
6.61
|
|
|
|
58,054
|
|
|
|
3,080
|
|
|
|
7.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
2,363,949
|
|
|
|
40,716
|
|
|
|
2.30
|
|
|
|
2,197,770
|
|
|
|
56,594
|
|
|
|
3.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
274,535
|
|
|
|
|
|
|
|
|
|
|
|
265,245
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
20,877
|
|
|
|
|
|
|
|
|
|
|
|
21,826
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
307,060
|
|
|
|
|
|
|
|
|
|
|
|
226,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,966,421
|
|
|
|
|
|
|
|
|
|
|
$
|
2,711,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread
|
|
|
|
|
|
$
|
70,894
|
|
|
|
2.85
|
%
|
|
|
|
|
|
$
|
67,305
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
122.68
|
%
|
|
|
|
|
|
|
|
|
|
|
120.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net interest margin = annualized net
interest income / average interest-earning
assets
|
|
(2)
|
|
Information regarding non-covered and covered loans for the periods shown is not readily available.
|
37
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges
|
|
$
|
7,859
|
|
|
$
|
7,030
|
|
|
$
|
829
|
|
|
|
11.79
|
%
|
Other fees
|
|
|
550
|
|
|
|
1,088
|
|
|
|
(538
|
)
|
|
|
(49.45
|
)
|
Other noninterest income
|
|
|
806
|
|
|
|
1,349
|
|
|
|
(543
|
)
|
|
|
(40.25
|
)
|
Gain on acquisition
|
|
|
3,281
|
|
|
|
|
|
|
|
3,281
|
|
|
|
N/A
|
|
Gain on sales of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan sales
|
|
|
172
|
|
|
|
790
|
|
|
|
(618
|
)
|
|
|
(78.23
|
)
|
Mortgage loan sales
|
|
|
1,858
|
|
|
|
712
|
|
|
|
1,146
|
|
|
|
160.96
|
|
All other loan sales
|
|
|
|
|
|
|
542
|
|
|
|
(542
|
)
|
|
|
(100.00
|
)
|
Gain on investment securities
|
|
|
2,922
|
|
|
|
1,198
|
|
|
|
1,724
|
|
|
|
143.91
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
17,448
|
|
|
$
|
12,709
|
|
|
$
|
4,739
|
|
|
|
37.29
|
%
|
|
|
|
|
|
|
|
The increase in other service charges is the result of increases in commercial account service
charges due to a reduction in earnings credits on balances caused by decreases in interest rates,
offset in part by decreased overdraft service charges. Other fees decreased as a result of
decreased brokerage fees and increased amortization of mortgage servicing rights.
The decrease in other noninterest income is the result of decreased consulting fee income. The
gain on acquisition is the result of the previously described FDIC-assisted transaction which
resulted in a gain of $3.3 million.
Gain on sales of loans is a reflection of the activity in the student, mortgage and commercial
lending areas discussed elsewhere in this report.
Gain on investment securities includes a $2.9 million gain recognized as the result of the sale of
investment securities during the first quarter of 2009, while the $1.2 million gain in 2008 is the
result of the redemption of certain VISA USA common shares during the first quarter of 2008.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months
|
|
|
|
|
|
|
ended September 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
21,950
|
|
|
$
|
26,941
|
|
|
$
|
(4,991
|
)
|
|
|
(18.53
|
)%
|
Occupancy
|
|
|
8,478
|
|
|
|
8,028
|
|
|
|
450
|
|
|
|
5.61
|
|
FDIC and other insurance
|
|
|
4,444
|
|
|
|
1,443
|
|
|
|
3,001
|
|
|
|
207.97
|
|
Other real estate (net)
|
|
|
91
|
|
|
|
115
|
|
|
|
(24
|
)
|
|
|
(20.87
|
)
|
Unfunded loan commitment reserve
|
|
|
(377
|
)
|
|
|
250
|
|
|
|
(627
|
)
|
|
|
(250.80
|
)
|
Other general and administrative
|
|
|
10,231
|
|
|
|
11,918
|
|
|
|
(1,687
|
)
|
|
|
(14.16
|
)
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
44,817
|
|
|
$
|
48,695
|
|
|
$
|
(3,878
|
)
|
|
|
(7.96
|
)%
|
|
|
|
|
|
|
|
Salaries and employee benefits decreased primarily as a result of a decrease in the profit
sharing contribution, a decrease in salaries expense, and a decrease in accrued bonus expense. As
a result of the acquisition of FNBA at the end of the second quarter, the number of full-time
equivalent employees for the first nine months increased from 442 at the beginning of the year to
471 as of September 30, 2009, including 43 full-time equivalent employees from FNBA. For the first
nine months of 2008, the number of full-time equivalent employees decreased from 489 at the
beginning of the year to 458 as of September 30, 2008.
Occupancy expense increased primarily due to increases in building rental expense, depreciation
expense, ad valorem tax expense, security service expense, and janitorial service expense.
Southwests bank subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates.
The increase from prior year is due to a special assessment of 5 basis points, resulting in an
additional $1.4 million. The FDIC raised the
38
current assessment rates uniformly by 7 basis points for the 2009 assessment, and an additional 10 basis
point assessment is paid on covered transaction accounts exceeding $250,000 under the Temporary
Liquidity Guaranty Program.
In February 2009, the FDIC issued final rules that changed the risk-based assessment system and set
assessment rates to begin in the second quarter of 2009. Four risk categories (I-IV), each subject
to different premium rates, were established, based upon an institutions status as well
capitalized, adequately capitalized or undercapitalized, and the institutions supervisory rating.
Until April 1, 2009, insured depository institutions paid deposit insurance premiums that ranged
from 5 to 7 basis points on an institutions assessment base for institutions in Risk Category I
(well capitalized institutions perceived as posing the least risk to the insurance fund), and 10,
28, and 43 basis points for institutions in Risk Categories II, III, and IV. Stillwater National
and Bank of Kansas are in Risk Category I. Beginning on April 1, 2009, three new factors can
result in adjustments to an institutions initial base assessment rate: (1) a potential decrease
for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a
portion of Tier I capital; (2) a potential increase for secured liabilities above a threshold
amount; and (3) for non-Risk Category I institutions, a potential increase for brokered deposits
above a threshold amount, other than those received through a deposit placement network on a
reciprocal basis. Beginning April 1, 2009, the adjusted premium rates increased to range from 7 to
24 basis points for Risk Category I and from 17 to 77.5 for Risk Categories II through IV.
On May 22, 2009, the FDIC adopted a final rule levying a special assessment on insured institutions
as part of the agencys efforts to rebuild the Deposit Insurance Fund and help maintain public
confidence in the banking system. The final rule established a special assessment of 5 basis
points on each FDIC-insured depository institution. The assessment was paid on September 30, 2009
and was accrued as of June 30, 2009.
On September 29, 2009, the FDIC proposed insured institutions 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 proposal, on December 30, 2009, Stillwater National and Bank of
Kansas will prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011, and 2012. Under the plan, banks will be assessed through 2010 according
to the risk-based premium schedule adopted earlier this year. However, beginning, January 1, 2011,
the base rate will increase by 3 basis points.
The unfunded loan commitment reserve expense decreased due to a decline in the level of commitments
when compared to the same period of the prior year.
The decrease in other general and administrative expenses is the result of an increase in deferred
expense recognition related to loan origination costs, decreased charitable contributions,
decreased deposit losses, and decreased accounting fees, offset in part by increased other loan
costs and increased legal fees.
Provisions for Loan Losses and for Unfunded Loan Commitments
Southwest makes provisions for loan losses in amounts necessary to maintain the allowance for loan
losses and the reserve for unfunded loan commitments at the levels Southwest determines are
appropriate. (See Note 6: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments,
in the Notes to Unaudited Consolidated Financial Statements.)
The allowance for loan losses of $57.8 million increased $18.0 million, or 45%, from year-end 2008.
A provision for loan losses of $28.5 million was recorded in the first nine months of 2009, an
increase of $16.3 million, or 132%, from the first nine months of 2008. The increase in the
provision for loan losses was the result of the calculations of the appropriate allowance at each
period end. (See Note 6: Allowance for Loan Losses and Reserve for Unfunded Loan Commitments, in
the Notes to Unaudited Consolidated Financial Statements and Loans on page 26 of this report.)
At September 30, 2009, the reserve for unfunded loan commitments was $3.3 million, a $377,000, or
10%, a decrease from the amount reported at December 31, 2008. This reserve is included in other
liabilities. The related provision for unfunded loan commitments is a component of general and
administrative expense. (See Note 6: Allowance for Loan Losses and Reserve for Unfunded Loan
Commitments, in the Notes to Unaudited Consolidated Financial Statements.)
39
Taxes on Income
Southwests income tax expense was $5.6 million and $7.4 million for the first nine months of 2009
and 2008, respectively, a decrease of $1.8 million, or 24%. The effective tax rate for the first
nine months of 2009 was 37.23% while the effective tax rate for the first nine months of 2008 was
38.67%.
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. Additional sources of liquidity, including cash flow from the repayment of loans and
the sale of participations in outstanding loans, are also considered in determining whether
liquidity is satisfactory. Liquidity is also achieved through growth of deposits, reductions in
liquid assets, and accessibility to capital and money markets. These funds are used to meet
deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization.
Southwest, Stillwater National, and Bank of Kansas have available various forms of short-term
borrowings for cash management and liquidity purposes. These forms of borrowings include federal
funds purchased, securities sold under agreements to repurchase, and borrowings from the Federal
Reserve Bank (FRB), the Student Loan Marketing Association (Sallie Mae), the Federal Home Loan
Bank of Topeka (FHLB).
Stillwater National also carries interest-bearing demand notes issued by the U.S. Treasury in
connection with the Treasury Tax and Loan note program; the outstanding balance of those notes was
$1.3 million at September 30, 2009. Stillwater National has approved federal funds purchase lines
totaling $377.0 million with ten banks; $33.0 million was outstanding on these lines at September
30, 2009. Stillwater National 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 Stillwater National to
borrow up to $97.4 million. As of September 30, 2009, no borrowings were made through the BIC
program. In addition, Stillwater National has available a $517.1 million line of credit and Bank
of Kansas has a $46.2 million line of credit from the FHLB. Borrowings under the FHLB lines are
secured by investment securities and loans. At September 30, 2009, the Stillwater National FHLB
line of credit had an outstanding balance of $61.5 million and the Bank of Kansas lines of credit
had an outstanding balance of $9.0 million.
See also
Deposits and Other Borrowings on page 29 for funds available
on brokered certificate of deposit lines of credit.
Stillwater National sells securities under agreements to repurchase with Stillwater National
retaining custody of the collateral. Collateral consists of U.S. government agency obligations,
which are designated as pledged with Stillwater Nationals safekeeping agent. These transactions
are for one to four day periods. Outstanding balances under this program were $26.5 million and
$48.0 million as of September 30, 2009 and 2008, respectively.
During the first nine months of 2009, the only category of other borrowings whose average exceeded
30% of ending shareholders equity was funds borrowed from the FHLB.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
Funds
|
|
Funds
|
|
|
Borrowed
|
|
Borrowed
|
(Dollars in thousands)
|
|
from the FHLB
|
|
from the FHLB
|
|
Amount outstanding at end of period
|
|
$
|
70,587
|
|
|
$
|
151,500
|
|
Weighted average rate paid at end of period
|
|
|
2.91
|
%
|
|
|
3.26
|
%
|
Average Balance:
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
$
|
86,644
|
|
|
$
|
124,954
|
|
For the nine months ended
|
|
$
|
114,966
|
|
|
$
|
120,797
|
|
Average Rate Paid:
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
3.29
|
%
|
|
|
3.54
|
%
|
For the nine months ended
|
|
|
3.07
|
%
|
|
|
3.21
|
%
|
Maximum amount outstanding at any month end
|
|
$
|
151,500
|
|
|
$
|
156,600
|
|
During the first nine months of 2009, cash and cash equivalents increased by $4.8 million, or
18%, to $32.1 million. This increase was the net result of cash provided by operating activities
of $53.9 million, offset by cash used in investing activities of $33.4 million (primarily from
purchases of available for sale securities and loan originations and repayments offset by
40
proceeds from sales of available for sale securities) and cash used in financing activities of
$15.7 million (primarily from decreases in other borrowings offset by increases in deposits).
During the first nine months of 2008, cash and cash equivalents decreased by $9.2 million, or 20%,
to $36.5 million. This decrease was the net result of cash used in investing activities of $288.5
million (primarily net loans originated net of principal repayments), offset by cash provided from
financing activities of $254.3 million (primarily from increased deposits and other borrowings),
and cash provided by operating activities of $25.0 million.
CAPITAL RESOURCES
Bank holding companies are required to maintain capital ratios in accordance with regulations
adopted by the Federal Reserve Board (FRB). The guidelines are commonly known as Risk-Based
Capital Guidelines. At September 30, 2009, Southwest exceeded all applicable capital requirements,
having a total risk-based capital ratio of 14.31%, a Tier I risk-based capital ratio of 13.04%, and
a leverage ratio of 12.39%. As of September 30, 2009, Stillwater National and Bank of Kansas met
the criteria for classification as well-capitalized institutions under the prompt corrective
action rules of the Federal Deposit Insurance Act. 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 bank regulators.
On August 28, 2009, Southwest declared a dividend of $0.0238 per common share payable on October 1,
2009 to shareholders of record as of September 17, 2009. This represents a decrease from the
$0.095 dividend paid for each quarter of 2008 and equals the dividends paid on April 1, 2009 and
June 1, 2009. The dividend amount is established by the Board of Directors each quarter. In
making its decision on dividends, the Board considers operating results, financial condition,
capital adequacy, regulatory requirements, shareholder returns and other factors.
EFFECTS OF INFLATION
The unaudited consolidated financial statements and related unaudited consolidated financial data
presented herein have been prepared in accordance with accounting principles generally accepted in
the United States of America and practices within the banking industry which 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 do the effects of general levels of inflation.
* * * * * * *
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 determine to increase its interest rate risk position in order to increase its net
interest margin. Southwest monitors interest rate risk and adjusts the composition of its
rate-sensitive assets and liabilities in order to limit its exposure to changes in interest rates
on net interest income over time. Southwests asset/liability committee reviews its interest rate
risk position and profitability, and recommends adjustments. The asset/liability committee also
reviews the securities portfolio, formulates investment strategies, and oversees the timing and
implementation of transactions. Notwithstanding Southwests 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.
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
41
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 timing, cash flows,
magnitude, and frequency of interest rate changes, changes in market conditions and management
strategies, among other factors.
The balance sheet is subject to quarterly testing for six alternative interest rate shock
possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by
+/- 100, 200, and 300 basis points (bp), 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 the 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Interest Rates:
|
|
+ 300 bp
|
|
+200 bp
|
|
+100 bp
|
|
Policy Limit
|
|
|
(18.00
|
)%
|
|
|
(10.00
|
)%
|
|
|
(5.00
|
)%
|
September 30, 2009
|
|
|
(1.09
|
)%
|
|
|
(4.20
|
)%
|
|
|
(3.65
|
)%
|
December 31, 2008
|
|
|
(2.26
|
)%
|
|
|
(4.08
|
)%
|
|
|
(3.81
|
)%
|
On December 16, 2008, the Federal Open Market Committee established the overnight rate as a
range of 0% to 0.25%. Southwest believes that all down rate scenarios are impractical since they
would result in rates of less than 0%. As a result, the down 100 bp, down 200 bp and down 300 bp
scenarios have been excluded. The Net Interest Income at Risk position improved in the +100 bp and
+300 bp scenarios while declining slightly in the +200 bp scenario when compared to the December
31, 2008 risk position. Southwests largest exposure to changes in interest rate is in the +200 bp
scenario with a measure of (4.20%) at September 30, 2009, a decline of 0.12 percentage points from
the December 31, 2008 level of (4.08%). All of the above measures of net interest income at risk
remain well within prescribed policy limits.
The measures of equity value at risk indicate 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Interest Rates:
|
|
+300 bp
|
|
+200 bp
|
|
+100 bp
|
|
Policy Limit
|
|
|
(35.00
|
)%
|
|
|
(20.00
|
)%
|
|
|
(10.00
|
)%
|
September 30, 2009
|
|
|
(9.07
|
)%
|
|
|
(4.64
|
)%
|
|
|
(2.06
|
)%
|
December 31, 2008
|
|
|
(8.48
|
)%
|
|
|
(4.03
|
)%
|
|
|
(0.82
|
)%
|
As of September 30, 2009, the economic value of equity measure decreased in each of the
increasing interest rate scenarios when compared to the December 31, 2008 percentages. Southwests
largest economic value of equity exposure is the +300 bp scenario which declined 0.59 percentage
points to (9.07%) on September 30, 2009 from the December 31, 2008 value of (8.48%). The economic
value of equity ratio in all scenarios remains well within Southwests Asset and Liability
Management Policy limits.
42
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 September 30, 2009. Southwests Chief Executive Officer
and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwests
Chief Executive Officer and Chief Financial Officer concluded that Southwests disclosure controls
and procedures were effective as of September 30, 2009.
First Nine Months of 2009 Changes in Internal Control over Financial Reporting
No change occurred during the first nine months of 2009 that has materially affected, or is
reasonably likely to materially affect, Southwests internal control over financial reporting.
43
PART II: OTHER INFORMATION
|
|
|
Item 1:
|
|
Legal proceedings
|
|
|
|
None
|
|
Item 1A:
|
|
Risk Factors
|
|
|
|
There were no material changes in risk factors during the third quarter of 2009 from
those disclosed in Southwests Form 10-K for the year ended December 31, 2008 as
supplemented and amended under this item in Southwests Form 10-Q for the quarter
ended June 30, 2009.
|
|
Item 2:
|
|
Unregistered sales of equity securities and use of proceeds
|
|
|
|
There were no unregistered sales of equity securities by Southwest during the quarter
ended September 30, 2009.
|
|
|
|
There were no purchases of Southwests common stock by or on behalf of Southwest or
any affiliated purchasers of Southwest (as defined in Securities and Exchange
Commission Rule 10b-18) during the three months ended September 30, 2009.
|
|
Item 3:
|
|
Defaults upon senior securities
|
|
|
|
None
|
|
Item 4:
|
|
Submission of matters to a vote of security holders
|
|
|
|
None
|
|
Item 5:
|
|
Other information
|
|
|
|
None
|
|
Item 6:
|
|
Exhibits
|
|
|
|
Exhibit 31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications
|
|
|
|
Exhibit 32(a), (b) 18 U.S.C. Section 1350 Certifications
|
44
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
|
|
|
|
|
|
|
|
|
By:
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/s/ Rick Green
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|
|
|
November 5, 2009
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|
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|
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Rick Green
|
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Date
|
|
|
|
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President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
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By:
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/s/ Kerby Crowell
|
|
|
|
November 5, 2009
|
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|
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Kerby Crowell
|
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|
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Date
|
|
|
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Executive Vice President, Chief Financial
|
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Officer and Secretary
|
|
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(Principal Financial Officer)
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|
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45
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