ITEM 1. BUSINESS
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Business
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General
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We are a financial holding company headquartered in Stillwater, Oklahoma for our banking subsidiary, Bank SNB, a state-chartered member bank. We were organized in 1981 as the holding company for Bank SNB, which was chartered in 1894. We are registered as a financial holding company pursuant to the Bank Holding Company Act of 1956, as amended by the Financial Services Modernization Act or Gramm-Leach-Bliley Act (the "Holding Company Act"). As a financial holding company, we are subject to supervision and regulation by the Federal Reserve. Bank SNB’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law.
			
		
			
		
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On December 14, 2016, we entered into a definitive agreement and plan of merger (the “Merger Agreement”) with Simmons First National Corporation (“Simmons”), an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock (the “Merger”), representing an aggregate Merger consideration of approximately $564.4 million (based on Simmons’ common stock closing price as of December 13, 2016), subject to potential adjustments.
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Simmons conducts banking operations through 150 financial centers located in communities throughout Arkansas, Kansas, Missouri and Tennessee. As of December 31, 2016, Simmons had $8.4 billion in total assets, $5.6 billion in loans and $6.7 billion in deposits. The completion of the Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions.
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Products and Services
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We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and retail financial services including commercial and consumer lending, deposit products and services, specialized cash management, and other financial products and services. Our areas of expertise focus on the special financial needs of healthcare and health professionals, commercial real estate borrowers, businesses and their managers and owners, commercial lending, and energy banking. The healthcare and real estate industries make up the majority of our loan portfolio.
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Our commercial lending services include (i) commercial real estate loans, (ii) working capital loans, (iii) construction loans, (iv) loans to small businesses, (v) loans for equipment and general business expansion, (vi) loans to energy companies based on proved producing reserves and (vii) loans to a broad variety of healthcare providers, business, and related concerns. Consumer lending services include (i) residential real estate loans and mortgage banking services, (ii) personal lines of credit, (iii) loans for the purchase of automobiles, and (iv) other installment loans. We also offer deposit and personal banking services, including (i) commercial deposit services, commercial checking, money market, and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking accounts, negotiable order of withdrawal accounts, savings accounts, and automated teller machine access. Bank SNB offers personal brokerage services through a relationship with an independent institution.
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We have developed internet banking services, called Bank SNB DirectBanker®, for consumer and commercial customers, a highly automated lockbox, document imaging, and information service for commercial customers called “Bank SNB Digital Lockbox,” and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds.
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Strategic Focus
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Our bank has and will continue to position itself for future growth. We seek to produce consistent and sustainable revenue growth by enhancing, clarifying, and expanding our geographic markets and increasing and diversifying our revenue base. This consists of, but is not limited to: building out existing markets with robust and profitable growth potential; expanding our professional team; and identifying, targeting, and acquiring earning assets under appropriate risk guidelines. We are focused on consummating the Merger with Simmons and will be conducting our operations with the intent to satisfy all of the covenants and conditions to closing contained in the Merger Agreement.
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We also seek to provide customers with exceptional service while, at the same time, improving operating efficiency. Over many years, we have refined our approach to customer service by listening to our customers’ needs and desires. We actively seek to make the customer experience consistent over time and across all of our locations. We improve operating efficiency by focusing on internal policy, process and procedure, along with technology, with the goal of continuous improvement while providing an exceptional experience to our clients. We build close relationships with businesses and their principals, business professionals and individuals by providing personalized financial solutions that give them more control over their financial futures. We also apply a philosophy of continuous improvement to internal and external information reporting to improve our decision making processes and product delivery.
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Organization
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Our business operations are conducted through four operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, and an Other Operations segment that includes funds management (investment portfolio and funding) and corporate investments. Our organizational structure is designed to facilitate high-level customer service, prompt response, efficiency, and appropriate, uniform credit standards and other controls.
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Banking Segments - Our banking segments include Oklahoma Banking, which includes the Stillwater division, the Central Oklahoma division based in Oklahoma City, the Tulsa division, and the Colorado division based in Denver; Texas Banking, which includes the Dallas, Austin, and San Antonio divisions; and Kansas Banking, which includes the Wichita and Hutchinson divisions. All of the regional divisions focus on providing commercial and consumer financial services, including deposit products and services, to local businesses and their senior employees and to other managers and professionals living and working in our market areas. The Stillwater, Hutchinson, and Denver divisions serve their respective markets as full-service community banks, emphasizing commercial and consumer lending. The other six divisions pursue a more focused marketing strategy, targeting managers, professionals, and businesses for lending, and offering more specialized services. We originate and produce mortgages in our Stillwater, Oklahoma City, Tulsa, Austin, Wichita, and Denver divisions. Mortgage operations are managed through our home office located in Stillwater, Oklahoma. We originate conventional, jumbo, Federal Housing Administration ("FHA"), Veterans' Administration ("VA"), and other types of first mortgage loans for sale to the Federal National Mortgage Association (“FNMA”) or private investors. Servicing on these loans may be released or retained in connection with the sale.
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Support and Control Functions - Support and control functions are centralized, although each segment has support and control personnel. Costs of centrally managed support and control functions other than funds management (which is included in the Other Operations segment) are allocated to the Banking segments. Our philosophy of customer service extends to our support and control functions. We manage and offer products that are technology based, or that otherwise are more efficiently offered centrally through our home office. These include products that are marketed through the regional offices, such as our internet banking product for commercial and retail customers (Bank SNB DirectBanker®), commercial information, and item processing services (Bank SNB Digital Lockbox). Our technology products are marketed to existing customers and to help develop new customer relationships. Use of these products by customers enables us to serve our customers more effectively, use our resources more efficiently, and increase our fee income.
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For additional information regarding our operating segments, please see “Note 20: Operating Segments” in the Notes to the Consolidated Financial Statements.
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Banking Centers and Geographic Markets
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The majority of our banking centers are located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, and Kansas. As of December 31, 2016, Bank SNB had thirty banking centers: six located in Stillwater, Oklahoma (which includes our operations center that facilitates electronic banking), nine located in the Oklahoma City, Oklahoma metropolitan area, three located in Denver, Colorado, two each located in Tulsa, Oklahoma, San Antonio, Texas, Hutchinson, Kansas and Wichita, Kansas and, one each in Chickasha, Oklahoma, Austin, Texas, Dallas, Texas, and Tilden, Texas. In addition, we have a fully dedicated loan production office in Denver, Colorado.
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We focus our efforts on markets with characteristics that will allow us to capitalize on our strengths and to continue establishing new offices in those markets. We extend loans beyond Oklahoma, Texas, Kansas, and Colorado to our borrowers who conduct business in other states.
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Employees
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Another major component of our strategy is to be an employer of choice in our markets. We aim to employ talented and devoted people who embrace our vision and feel invested in our success. As of December 31, 2016, we employed 387 persons on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others. None of our employees or any of our consolidated subsidiary employees are represented by a union or covered under a collective bargaining agreement. Our management considers our employee relations to be excellent.
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Competition
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We encounter competition in seeking deposits and in obtaining loan, cash management, investment, and other customers. The level of competition for deposits is high. Our principal competitors for deposits are other financial institutions, including national banks, state banks, federal savings banks, and credit unions. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from U.S. Government securities, private issuers of debt obligations, and suppliers of other investment alternatives for depositors, such as securities firms. Competition from credit unions has intensified as historic federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over national banks, federal savings banks, and state banks, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are more competitive than those offered by national banks, federal savings banks, and state banks.
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We also compete in our lending activities with other financial institutions such as securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, and other sources of funds. The level of competition for loans is high. Many of our nonbank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally-insured banks. As a result, such nonbank competitors have advantages over us in providing certain services. A number of the financial institutions with which we compete in lending, deposit, investment, cash management, and other activities are larger than us or have significantly larger market share in the markets we serve. Our Texas, Kansas, and Colorado divisions compete for loans, deposits, and other services against local and nationally based financial institutions, many of which have much larger market shares and widespread office networks. In recent years, competition has increased in our Oklahoma market areas as new entrants and existing competitors have sought to more aggressively expand their loan and deposit market shares.
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The business of mortgage banking is highly competitive. We compete for loan originations with other financial institutions, such as mortgage bankers, state and national banks, federal savings banks, credit unions, and insurance companies. Many of our competitors have financial resources that are substantially greater than those available to us. We compete principally by providing competitive pricing, by motivating our sales force through the payment of commissions on loans originated and by providing high quality service to builders, borrowers, and realtors.
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Supervision and Regulation
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We are a financial holding company under the Holding Company Act and are regulated by the Federal Reserve. Our banking subsidiary, Bank SNB, is an Oklahoma banking corporation and is subject to regulation, supervision, and examination by the Oklahoma State Banking Department and the Federal Reserve. This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and the banking system as a whole, and not for the protection of our shareholders.
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The following summarizes certain provisions of existing laws and regulations that affect our operations and those of Bank SNB. Any discussion of laws and regulations applicable to a bank holding company also apply to us as a financial holding company. This summary does not address all aspects of these laws and regulations or include all laws and regulations that affect us now or may affect us in the future.
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General - As a financial holding company, we are regulated under the Holding Company Act and are subject to supervision and regular examination by the Federal Reserve. Under the Holding Company Act, we are required to furnish to the Federal Reserve quarterly and annual reports of our operations and additional information and reports.
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A financial holding company may engage in certain financial activities, including, without limitation, securities underwriting and dealing, insurance agency and underwriting activities and merchant banking activities. To engage in any such new financial activity, each insured depository institution of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act, and the financial holding company must notify the Federal Reserve within 30 days of engaging in such new activity. We are currently eligible to engage in new financial activities but have no immediate plan to do so.
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Under the Holding Company Act, a bank holding company must obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the bank holding company would directly or indirectly own or control more than 5% of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.
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Also under the Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of us or Bank SNB. For purposes of the Holding Company Act, "control" is defined as ownership of more than 25% of any class of voting securities, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies.
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The federal Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act) to file a written notice with the Federal Reserve before the person or persons acquire control of us or Bank SNB. The Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank.
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The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing, or controlling banks, providing services for its subsidiaries, non-bank activities that are closely related to banking and other financially related activities. Our activities are subject to these legal and regulatory limitations under the Holding Company Act and Federal Reserve regulations. Non-bank and financially related activities of bank holding companies also may be subject to regulation and oversight by regulators other than the Federal Reserve.
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The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any banking subsidiary of that bank holding company.
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The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See “Regulatory Capital Requirements” on page 9 of this report.
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The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition.
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Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) - The Dodd-Frank Act, enacted in July 2010, made significant changes in laws regarding the structure of banking regulation, the powers of the Federal Reserve and other federal and state banking regulators, deposit insurance assessments, the handling of troubled institutions, regulatory capital calculations, reporting and governance obligations of public companies, and many other provisions affecting supervision of banks, bank holding companies, and other financial services organizations. Among other things, the Dodd-Frank Act:
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Created the Consumer Financial Protection Bureau (“CFPB”), whose regulations may adversely affect the business operations of financial institutions offering consumer financial products or services, including us. Although the CFPB has jurisdiction over banks with $10 billion or greater in assets, the rules, regulations and policies issued by the CFPB may also apply to Bank SNB through the adoption of similar policies by the Federal Reserve, FDIC, and state banking regulators.
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Made permanent the $250,000 deposit insurance limit for insured deposits.
			
		
			
		
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Revised the assessment base for calculating an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund to be based on average consolidated total assets minus average tangible equity rather than on deposits, and makes changes to the minimum designated reserve ratio of the Deposit Insurance Fund.
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Eliminated the prohibition against payment of interest on demand deposits, which allows businesses to have interest bearing demand accounts formerly prohibited by law and Federal Reserve regulations.
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Changed the requirements for certain transactions with affiliates and insiders.
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Required banking regulators to establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company that provides an insider or other employee with excessive compensation or compensation that gives rise to excessive risk or could lead to a material financial loss to the institution.
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Limited the use of new trust preferred securities issued after May 19, 2010 as regulatory capital.
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Permitted banks to engage in de novo branching outside of their home states, provided that the laws of the target state permit banks chartered in that state to branch within that state.
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Significant elements of the Dodd-Frank Act have been implemented, but implementation of other elements of the Act requires additional regulations, many of which have not yet been established.
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Source of Strength Doctrine - Federal Reserve policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and does not permit a bank holding company to conduct its operations in an unsafe or unsound manner. Under this "source of strength doctrine", a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment of deposits and to certain other indebtedness of such subsidiary banks. The Holding Company Act provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. Furthermore, the Federal Reserve has the right to order a bank holding company to terminate any activity that the Federal Reserve believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. The Dodd-Frank Act codified the "source of strength doctrine".
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State Member Bank Regulation - As an Oklahoma state-chartered bank that is a member of the Federal Reserve System, Bank SNB is subject to the primary supervision of the Oklahoma State Banking Department and the Federal Reserve. Prior regulatory approval is required for Bank SNB to establish or relocate a branch office or to engage in any merger, consolidation, or significant purchase or sale of assets.
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The Oklahoma State Banking Department and the Federal Reserve regularly examine the operations and condition of Bank SNB, including, but not limited to, its capital adequacy, loans, allowance for loan losses, investments, liquidity, interest rate risk, and management practices. In addition, Bank SNB is required to furnish quarterly and annual reports to the Federal Reserve. Oklahoma State Banking Department and the Federal Reserve enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a state member bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.
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Dividend Restrictions - Dividends from Bank SNB constitute the principal source of our cash revenues. The payment of dividends by Bank SNB is subject to regulatory restrictions. Bank SNB is subject to legal and regulatory limitations on the amount of dividends that it may pay without prior approval of the Oklahoma State Banking Department and the Federal Reserve. Under these regulations, the total amount of dividends that may be paid in any calendar year by Bank SNB to us without regulatory approval is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. In addition, Bank SNB is prohibited by federal statute from paying dividends or making any other capital distribution that would cause Bank SNB to fail to meet its regulatory capital requirements or when the payment of dividends would be an unsafe and unsound banking practice.
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Limits on Loans to One Borrower - As an Oklahoma state-chartered bank, Bank SNB is subject to limits on the amount of loans it can make to one borrower. With certain limited exceptions, loans and extensions of credit from Oklahoma state-chartered banks outstanding to any borrower (including certain related entities of the borrower) at any one time may not exceed
			
		
			
		
30% of the capital of the bank. An Oklahoma state-chartered bank may lend an additional amount if the loan is fully secured by certain types of collateral, like bonds or notes of the United States. Certain types of loans are exempted from the lending limits, including loans secured by segregated in-bank deposits. We have established an internal limit of $20.0 million to any one borrower.
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Transactions with Affiliates - Bank SNB is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, us and other affiliates and on investments in our and their stock or other securities. These restrictions prevent us and our nonbanking subsidiaries from borrowing from Bank SNB unless the loans are secured by specified collateral. Additionally, the restrictions require our transactions with Bank SNB to have terms comparable to terms of arms-length transactions with unaffiliated third persons. In addition, secured loans and investments by Bank SNB are generally limited to 10% of Bank SNB’s capital and surplus with respect to us and Bank SNB’s other affiliates on an individual basis, and to 20% of Bank SNB’s capital and surplus with respect to us and all other Bank SNB affiliates in the aggregate. Certain exemptions to these limitations apply to extensions of credit by, and other transactions between, Bank SNB and our other subsidiaries. These regulations and restrictions may limit our ability to obtain funds from Bank SNB for our cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses.
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Real Estate Lending Guidelines - Under federal and state banking regulations, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or interests in real estate or that are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting requirements. A bank’s real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Guidelines") adopted by the federal banking regulators. The Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the limits specified in the Guidelines. The Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits.
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Federal Deposit Insurance - Bank SNB pays deposit insurance premiums to the FDIC. For additional information, see “Management’s Discussion and Analysis - FDIC and other insurance” on page 37 of this report.
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Regulatory Capital Requirements - The Federal Reserve, the Oklahoma State Banking Department, and the FDIC have established guidelines for maintenance of appropriate levels of capital by bank holding companies and banks. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total average assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets.
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Federal regulations require bank holding companies and banks to maintain a minimum leverage ratio of Tier 1 capital (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the strongest bank holding companies and banks with composite examination ratings of 1 under the rating system used by the federal banking regulators would be permitted to operate at or near this minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization's capital adequacy by its primary regulator. A bank or bank holding company experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. In addition, the Federal Reserve has indicated that it also may consider the level of an organization's ratio of Tier 1 capital to total assets in making an overall assessment of capital.
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The risk-based capital rules require bank holding companies and banks to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders' equity and, subject to certain limitations, qualifying perpetual preferred stock, trust preferred securities, minority interests in the equity accounts of consolidated subsidiaries, and deferred tax assets, less all intangible assets, except for certain mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases, and the amount of perpetual preferred stock and trust preferred securities that does not qualify as Tier 1 capital, long-term preferred stock with an original maturity of at least 20 years from issuance, hybrid capital instruments, including perpetual debt and mandatory convertible securities, subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax net unrealized gains on available for sale equity securities.
			
		
			
		
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The Dodd-Frank Act includes certain provisions concerning the components of regulatory capital. Certain of these provisions are intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under these provisions, trust preferred securities issued before May 19, 2010 by a company, such as us, with total consolidated assets of less than $15 billion, are eligible to be treated as regulatory capital, but any such securities issued after May 19, 2010 are not eligible to be treated as regulatory capital.
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The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50%, and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses that may be included in capital to 1.25% of total risk-weighted assets.
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The federal and state banking regulatory agencies have established a joint policy regarding the evaluation of banks' capital adequacy for interest rate risk. Under the policy, the assessment of a bank's capital adequacy includes an assessment of exposure to adverse changes in interest rates. Management believes our interest rate risk management systems and our capital relative to our interest rate risk are adequate.
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Federal and state banking regulations also require banks with significant trading assets or liabilities to maintain supplemental risk-based capital based upon their levels of market risk. Bank SNB did not have any trading assets or liabilities during 2016, 2015, or 2014 and was not required to maintain such supplemental capital.
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The federal and state banking regulators have established regulations that classify banks by capital levels and provide for various "prompt corrective actions" to resolve the problems of any bank that fails to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 8% or more, and a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank that does not meet these standards is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized, depending on its capital levels. A bank that falls within any of these three undercapitalized categories is subject to severe regulatory sanctions. As of December 31, 2016, Bank SNB was well-capitalized as defined in applicable banking regulations. For information regarding Bank SNB’s compliance with its regulatory capital requirements, see “Management's Discussion and Analysis - Capital Resources” on page 45 of this report and in the Notes to the Consolidated Financial Statements in this report, “Note 16 Capital Requirements and Regulatory Matters”.
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Basel III - United States banking regulators are members of the Basel Committee on Banking Supervision. This committee issues accords, which include capital guidelines for use by regulators in individual countries, generally referred to as Basel I (1988), Basel II (2004), and Basel III (2011). U.S. banking agencies have published the final proposed rules to implement Basel III in the United States (the “Basel III Capital Rules”), which were effective for us January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Capital Rules introduced a comprehensive new regulatory framework for U.S. banking organizations, which is consistent with international standards. The implementation of Basel III is intended to help ensure that banks of all sizes maintain strong capital positions to keep them viable during times of financial stress and severe economic downturns.
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The Basel III Capital Rules, among other things, introduce a new capital measure called “Common Equity Tier 1” (“CET1”), specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expand the scope of the deductions/adjustments as compared to existing regulations.
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Under the Basel III Capital Rules, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:
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4.5% CET1 to risk weighted assets
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6.0% Tier 1 capital to risk weighted assets
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8.0% Total capital to risk weighted assets
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4.0% Tier 1 capital to average quarterly assets
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When fully phased in on January 1, 2019, the Basel III Capital Rules will require us to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a “capital conservation buffer” equal to 2.5% of total risk-weighted assets (the “Capital Buffer”), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the Capital Buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the Capital Buffer and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average quarterly assets. The Capital Buffer will be tested on a quarterly basis. Our ability to pay dividends, discretionary bonuses, or repurchase stock will be restricted unless we maintain the Capital Buffer. As of December 31, 2016, we were well-capitalized even if we apply the Capital Buffer, which does not go into effect until future years.
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The Basel III Capital Rules also prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and resulting in higher risk weights for a variety of asset categories. Specific changes to the rules impacting our determination of risk-weighted assets include a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans, and a 150% risk weight to exposures that are 90 days past due.
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Banks with under $250 billion in assets were given a one-time, opt-out election under the Basel III Capital Rules to filter from regulatory capital certain accumulated other comprehensive income (“AOCI”) components. Without this election, a bank must reflect unrealized gains and losses on “available for sale” securities in regulatory capital. This AOCI opt-out election had to be made on a bank’s first regulatory report filed after January 1, 2015.
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We timely made the AOCI opt-out election. Accordingly, amounts reported as accumulated other comprehensive income/loss related to securities available for sale and effective cash flow hedges do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.
Brokered Deposits - Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew, or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Bank SNB is well-capitalized and therefore is eligible to accept brokered deposits without limitation.
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Supervision and Regulation of Mortgage Banking Operations - Bank SNB’s mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development, FHA, VA, and FNMA with respect to originating, processing, selling, and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as Bank SNB are required to submit financial statements to FNMA, FHA, and VA annually. Each regulatory entity has its own financial requirements. Lenders’ affairs are also subject to examination by the Federal Reserve, FNMA, FHA, and VA at all times to assure compliance with the applicable regulations, policies, and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Home Mortgage Disclosure Act, Fair Credit Reporting Act, the National Flood Insurance Act, and the Real Estate Settlement Procedures Act, and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Bank SNB mortgage banking operations are also affected by various state and local laws and regulations and the requirements of various private mortgage investors.
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Community Reinvestment - Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s record of making loans in its assessment areas; (b) investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (c) service, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches, and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, bank and bank holding company acquisitions, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. Bank SNB was assigned a “satisfactory” rating as a result of its last CRA examination.
Bank Secrecy Act; Patriot Act - Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the U.S. Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA PATRIOT Act” or the “Patriot Act,” enacted in response to the September 11, 2001 terrorist attacks, contains prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations, and money launderers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
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Other Laws and Regulations - Some of the aspects of the lending and deposit business of Bank SNB are subject to regulation by the Federal Reserve and the FDIC, including reserve requirements and disclosure requirements in connection with personal and mortgage loans and deposit accounts. In addition, Bank SNB is subject to numerous federal and state laws and regulations that include specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of credit terms, and discrimination in credit transactions.
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Enforcement Actions - Federal statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease-and-desist orders, receivership, conservatorship, or the termination of deposit insurance.
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Available Information
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We provide internet access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports through our Investor Relations section at www.oksb.com (This site is also accessible through Bank SNB’s website at www.banksnb.com.) The SEC maintains a website (www.sec.gov) where these filings also are available through the SEC’s EDGAR system. There is no charge for access to these filings through either our site or the SEC’s site, although users should understand that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, that they may bear. The public also may read and copy materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
			
		
			
		
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ITEM 1A.
ITEM 1A. RISK FACTORS
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The following are some important risk factors that could affect our future financial performance or could cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, or which we do not believe are material, may also impair or adversely affect our business, financial condition or results of operation.
Risks Relating to our Business
Difficult and unsettled market conditions may affect our profits and loan quality and may continue to do so for an unknown period.
Unsettled market conditions may increase the likelihood and the severity of adverse effects discussed in the following risk factors, in particular:
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There may be less demand for our products and services;
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Competition in our industry could intensify as a result of increased consolidation of the banking industry;
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It may become more difficult to estimate losses inherent in our loan portfolio;
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Loan delinquencies and problem assets may increase;
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Collateral for loans may decline in value, increasing loan to value ratios and reducing our customers’ borrowing power and the security for our loans;
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Deposits and borrowings may become even more expensive relative to yields on loans and securities, reducing our net interest margin, and making it more difficult to maintain adequate sources of liquidity;
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Asset based liquidity, which depends upon the marketability of assets such as mortgages, may be reduced; and
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Compliance with banking regulations enacted in connection with stimulus legislation and other legislation may increase our costs, limit our ability to pursue business opportunities, and impair our ability to hire and retain talented managers.
Changes in interest rates and other factors beyond our control may adversely affect our earnings and financial condition.
Our net income depends to a great extent upon the level of our net interest income. Changes in interest rates can increase or decrease net interest income and net income. Net interest income is the difference between the interest income we earn on loans, investments, and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.
Market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in world financial markets. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. Changes in the market interest rates for types of products and services in our various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors. The results of our interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that we will be able to successfully manage our interest rate risk.
Changes in local economic conditions could adversely affect our business.
Our commercial and commercial real estate lending operations are concentrated in the metropolitan areas of Oklahoma City, Stillwater, Edmond, and Tulsa, Oklahoma; Dallas, Austin, and San Antonio, Texas; Hutchinson and Wichita Kansas;
			
		
			
		
and Denver, Colorado. Our success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase our problem loans and charge-offs and otherwise negatively affect our performance and financial condition.
Adverse changes in healthcare-related businesses could lead to slower loan growth and higher levels of problem loans and charge-offs.
We have approximately $423.8 million in loans to individuals and businesses involved in the healthcare industry, including business and personal loans to physicians, dentists, and other healthcare professionals, and loans to for-profit hospitals, nursing homes, suppliers and other healthcare-related businesses, representing approximately 23% of total loans outstanding as of December 31, 2016. Our strategy calls for continued commitment to healthcare lending. This concentration exposes us to the risk that adverse developments in the healthcare industry could hurt our profitability and financial condition as a result of increased levels of nonperforming loans and charge-offs and reduced loan demand and deposit growth.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Educations Reconciliations Act of 2010, has impacted the provision of healthcare in the United States. We have assessed its potential outcome on the market for healthcare and our services for the healthcare industry, and believe it is too early to conclude the entire impact on them. However, some trends are emerging. We are beginning to see an evolution that favors larger healthcare providers, which is driving many strategic mergers and acquisitions. Also, reimbursement and service provider margins continue to be pressed. The law is complex and implementation requires the adoption of significant regulations. As a result, the new laws could have adverse effects on the growth and profitability of our healthcare business. There is additional uncertainty as to the future of the Affordable Care Act following the election of President Trump. President Trump and Congress have indicated a desire and a willingness to repeal the Affordable Care Act, possibly without a replacement, although replacement options are being considered. Until the future of the Affordable Care Act and any replacement statute is decided, the healthcare industry will continue to experience increased uncertainty as to the environment in which healthcare providers will operate.
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We have credit exposure to the oil and gas industry.
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Our direct exposure to the oil and gas industry is approximately 3% of our portfolio loans. However, many of our customers provide transportation and other services and products that support oil and gas exploration and production activities. As of December 31, 2016, we had $84.7 million in loan commitments, of which $48.6 million was funded debt, to borrowers in the oil and gas industry. As of December 31, 2016, the price per barrel of crude oil was approximately $54 compared to approximately $37 as of December 31, 2015. If oil prices return to lower levels for an extended period, we could experience weaker energy loan demand and increased losses within our energy portfolio. Furthermore, a prolonged period of low or stagnant oil prices could have a negative impact on the economies of energy-dominant states such as Oklahoma and Texas. As a result, low oil prices could have an adverse effect on our business, financial condition and results of operation. We have the ability to adjust the borrowing base on outstanding commitments based on market price and condition.
Our allowance for loan losses may not be adequate to cover our actual loan losses, which could adversely affect our earnings.
We maintain an allowance for loan losses in an amount that we believe is appropriate to provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the allowance. Federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based
			
		
			
		
upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations.
Commercial and commercial real estate loans comprise a significant portion of our total loan portfolio. These types of loans typically are larger than residential real estate loans and other consumer loans. Because our loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the allowance for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.
The results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy’s performance is worse than we expect.
We perform internal assessments of our capital and asset quality as part of our planning process. Our process includes stress tests using alternative credit quality assumptions in order to estimate their effects on loan loss provisions, net income, and regulatory capital ratios. The alternative assumptions include mild and severe credit quality stress scenarios.
The results of these stress tests involve assumptions about the economy, future loan losses and default rates, which may not accurately reflect the impact on our earnings or financial condition or actual future conditions. Actual future economic conditions may result in significantly higher credit losses than we assume in our stress tests, with a corresponding more negative impact on our earnings, financial condition, and capital than those predicted by our internal stress test.
We may not realize our deferred tax assets.
We may experience negative or unforeseen tax consequences. We review the probability of the realization of our deferred tax assets based on forecasts of taxable income quarterly. This review uses historical results, projected future operating results based on approved business plans, eligible carryforward and carryback periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. and our industry may require the creation of a valuation allowance to reduce our deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition.
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Additionally, we conduct quarterly assessments of our deferred tax assets. The carrying value of these assets is dependent upon earnings forecasts and prior period changes, among other things. A significant change in our assumptions could affect the carrying value of our deferred tax assets on our balance sheet.
Our earnings and financial condition may be adversely affected by changes in accounting principles and in tax laws, or the interpretation of them.
Changes in U.S. generally accepted accounting principles could have negative effects on our reported earnings and financial condition.
Changes in tax laws, rules, and regulations, including changes in the interpretation or implementation of tax laws, rules, and regulations by the Internal Revenue Service or other governmental bodies, could affect us in significant and unpredictable ways. Such changes could subject us to additional costs, among other things. Failure to comply with tax laws, rules, and regulations could result in sanctions by regulatory agencies, civil money penalties, and reputation damage.
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Our information systems may experience an interruption or breach in security.
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We rely heavily on third-party services for communications, information systems, and the internet for nearly every spectrum of our business operations. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. We have taken steps designed to improve the security and redundancy of our networks and computer systems and our physical space. Despite these defensive measures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The potential consequences of a material cybersecurity incident
			
		
			
		
include interruption of our business operations, damage to our reputation, loss of customer business, and additional regulatory scrutiny or civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. In some situations, we may not become aware of a cyber incident for some time after it occurs, which could increase our exposure.
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In the event of a failure in our computer systems, we would rely on our disaster recovery system to keep our business operational. Any unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct our business efficiently and without significant additional expenses and may have a material adverse effect on our financial condition and results of operations.
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Government regulation significantly affects our business.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds, depositors and the banking system as a whole, not shareholders. Bank SNB is subject to regulation and supervision by the Oklahoma State Banking Department and the Federal Reserve. We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies.
Changes in the laws, regulations, and regulatory practices affecting the banking industry may limit our ability to increase or assess fees for services provided, increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability and financial condition. Federal economic and monetary policy may also affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads.
The FDIC insures deposits at insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Economic conditions in the past have contributed to bank failures. The FDIC may increase our deposit insurance costs by increasing regular assessment rates and levying special assessments, which may in the future significantly and adversely affect our net income.
The Dodd-Frank Act will likely continue to increase our regulatory compliance burden and costs, may place restrictions on certain products and services, and limit our future capital raising alternatives.
The Dodd-Frank Act made significant, wide-ranging changes in the regulation of the financial services industry that affect all financial institutions, including us. The Dodd-Frank Act may continue to increase our regulatory compliance burden, increase the costs associated with regulatory examinations and compliance measures, and increase other operating costs.
Among other things, the Dodd-Frank Act eliminated the prohibition of paying interest on commercial demand deposits, which may increase our funding costs, and limits the use of new trust preferred securities as regulatory capital. In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau, whose regulations may adversely affect our business operations. Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to us through the adoption of similar policies by the Federal Reserve.
Significant elements of the Dodd-Frank Act have been implemented, but implementation of other elements of the Dodd-Frank Act requires additional regulations, some of which have not yet been established. There is additional uncertainty as to the future of the Dodd-Frank Act following the election of President Trump. President Trump and Congress have indicated a desire and a willingness to repeal certain provisions of the Dodd-Frank Act. Certain provisions of the Dodd-Frank Act that have yet to be implemented may never be implemented and additional repeal or amendments to various sections of the Dodd-Frank Act are likely. This additional uncertainty may increase our risks and costs until such time as any changes are finally implemented.
			
		
			
		
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Examination reports may include significant findings and assessments about our condition and operations that are not publicly disclosed. Assessments by bank examiners may cause us to increase our publicly reported problem assets and potential problem loans, charge-offs, or provisions for loan losses.
Examinations by federal regulatory agencies include assessments of risk, financial health, capital adequacy, loan risk, and other factors that federal banking laws do not allow to be publicly disclosed. The assignment of loans to credit risk categories involves judgment and the application of credit policies. In their examinations, federal banking examiners may assign different risk categories to loans than those assigned by management. In that case, we must amend our risk categorizations to match those assigned by the bank examiners, which may result in increases in publicly reported problem and potential problem loans, charge-offs, or provisions for loan losses.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial bankers. The unexpected loss of services of any key management personnel or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial condition.
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Competition may decrease our growth or profits.
We compete for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than ours. Credit unions have federal tax exemptions, which they may take advantage of to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably.
Risks Related to the Acquisition of Southwest by Simmons
Business uncertainties while the Merger is pending may negatively impact our ability to attract and retain personnel and impact our customer relationships.
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Uncertainty about the effect of the Merger on our employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Retention of certain employees by Southwest may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined entity, our business could be harmed.
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Regulatory approvals for the Merger may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.
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In determining whether to grant regulatory approvals for the Merger, the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under ‘‘Supervision and Regulation’’. An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval for the Merger or delay receipt of such approvals. The regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Such conditions or changes could have the effect of delaying or preventing completion of the Merger or imposing additional costs on or limiting the revenues of the combined company following the Merger, any of which might have an adverse effect on the combined company following the Merger.
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If the Merger is not completed, we will have incurred substantial expenses without realizing the expected benefits of the Merger.
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We have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, we would have to recognize the expenses we have incurred without realizing the expected benefits of the Merger, which could materially impact our earnings and results of operations.
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The Merger Agreement limits our ability to pursue acquisition proposals and requires us to pay a termination fee under limited circumstances.
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The Merger Agreement prohibits us from initiating, soliciting, knowingly encouraging or knowingly facilitating certain third party acquisition proposals. The Merger Agreement also provides that we must pay a termination fee in the amount of $20 million in the event the Merger Agreement is terminated under certain circumstances, including involving our failure to abide by certain obligations not to solicit acquisition proposals and our board of directors withdrawing or materially and adversely changing its recommendation that our shareholders approve the Merger proposal. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing such an acquisition.
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Termination of the Merger Agreement could negatively impact us.
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If the Merger Agreement is terminated, there may be various negative consequences to us. For example, our businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. The closing price of our common stock on March 8, 2017 was $26.85 per share, which is 10% higher than the $24.30 closing price of our common stock on December 13, 2016, the day immediately prior to the announcement of the Merger. If the Merger Agreement is terminated, it is likely that the market price of our common stock will decline to the extent that the current market price reflects a market assumption that the Merger will be completed.
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Risks Related to Ownership of Our Common Stock
The market price for our common stock may be highly volatile, which may make it difficult for investors to resell shares of common stock at times they desire or at prices they find attractive.
The overall market and the price of our common stock fluctuates as a result of a variety of factors, many of which are beyond our control. These factors include, in addition to those described in the Risk Factors:
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Market assumptions with respect to the likelihood of consummation of the Merger with Simmons;
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Actual or anticipated quarterly fluctuations in our operating results and financial condition;
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Changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;
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Speculation in the press or investment community generally or relating to our reputation or the financial services industry;
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The size of the public float of our common stock;
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Repurchases by us under our stock repurchase program;
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Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings;
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Fluctuations in the stock price and operating results of our competitors;
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Future sales of our equity or equity-related securities;
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Proposed or adopted regulatory changes or developments;
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Unknown, anticipated or pending investigations, proceedings, or litigation that involve or affect us;
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Domestic and international economic factors unrelated to our performance; and
·
General market conditions and, in particular, developments related to market conditions for the financial services industry.
			
		
			
		
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In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations as a result of general economic instability and recession. This volatility has had a significant effect on the market price of securities issued by many companies, including volatility resulting from reasons unrelated to their performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our future operating results. We expect that the market price of our common stock will continue to fluctuate, and there can be no assurance about the levels of the market prices for our common stock.
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.
Although our common shares are listed for trading on the NASDAQ Global Select Market, the trading in our common shares has less liquidity than many other companies quoted on the NASDAQ Global Select Market. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the market of willing buyers and sellers for our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common shares will increase in the future. Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically.
Future issuances or sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our board of directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued stock, including shares authorized and unissued under our 2008 Stock Based Award Plan. Though currently prohibited by the Merger Agreement, if the Merger is not completed in the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock or reduce the market price for our common stock.
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The sale, or availability for sale, of a substantial number of shares of common stock in the public market could adversely affect the price of our common stock and could impair our ability to raise additional capital through the sale of equity securities.
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Our ability to pay dividends is limited by law, contract, and banking agency discretion.
In January 2014, our board of directors reinstated quarterly common stock dividends with their approval of a quarterly cash dividend of $0.04 per share. This was the first time dividends on our common stock had been declared since 2009. In January 2015, our board of directors increased our quarterly cash dividend from $0.04 per share to $0.06 per share, and in January 2016, our board of directors increased our quarterly cash dividend from $0.06 per share to $0.08 per share.
Our ability to pay dividends to our shareholders depends on our receipt of dividends from Bank SNB. The amount of dividends Bank SNB may pay to us is limited by state and federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business. For information regarding our ability to pay dividends, see the Notes to the Consolidated Financial Statements in this report, “Note 16 Capital Requirements and Regulatory Matters”.
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Our ability to increase or pay dividends to our shareholders is limited by covenants included in the Merger Agreement.
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Our ability to pay dividends to our shareholders is further limited because the Federal Reserve has the power to prohibit payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by financial holding companies, which expresses the Federal Reserve's view that a financial holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition.
			
		
			
		
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Restrictions on unfriendly acquisitions could prevent a takeover.
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Our certificate of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by our board of directors. The Oklahoma General Corporation Act includes provisions that make our acquisition more difficult. These provisions may prevent a future takeover attempt in which our shareholders otherwise might receive a substantial premium for their shares over then-current market prices. These provisions include supermajority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. Our certificate of incorporation also authorizes the issuance of additional shares without shareholder approval on terms or in circumstances that could deter a future takeover attempt.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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NONE.
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ITEM 2.
ITEM 2. Properties
The locations of Southwest and its banking subsidiary are shown below:
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Southwest Bancorp, Inc. Location
Corporate Headquarters
						
						
608 S. Main Street
P.O. Box 1988
www.oksb.com
Stillwater, Oklahoma 74076
405-742-1800
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Bank SNB Locations
						
						
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Corporate Headquarters and Branch
608 S. Main Street
P.O. Box 1988
www.banksnb.com
Stillwater, Oklahoma 74076
405-372-2230
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Drive-in Facility and Branch
308 S. Main Street
P.O. Box 1988
Stillwater, Oklahoma 74076
405-372-2230
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Operations Center
1624 Cimarron Plaza
P.O. Box 1988
Stillwater, Oklahoma 74076
405-372-2230
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19th & Sangre Branch
1908 S. Sangre
P.O. Box 1988
Stillwater, Oklahoma 74074
405-372-2230
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OSU Campus Branch
1102 W. Hall of Fame Avenue
P.O. Box 1988
						
OSU-Student Union Branch
Student Union, Room 056
P.O. Box 1988
Stillwater, Oklahoma 74076
						
						
						
Stillwater, Oklahoma 74076
405-372-2230
						
						
						
405-744-5962
			
		
			
		
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Waterford Branch
6301 Waterford Boulevard
Suite 101 & 102
Oklahoma City, Oklahoma 73118
405-427-4000
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OKC - South Penn Branch
9921 S. Pennsylvania Ave.
						
OUHSC - OKC Branch
1106 N. Stonewall
						
OKC - Classen Branch
2523 N. Classen Blvd.
						
OKC - Capitol Hill Branch
3131 S. Shields Blvd.
						
OKC - Memorial Branch
3805 W. Memorial Rd.
						
OKC - Rockwell Branch
7308 N.W. Expressway
Oklahoma City, Oklahoma 73159
						
						
Oklahoma City, Oklahoma 73117
						
						
Oklahoma City, Oklahoma 73106
						
						
Oklahoma City, Oklahoma 73129
						
						
Oklahoma City, Oklahoma 73134
						
						
Oklahoma City, Oklahoma 73132
405-427-4000
						
						
405-271-3113
						
						
405-844-0110
						
						
405-844-0110
						
						
405-844-0110
						
						
405-844-0110
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Edmond Spring Creek Branch
1440 S. Bryant Avenue
Edmond, Oklahoma 73034
405-427-4000
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Edmond Branch
1601 S. Kelly
						
						
Edmond, Oklahoma 73013
						
405-844-0110
Chickasha Branch
500 W. Grand Avenue
Chickasha, Oklahoma 73018
405-427-3100
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Tulsa Utica Branch
1500 S. Utica Avenue
P.O. Box 521500
						
Tulsa, Oklahoma 74152
						
918-523-3600
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Tulsa 61st Branch
2431 E. 61st
Suite 170
P.O. Box 521500
Tulsa, Oklahoma 74152
						
						
						
918-523-3600
						
						
						
Tilden Branch
205 Elm Street
P.O. Box 299
Tilden, Texas 78072
361-274-3391
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Preston Center Branch
5950 Berkshire Lane
Suite 150 and 350
Dallas, Texas 75225
972-624-2900
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Austin Branch
3001 Palm Way
Suite 108
						
Austin, Texas 78758
						
						
						
512-314-6700
						
						
						
			
		
			
		
San Antonio Medical Hill Branch
9324 Huebner Road
						
						
San Antonio Pyramid Branch
601 N.W. Loop 410
Suite 230
						
San Antonio, Texas 78240
						
						
						
San Antonio, Texas 78216
210-442-6100
						
						
						
210-442-6101
Hutchinson Branch
100 East 30th Avenue
P.O. Box 1707
						
South Hutchinson Branch
524 N. Main Street
P.O. Box 1707
						
Wichita - East Branch
8415 E. 21st Street North
Suite 150
						
Wichita - West Branch
10111 W. 21st Street North
						
Denver - Englewood Branch
3531 S. Logan Street
Suite A
						
Denver - Highlands Ranch Branch
9131 S. Broadway
Suite 500
						
Denver - Lone Tree Branch
10457 Park Meadows Drive
Suite 300
						
Denver - industry
3001 Brighton Blvd.
Suite 718
Hutchinson, Kansas 67502
						
						
						
South Hutchinson, Kansas 67505
						
						
						
Wichita, Kansas 67206
						
						
						
Wichita, Kansas 67205
						
						
Englewood, Colorado 80113
						
						
						
Highlands Ranch, Colorado 80129
						
						
						
Lone Tree, Colorado 80124
						
						
						
Denver, Colorado 80216
620-728-3000
						
						
						
620-728-3000
						
						
						
316-315-1600
						
						
						
316-315-1600
						
						
303-761-7500
						
						
						
720-344-0953
						
						
						
303-706-1723
						
						
						
303-754-5385
						
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae. The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae. Plaintiffs claim that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code. Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action. On March 26, 2014, the Court denied the plaintiffs’ request to certify the class; however, the Court permitted the plaintiffs to amend the filing to redefine the class. Plaintiffs filed a renewed motion on June 23, 2014. On December 19, 2014, the Court issued a decision on the renewed motion, certifying a class with respect to claims of improper late fees, but denying class certification with respect to plaintiffs’ usury claims. Plaintiffs thereafter filed a motion seeking leave to amend their complaint to add additional parties, which Sallie Mae opposed, and, on March 24, 2015, the Court denied the plaintiffs’ motion. On June 5, 2015, the law firm Cohen Milstein Sellers & Toll based in Washington, D.C. entered its appearance as co-counsel on behalf of plaintiffs.
			
		
			
		
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Bank SNB is not specifically named in the action. However, in the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”). Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB. Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.
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In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management currently does not expect that the outcome of such actions will have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.
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ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
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Not applicable.
			
		
			
		
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Part II
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ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Stock Listing
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Common shares of Southwest Bancorp, Inc. are traded on NASDAQ Global Select Market under the symbol OKSB.
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Transfer Agents and Registrars
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For Southwest Bancorp, Inc.:
						
Computershare Investor Services, LLC
						
2 North LaSalle St.
						
Chicago, IL 60602
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Recent Stock Prices, Dividends, and Equity Compensation Plan Information
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Our board of directors decides whether or not to pay dividends on common stock, and the amount of any such dividends, each quarter. In making its decisions on dividends, the board of directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. Our ability to pay dividends depends upon regulatory approval and cash resources, which include dividend payments from Bank SNB. For information regarding the ability of Bank SNB to pay dividends to us and the restrictions on bank dividends under federal banking laws, see “Note 16: Capital Requirements & Regulatory Matters” in the Notes to the Consolidated Financial Statements, “Dividend Restrictions” on page 47 of this report, and “Risk Factors” on page 13 of this report.
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As shown on the table below, common shareholders received quarterly cash dividends of $0.08 per share in 2016 and $0.06 per share in 2015. In January 2017, our board of directors approved a quarterly cash dividend of $0.08 per share.
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As of March 1, 2017, there were approximately 480 holders of record of our common stock. The following table sets forth the common stock dividends declared for each quarter during 2016 and 2015, and the range of high and low closing trade prices for the common stock for those periods.
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Repurchases under the repurchase program authorized by our Board of Directors (the “Board”) are available at the discretion of management based upon market, business, legal, and other factors. We repurchased 867,310 shares under the 2014 program for a total of $14.3 million. As of December 31, 2015, we had repurchased 254,248 shares under the 2015 program for a total of $4.4 million. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Our ability to repurchase our common stock is limited during the time that the Merger is pending. No repurchases were made in the fourth quarter of 2016. For information regarding our most recently authorized program by the Board, see “Management’s Discussion and Analysis - Significant Developments” on page 30 of this report.
			
		
			
		
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Stock Performance
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The following table compares the cumulative total return on a hypothetical investment of $100 in our common stock at the closing price on December 31, 2011 through December 31, 2016, with the hypothetical cumulative total return on the NASDAQ Stock Market Index (U.S. Companies) and the NASDAQ Bank Index for the comparable period.
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Equity Compensation Plan Information
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The following table presents disclosure regarding equity compensation plans in existence at December 31, 2016, consisting of our 2008 Stock Based Award Plan, which was approved by our shareholders.
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ITEM 6.
ITEM 6. Selected Financial Data
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The following table presents our selected consolidated financial data for each of the five years in the period ended December 31, 2016. The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements, including the accompanying Notes to the Consolidated Financial Statements, presented elsewhere in this report.
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Selected Financial Data (Continued)
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(1) Preferred stock - declared and paid includes a one-time non-cash equity charge of $1.2 million for 2012 to reflect the accelerated accretion of the remaining discount on the Series B Preferred securities repurchased in August of 2012.
(2) At period end.
(3) Net of unearned discounts but before deduction of allowance for loan losses.
(4) Total loans include loans held for sale.
(5) Reflects the repurchase of preferred securities in 2012. Please see “Capital Resources” on page 45 and “Note 14: Shareholders’ Equity” in the Notes to the Consolidated Financial Statements.
(6) The efficiency ratio = noninterest expenses / (net interest income + total noninterest income) as shown on the Consolidated Statements of Operations.
(7) Ratio = average assets for year divided by the number of full-time equivalent employees at year-end.
(8) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more, and restructured loans not performing in accordance with restructured terms.
(9) Nonperforming assets consist of nonperforming loans and other real estate.
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item 7.
item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The purpose of this discussion and analysis is to provide an understanding of our financial results and condition through the eyes of management for the year ended December 31, 2016. This report should be read in conjunction with our Consolidated Financial Statements including the notes thereto, and the other financial information appearing elsewhere in this report.
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Executive Summary
We are a financial holding company for Bank SNB, an Oklahoma state banking corporation, which has been providing banking services since 1894. Through Bank SNB, we have thirty banking centers primarily located along the heavily populated areas on the I-35 corridor through Texas, Oklahoma, Kansas, and Colorado. We focus on providing customers with exceptional service and meeting all of their banking needs by offering a wide variety of commercial and retail financial services, including commercial and consumer lending, deposit and investment services, specialized cash management, and other financial services and products.
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On December 14, 2016, we entered into a Merger Agreement with Simmons, an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock, representing an aggregate Merger consideration of approximately $564.4 million (based on Simmons’ common stock closing price as of December 13, 2016), subject to potential adjustments.
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Our business operations are conducted through four operating segments that include Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. Due to its size and management structure, Colorado Banking operations are included within our Oklahoma Banking segment.
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Business Strategy
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Our bank has and will continue to position itself for future growth. We seek to produce consistent and sustainable revenue growth by enhancing, clarifying, and expanding our geographic markets and increasing and diversifying our revenue base. This consists of, but is not limited to: building out existing markets with robust and profitable growth potential; expanding our professional team; and identifying, targeting, and acquiring earning assets under appropriate risk guidelines. We are focused on consummating the Merger with Simmons and will be conducting our operations with the intent to satisfy all of the covenants and conditions to closing contained in the Merger Agreement.
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We also seek to provide customers with exceptional service while, at the same time, improving operating efficiency. Over many years, we have refined our approach to customer service by listening to our customers’ needs and desires. We actively seek to make the customer experience consistent over time and across all of our locations. We improve operating efficiency by focusing on internal policy, process and procedure, along with technology, with the goal of continuous improvement while providing an exceptional experience to our clients. We build close relationships with businesses and their principals, business professionals and individuals by providing personalized financial solutions that give them more control over their financial futures. We also apply a philosophy of continuous improvement to internal and external information reporting to improve our decision making processes and product delivery.
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Another major component of our strategy is to be an employer of choice in our markets. We aim to employ talented and devoted people who embrace our vision and feel invested in our success. As of December 31, 2016, we employed 387 people on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others.
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Industry Focus
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Our area of expertise focuses on the special financial needs of healthcare and health professionals, commercial real estate borrowers, businesses and their managers and owners, commercial lending, and energy banking. The healthcare and real estate industries make up the majority of our loan and deposit portfolio.
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Our tactical focus on healthcare lending was established in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities. As of December 31, 2016, $423.8 million, or approximately 23%, of our loans were loans to individuals and businesses in the healthcare industry. We conduct regular market reviews of current and potential healthcare lending business and make determinations with respect to the appropriate concentrations within healthcare based upon economic and regulatory conditions.
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As of December 31, 2016, $608.6 million, or approximately 32%, of our loans were real estate industry loans. Economic factors that affect commercial real estate values include job growth, corporate profits, and business expansion. The unemployment rate, uncertainty over government regulation and fiscal policy, the rising cost of debt capital, and depressed oil and gas prices are all industry risk factors.
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As of December 31, 2016, approximately 3% of our loan portfolio was to customers in the oil and gas industry. As of December 31, 2016, our exposure continues to be focused on production based companies and servicing companies, representing 70% and 30%, respectively, of our energy portfolio. If oil prices return to lower levels for an extended period, we could experience weaker energy loan demand and increased losses within our energy portfolio. Furthermore, a prolonged period of low or stagnant oil prices could have a negative impact on the economies of energy-dominant states such as Oklahoma and Texas. As a result, low oil prices could have an adverse effect on our business, financial condition and results of operation. We have the ability to adjust the borrowing base on outstanding commitments based on market price and condition.
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Economic Overview
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2016 began with signs of deteriorating economic conditions in the United States and abroad but ended with increased optimism for the U.S. economy and the second federal funds rate increase in ten years. While the U.S. economy generally showed signs of improvement throughout the year, albeit at an uneven pace, the year was defined by several key story lines including the drop in oil prices in the first quarter to the lowest level in over a decade. This added to pressures in the manufacturing sector that was already experiencing the effects of a strong U.S. dollar and the negative effect on export demand. With concerns of a global economic slowdown, Federal Reserve rate policy was a key focus for financial markets. In the first quarter of 2016, the market expectation of two Fed Funds rate increases during the year began to shift to the likelihood that there would be no rate increases in 2016.
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Another key influence on Fed policy and concerns of the resulting impact to the global economy was the July Brexit vote in the United Kingdom, where U.K. citizens voted to leave the European Union. Interest rates during this time declined with the 10-year treasury rate hitting an all-time low in mid-2016. The second half of 2016 saw increased optimism on the U.S. economy with consumer spending holding up, continued improvements in the labor market, a modest recovery in oil prices, and a calming of fears on the impact of the Brexit vote. There was also increased optimism for the U.S. economy after the U.S. presidential election and the anticipated impact of the fiscal and regulatory policies of the new administration. Equity markets ended the year with new all-time highs and interest rates were higher across the yield curve.
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In 2017, rates are expected to increase as inflation indicators continue to show signs of firming and the U.S. labor market approaches full employment. Concerns for the global economy persist from the potential impact of the Brexit vote as well as growth concerns in emerging markets that could have an impact on Fed policy, altering the consensus expectation for three Federal Funds rate hikes during the course of the year. The modest recovery in oil prices since the first quarter of 2016 could have a positive impact on the regional economy as the financial health of oil producers continues to improve, which is expected to result in increased capital budgets for some firms for the first time in several years.
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Significant Developments
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On October 9, 2015, we completed the acquisition of First Commercial Bancshares, Inc. (“Bancshares” or “FCBI”) through the merger of Bancshares with and into us (the “Bancshares Merger”). The Bancshares Merger was consummated pursuant to the Agreement and Plan of Reorganization (the “Bancshares Merger Agreement”) dated as of May 27, 2015. The Bancshares Merger expanded our presence in the Oklahoma City metro area with five additional banking centers, increasing our total to ten. It also expanded our geographic footprint to Colorado with three full-service banking centers and one loan production office in Denver. We hired a market president and two commercial bankers to lead our newly
			
		
			
		
established Denver banking efforts. 2016 was the first full year of operations of Bancshares to be included in our financial results.
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On May 25, 2016, the Board authorized our fourth stock repurchase program since August 2014. The program authorized the repurchase of up to another 5.0%, or approximately 921,000 shares, of our outstanding common stock effective February 23, 2017, which was the original expiration date of the third program. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Our ability to repurchase our common stock is limited during the time that the Merger is pending.
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On December 14, 2016, we entered into a Merger Agreement with Simmons, an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock, representing an aggregate Merger consideration of approximately $564.4 million (based on Simmons’ common stock closing price as of December 13, 2016), subject to potential adjustments.
			
		
			
		
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Results of Operations
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Net income available to common shareholders totaled $17.7 million, or $0.92 diluted per common share, in 2016 compared to $17.4 million, or $0.90 diluted per common share, in 2015 and $21.0 million, or $1.06 diluted per common share, in 2014.
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The following table presents components of consolidated net income and selected ratios for the years 2016, 2015, and 2014 and the annual changes between those years.
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Net income available to common shareholders for 2016 increased $0.3 million compared to 2015. The increase is the result of a $12.0 million increase in net interest income and a $1.6 million increase in noninterest income, offset in part by an $8.3 million increase in the provision for loan losses and a $5.0 million increase in noninterest expense due to increased personnel, occupancy, and general and administrative expenses. The increases in net interest income, noninterest income, and noninterest expense are due in part to the Bancshares acquisition that occurred in the fourth quarter of 2015. Net income for the year ended December 31, 2016, was also reduced by the restructuring charges of $0.4 million, which occurred in the third quarter of 2016, and by $0.9 million of legal and consulting fees associated with the recently announced Merger Agreement with Simmons, which was entered into in the fourth quarter of 2016.
			
		
			
		
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Net income available to common shareholders for 2015 decreased $3.6 million compared to 2014. The decrease was primarily the result of a $3.1 million decrease in the credit provision for loan losses, a $4.5 million decrease in noninterest income, which is primarily due to the pre-tax net gain of $4.4 million on the sales of community bank branches in the second quarter of 2014, and a $1.3 million increase in noninterest expense, offset in part by a $2.4 million increase in net interest income and a $2.8 million decrease in income tax. For 2015, Bancshares contributed $1.1 million of net income, which was offset by deal costs of $1.2 million, net of tax.
Details of the changes in various components of net income are further discussed below.
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Net Interest Income
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Net interest income is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue representing 83% of total revenue in 2016. Net interest margin is net interest income as a percentage of average earning assets for the period. Net interest income and net interest margin increase or decrease as a result of changes in the levels of interest rates, the volume and the mix of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets funded by noninterest-bearing funding sources.
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Changes in monetary policy by the Federal Reserve Bank include making changes in the target Federal Funds rate. These changes influence other market interest rates such as the deposit and loan rates offered by many financial institutions. The Prime Rate, which is used to set the interest rate on a significant portion of our loan portfolio, increased from 3.50% to 3.75% as a result of changes in the target Federal Funds rate in December 2016. Our loan portfolio is also affected to a lesser extent by changes in the London Interbank Offered Rate (“LIBOR”). The one-month and three-month U.S. dollar LIBOR rates, respectively, were 0.77% and 1.00% at December 31, 2016 and 0.17% and 0.26% at December 31, 2015.
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The intended federal funds rate, which is the cost of immediately available overnight funds, fluctuates in a similar manner to the prime interest rate. It had been at or below 0.25% since 2008 but was increased to 0.50% on December 17, 2015 and to 0.75% on December 15, 2016.
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Net interest income for 2016 was $79.4 million, an increase of $12.0 million, or 18%, from the $67.4 million earned in 2015. Net interest margin was 3.46% for the year ended December 31, 2016, an increase of 11 basis points from 2015. Interest income for 2016 and for 2015 includes $1.1 million and $0.6 million, respectively, of accelerated discount accretion. Net interest income for 2015 was $67.4 million, an increase of $2.4 million, or 4%, from the $65.0 million earned in 2014. Net interest margin was 3.35% for the year ended December 31, 2015, a decrease of 10 basis points from 2014. Included in interest income for 2015 was $0.3 million due to accelerated discount accretion attributable to the acquisition of Bancshares. Included in interest income for 2014 was $0.8 million due to accelerated discount accretion attributable to the sale of loans covered by loss share agreements and $0.8 million due to interest recovery on nonaccrual loans.
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Interest rate spread, which represents the difference between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities, was 3.25% for 2016, compared to 3.14% for 2015, and 3.25% for 2014.
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We have seen growth in noninterest-bearing deposit accounts, which are a core funding source together with our interest-bearing deposits and qualified other borrowings. The average balance of noninterest-bearing deposit accounts increased to $554.5 million in 2016 from $524.0 million in 2015 and $449.1 million in 2014.
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For further analysis of asset sensitivity please see tables showing the effects of changes in interest rates and changes in volume of interest related assets and liabilities on page 35 of this report and the discussion of Quantitative and Qualitative Disclosures about Market Risk on page 49 of this report.
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The following table provides information relating to our average Consolidated Statements of Financial Condition and reflects the interest income on interest-earning assets, interest expense of interest-bearing liabilities, and the average yields earned and rates paid for the periods indicated. Yields and rates are derived by dividing income or expense reflected in our Consolidated Statements of Operations by the average daily balance of the related assets or liabilities, respectively, for the periods presented. Nonaccrual loans have been included in the average balances of total loans.
			
		
			
		
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The changes in the composition of interest-earning assets and their funding sources reflect market demand and management’s efforts to maximize net interest margin while controlling interest rate, credit, and other risks.
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Consolidated Average Balances, Yields and Rates
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The following table analyzes our changes in interest income and interest expense for the periods indicated. Information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by prior period’s rate); and (ii) changes in rates (changes in rate multiplied by prior period’s volume). Changes in rate-volume (changes in rate multiplied by changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
			
		
			
		
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Effect of Volume and Rate Changes on Net Interest Income
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Provision for Loan Losses
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The provision for loan losses is the amount that, based on our judgment, is required to maintain the allowance for loan losses at an appropriate level based upon the inherent risks in the loan portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period.
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Net charge-offs were $3.3 million for the year ended December 31, 2016. Net recoveries were $1.2 million for the year ended December 31, 2015. Net charge-offs were $1.6 million for the year ended December 31, 2014. The provisions for loan losses was $4.8 million for the year ended December 31, 2016, a credit of ($3.6) million for the year ended December 31, 2015, and a credit of ($6.6) million for the year ended December 31, 2014. The provision for loan losses for 2016 was driven by the growth in the loan portfolio and the impact of low energy prices combined with deterioration in a few general business credits that occurred primarily in the first quarter of 2016. For the year ended December 31, 2016, recoveries were $3.7 million. For the years ended December 31, 2015 and December 31, 2014, recoveries were $2.6 million and $5.3 million, respectively.
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See the section captioned “Allowance for Loan Losses” on page 43 of this report for further analysis of the provision for loan losses.
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Noninterest Income
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Noninterest income was $16.1 million for 2016, an increase of $1.6 million, or 11%, from 2015. Noninterest income was $14.5 million for 2015, a decrease of $4.5 million, or 24%, when compared with 2014.
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Service charges and fees - Service charges and fees increased $0.6 million, or 6%, in 2016 as a result of increased overdraft and interchange fees. Service charges and fees decreased $0.2 million, or 2%, in 2015 as a result of decreased overdraft service charges.
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Other noninterest income - Other noninterest income includes BOLI income and interest rate swap fee income. Other noninterest income in 2016 increased due to customer risk management interest rate swaps income and income from bank owned life insurance. Other noninterest income in 2015 increased primarily from customer risk management interest rate swaps income and income from bank owned life insurance that was purchased in the second quarter of 2015.
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Gain on sale of bank branches - Gain on sale of bank branches consisted of $4.4 million recognized as the pre-tax net gain on sales of the community bank branches in the second quarter of 2014.
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Gain on sales of loans - Gain on sales of loans includes the net gains recognized from the sale of mortgage loans that are classified as held for sale. For 2016 and 2015, the increases relate to increases in mortgage lending activity during the years.
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Gain on sales/calls of investment securities - Gain on sales or calls of investment securities in 2016 increased $0.1 million due to a slight restructure of the investment portfolio during the year. Gain on sales or calls of investment securities in 2015 and 2014 was the result of the sale of a private equity investment and the gain on the sale of a stock investment that was acquired in a prior year repossession in 2014.
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Noninterest Expense
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Noninterest expense was $63.2 million for 2016, an increase of $5.0 million, or 9%, from 2015. Noninterest expense was $58.2 million for 2015, an increase of $1.3 million, or 2%, from 2014. In 2015, noninterest expense included $3.1 million of expenses related to the acquisition of Bancshares.
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Salaries and employee benefits - Salaries and employee benefits increased $2.9 million, or 8%, for 2016 from 2015 primarily due to an increase in the number of employees related to the acquisition of Bancshares and an increase in employee benefits costs and incentives, partially offset by a decrease in personnel near the end of the third quarter of 2016.
			
		
			
		
Salaries and employee benefits increased $3.0 million, or 9%, for 2015 from 2014 primarily due to an increase in the number of employees related to the acquisition of Bancshares and an increase in employee benefits costs and incentives. The number of full-time equivalent employees decreased from 412 at the beginning of 2016 to 387 as of December 31, 2016. The number of full-time equivalent employees increased from 359 at the beginning of 2015 to 412 as of December 31, 2015.
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Occupancy - Occupancy expense increased $1.7 million, or 18%, in 2016 primarily the result of rent expense due to the acquired branches from Bancshares as well as building maintenance/repairs expense. Occupancy expense increased $0.2 million, or 2%, in 2015 primarily due to building maintenance/repairs expense.
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Data processing - Data processing decreased $0.3 million, or 13%, in 2016 and increased $0.4 million, or 23%, in 2015.
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FDIC and other insurance - Bank SNB pays deposit insurance premiums to the FDIC based on assessment rates. In 2016 and 2015, the increases in FDIC and other insurance are primarily the result of increases in average total assets and increases in the assessment rates.
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Other real estate, net - The decrease of $0.4 million, or 238%, in other real estate expense for 2016 is primarily the result of gains on sales of properties, of which $0.2 million was for the sale of a bank branch condominium in the third quarter. The decrease of $0.4 million, or 73%, in other real estate expense for 2015 is primarily due to a decrease in the overall other real estate and related property taxes and other write downs. Other real estate was $0.3 million at December 31, 2016, $2.3 million at December 31, 2015, and $3.1 million at December 31, 2014.
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General and administrative - Other general and administrative expenses increased $0.7 million, or 7%, in 2016, primarily due to $0.4 million in restructuring charges incurred in the third quarter of 2016 and $0.9 million in legal and consulting fees associated with the recently announced Merger Agreement incurred in the fourth quarter of 2016, partially offset by a cost savings initiative during 2016. Other general and administrative expenses decreased $1.9 million, or 16%, in 2015 due to lower legal and consulting fees, partially offset by increased expenses due to the acquisition of Bancshares.
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Operating Segments
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We have four reportable operating segments: Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. Due to its size and management structure, Colorado Banking is included within Oklahoma Banking. These business segments were identified through the products and services that are offered within each segment and the geographic area they serve. Prior to the fourth quarter of 2015, we disclosed a Mortgage Banking segment, which included 1-4 family mortgages and the available for sale loans. For segment reporting, the Mortgage Banking segment has been combined with and into the Oklahoma Banking segment due to those loans being managed from that location. Prior period numbers have been adjusted to reflect this change. This adjustment has no financial statement impact.
The contribution of the Oklahoma Banking segment decreased $0.6 million in 2016 as a result of a $4.1 million increase in the provision for loan losses and a $7.0 million increase in noninterest expense, offset in part by an $8.6 million increase in net interest income, a $1.4 million increase in noninterest income, and a $0.4 million decrease income tax expense. The contribution of the Oklahoma Banking segment increased $1.6 million in 2015 as a result of a $3.2 million increase in net interest income, and a $1.1 million increase in noninterest income, offset in part by a $1.8 million increase in noninterest expense, a $0.4 million increase in income tax expense, and an increase of $0.5 million in the provision for loan losses.
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The contribution of the Texas Banking segment increased $0.2 million in 2016 as a result of a $1.6 million increase in the provision for loan losses and a $0.2 million decrease in noninterest income, offset in part by a $1.5 million increase in net interest income and a $0.6 million decrease in noninterest expense. The contribution of the Texas Banking segment decreased $1.2 million in 2015 as a result of a $3.0 million increase in the provision for loan losses, a $0.9 million increase in noninterest expense and a $0.1 million decrease in noninterest income, offset in part by a $2.0 million increase in net interest income, and a $0.9 million decrease in income tax expense.
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The contribution of the Kansas Banking segment decreased $1.0 million in 2016, primarily as a result of a $2.7 million increase in the provision for loan losses and a $0.3 million decrease in noninterest income, offset in part by s $0.4 million increase in net interest income, a $0.9 million decrease in noninterest expense, and a $0.6 million decrease in income tax expense. The contribution of the Kansas Banking segment decreased $0.2 million in 2015, primarily as a result of a $3.2 million decrease in net interest income, and a $0.1 million decrease in noninterest income, offset in part by a $2.5 million decrease in noninterest expense, a $0.4 million decrease in the provision for loan losses, and a $0.2 million decrease in income tax expense.
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At December 31, 2016, our twenty-one Oklahoma segment locations accounted for $1.1 billion in loans, or 58% of total portfolio loans, our five Texas segment locations accounted for $636.6 million in loans, or 34% of total portfolio loans, and our four Kansas segment locations accounted for $144.6 million in loans, or 8% of total portfolio loans.
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For 2016 and 2015, the Other Operations segment, which includes our funds management unit and corporate investments, incurred a loss of $1.7 million and $3.4 million, respectively. The value of funds provided and cost of funds borrowed from the funds management unit by the operating segments are internally priced at rates that approximate market rates for funds with similar duration.
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The Oklahoma Banking, Texas Banking, and Kansas Banking segments provide the majority of consolidated net interest income and net earnings, and for the year ended December 31, 2016 accounted for approximately $1.9 billion, or 77%, of total assets.
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The segment disclosures are based upon a number of assumptions and allocations of expense. We allocate resources and evaluate performance of our segments after allocation of funds, indirect expenses, taxes, and capital costs. Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk factors.
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Taxes on Income
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The income tax expense for 2016 totaled $9.8 million, compared to income tax expense of $9.8 million for 2015 and income tax expense for 2014 of $12.6 million. The income tax expense fluctuates in relation to pre-tax income levels. The effective tax rate for the year ended December 31, 2016 was 35.7%, compared to 36.0% for the year ended December 31, 2015 and 37.5% for the year ended December 31, 2014. Our effective tax rate differs from the statutory rates primarily due to our level of tax-exempt income offset in part by certain non-deductible expense items.
			
		
			
		
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Total Assets
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Our total assets increased by $118.4 million, or 5%, to $2.5 billion at December 31, 2016, compared to $2.4 billion at December 31, 2015, after increasing by $415.0 million, or 21%, compared to $1.9 billion at December 31, 2014. The increase in assets in 2016 was primarily attributable to the $11.9 million, or 48%, increase in cash and due from banks, $97.7 million, or 6%, increase in total loans, the $24.5 million, or 6%, increase in securities, the $0.9 million, or 3%, increase in bank owned life insurance, and the $3.0 million, or 9%, increase in other assets, offset in part by a $14.3 million, or 27%, decrease in interest-bearing deposits, a $0.6 million, or 31%, decrease in non-hedge derivative asset, and a $1.9 million, or 85%, decrease in other real estate. The increase in assets in 2015 was primarily attributable to the $379.4 million, or 27%, increase in total loans, the $46.5 million, or 13%, increase in securities, the $27.7 million, or 100%, increase in bank owned life insurance, the $12.3 million, or 1,009%, increase in goodwill, and the $5.2 million, or 28%, increase in premises and equipment, and the $2.7 million, or 68%, increase in other intangible assets, all primarily due to the acquisition of Bancshares, offset in part by a $62.8 million, or 45%, decrease in cash and cash equivalents.
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Investment Securities Portfolio
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We maintain an investment securities portfolio consisting of securities issued by U.S. Government sponsored entities, state and political subdivisions, mortgage-backed securities, asset-backed securities, and other investments. Mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. Investment securities are held in safekeeping by an independent custodian. Asset-backed securities are collateralized by student loans.
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Investment securities assigned to the available for sale portfolio are generally used to supplement our liquidity, provide a prudent yield, and provide collateral for public deposits and other borrowing facilities. Unrealized net gains and losses on available for sale securities are recorded as an adjustment to equity, net of taxes, but are not reflected in our current earnings. If management determines that any impairment in any available for sale security is “other-than-temporary,” a securities loss will be recognized as a charge to earnings. If a security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31, 2016, we held $426.2 million in securities classified as available for sale with an unrealized loss of $0.9 million, $0.6 million net of taxes, related to these securities included in shareholders’ equity.
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Investment securities assigned to the held to maturity portfolio earn a prudent yield, provide liquidity from maturities and paydowns, and provide collateral to pledge for federal, state, and local government deposits and other borrowing facilities. The held to maturity investment portfolio at December 31, 2016 included $10.4 million in fixed-rate securities. If management determines any impairment in any held to maturity security is “other-than-temporary,” a securities loss will be recognized as a charge to earnings. As of December 31, 2016, there were no other-than-temporary impairment charges.
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We had no trading securities at December 31, 2016, 2015, or 2014.
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A summary of the investment securities portfolio is as follows for the years ended December 31, 2016, 2015, and 2014.
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We do not have any material amounts of investment securities or other interest-earning assets, other than loans, that would have been classified as nonperforming if such assets were loans or which were recognized by management as potential problem assets based upon known information about possible credit problems of the borrower or issuer.
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The following table shows the maturities, carrying value (amortized cost for investment securities being held to maturity or estimated fair value for investment securities available for sale), estimated fair market values, and average yields for our investment portfolio at December 31, 2016. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed securities are based on expected maturities. Expected maturities differ from contractual maturities because borrowers of the underlying mortgages may have the right to call or prepay obligations with or without prepayment penalties. The securities of no single issuer (other than the United States or its agencies), or in the case of securities issued by state and political subdivisions, no source or group of sources of repayment, accounted for more than 10% of our shareholders’ equity at December 31, 2016.
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Note: Average yields for investments held for sale is based on amortized cost. Yields on tax-exempt securities are shown on a tax-equivalent basis.
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Loan Portfolio
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The following table presents the composition of the loan portfolio over the previous five years.
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During the second quarter of 2014, we sold three bank branches in Kansas. The sold branches had combined total loans of $27.9 million. These transactions resulted in a net gain of $4.4 million, which is included under noninterest income in the gain on sale of bank branches, net as a separate line item on the Consolidated Statements of Operations.
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We have a strategic focus on providing loans and other services to healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. At December 31, 2016 and 2015, loans to individuals and businesses in the healthcare industry totaled $423.8 million, or 23%, and $425.7 million, or 24% of loans, respectively.
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As of December 31, 2016 and 2015, included in commercial loans is approximately $48.6 million and $63.4 million in energy loans, respectively.
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The overall increase in loans in 2016 was primarily due to the organic growth in each of our markets. The increase in loans in 2015 was due to the organic growth in each of our markets along with loans acquired with the acquisition of Bancshares.
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The following table sets forth the remaining maturities for certain loan categories (including loans held for sale) at December 31, 2016. Real estate construction includes certain loans which will convert to permanent financing at the point when construction is completed; these loans are reported according to their final maturity.
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Any floating rate loans that reached a contractual floor or ceiling level are treated as fixed rate rather than floating rate until the rate is again free to float. The following table sets forth at December 31, 2016 the dollar amount of all loans due more than one year after December 31, 2016.
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Nonperforming Assets and Potential Problem Loans
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The following table shows the amounts of nonperforming assets at the end of the periods indicated. Please see “Note 1: Summary of Significant Accounting and Reporting Polices” in the Notes to the Consolidated Financial Statements for a description of our policy for placing loans on nonaccrual status. Nonperforming troubled debt restructurings are included in nonaccrual loans.
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At December 31, 2016, six credit relationships represented 77% of nonperforming loans and 74% of nonperforming assets, while at December 31, 2015, nine credit relationships represented 78% of nonperforming loans and 69% of nonperforming assets.
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Nonperforming assets may fluctuate from period to period. The performance of any individual loan can be affected by external factors such as the interest rate environment, economic conditions, collateral values, or factors particular to the borrower. No assurance can be given that additional increases in nonaccrual loans will not occur in the future.
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Performing loans considered potential problem loans, loans which are not included in the past due, nonaccrual, or restructured categories, but for which known information about possible credit problems cause management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms, amounted to approximately $44.0 million at December 31, 2016, compared to $39.2 million at December 31, 2015. Loans may be monitored by management and reported in potential problem loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. These loans are subject to continued management attention and are considered by management in determining the level of the allowance for loan losses.
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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 us but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets, the provision for loan losses, and charge-offs.
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Allowance for Loan Losses
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We make provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level we determine is appropriate. The amount of the allowance is based on careful, continuous review and evaluation of the loan portfolio and ongoing quarterly assessments of the probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and GAAP. See “Allowance for Loan Losses” in “Note 1: Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements for a description of our allowance for loan losses methodology.
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Based upon this methodology, management established an allowance of $27.5 million, or 1.47% of total portfolio loans, at December 31, 2016, compared to an allowance of $26.1 million, or 1.47% of total portfolio loans, at December 31, 2015. This represents an increase in the allowance of $1.4 million, or 5%.
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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 December 31, 2016, the allowance on the $16.3 million in nonaccrual loans was $3.7 million (13%), compared with an allowance on the $19.9 million in nonaccrual loans at December 31, 2015 of $2.5 million (13%), representing an increase in the allowance of $1.2 million. The increase in the allowance for nonaccrual loans was primarily the result of the downgrade of one commercial real estate credit. At December 31, 2016, the allowance on the $1.2 million performing troubled debt restructured loans was $0, compared with an allowance on $20.2 million in performing troubled debt restructured loans of $1.6 million at December 31, 2015, representing a decrease in the allowance of $1.6 million. The decrease in performing troubled debt restructured loan balances and the related allowance was primarily due to the payoff of one commercial real estate credit and the renewal and upgrade of a commercial real estate credit that is no longer considered a troubled debt restructured loan.
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Excluding the impaired loans mentioned above, at December 31, 2016, the allowance for the remaining other loans was $23.9 million (1.3%), compared to $22.0 million (1.2%) at December 31, 2015, creating an increase in the allowance of $1.9 million. The allowance related to the remaining other loans reflects the consideration of the increase in loan volume, portfolio loss trends and qualitative factors, including management’s assessment of economic risk, asset quality trends, levels of potential problem loans, and loan concentrations in commercial real estate mortgage and construction loans. Based on its analysis management believes the amount of the allowance is appropriate.
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At December 31, 2016, the allowance for loan losses was 165.84% of nonperforming loans, compared to 128.23% of nonperforming loans at December 31, 2015. Nonaccrual loans, which comprise the majority of nonperforming loans, were $16.3 million as of December 31, 2016, a decrease of $3.6 million, or 18%, from December 31, 2015. Nonaccrual loans at December 31, 2016 were comprised of 44 relationships and were primarily concentrated in commercial loans (37%), commercial real estate loans (40%), and one-to-four family residential (17%) loans. All nonaccrual loans are considered impaired and are carried at their estimated collectible amounts.
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The following table presents a five-year history of the allocation of the allowance for loan losses along with the percentage of total loans in each category.
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The following table analyzes our allowance for loan losses for the periods indicated.
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Short-term Borrowings
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Our primary source of short-term borrowings is Federal Home Loan Bank (“FHLB”) advances. For additional information regarding our short-term and other borrowings, please see “Note 10: Borrowed Funds” in the Notes to the Consolidated Financial Statements.
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Off-Balance Sheet Arrangements and Contractual Obligations
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In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with GAAP, the full notional amounts of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit and are discussed further in “Note 19: Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contractual Obligations” in the Notes to the Consolidated Financial Statements.
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We have various contractual obligations that require future cash payment. The following table presents, as of December 31, 2016, significant fixed and determinable contractual obligations to third parties by payment date. At December 31, 2016, the notional or principal amount of such obligations are reflected on the Consolidated Statements of Financial Condition, with the exception of operating leases.
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(1) Excludes Interest.
(2) Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2016. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.
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For additional information regarding contractual obligations, please see “Quantitative and Qualitative Disclosures about Market Risk” on page 49 and in the Notes to the Consolidated Financial Statements in this report, “Note 6: Premises and Equipment,” “Note 9: Deposits,” “Note 10: Borrowed Funds,” “Note 11: Trust Preferred Securities and Subordinated Debentures,” and “Note 19: Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies.”
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Capital Resources
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At December 31, 2016, total shareholders’ equity was $286.6 million, compared to $296.1 million at December 31, 2015, a decrease of $9.5 million. The decrease was primarily due to the $22.7 million of treasury stock purchases and $6.0 million in common stock dividends paid, offset in part by an increase in net common stock issued under employee plans and related tax expense of $1.2 million, an increase of $0.4 million in other comprehensive income, net of tax, and net income of $17.7 million. Net unrealized losses on available for sale investment securities and derivative instruments (net of tax) decreased to ($0.9) million at December 31, 2016, from $(1.3) million at December 31, 2015.
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At December 31, 2015, total shareholders’ equity was $296.1 million, compared to $270.8 million at December 31, 2014, an increase of $25.3 million. The increase was primarily due to the $21.4 million of new stock issued related to the acquisition of Bancshares and $17.4 million of income, offset in part by a decrease in other comprehensive income (loss) of ($0.9) million, offset in part by $8.6 million in treasury stock purchases for the year and $4.6 million in common stock dividends paid. Net unrealized losses on available for sale investment securities and derivative instruments (net of tax) increased to ($1.3) million at December 31, 2015, from $(0.4) million at December 31, 2014.
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On August 14, 2014, the Board authorized the repurchase of up to 5%, or 990,000 shares, of our common stock, pursuant to a share repurchase program which expired on August 14, 2015. On February 24, 2015, the Board authorized a second consecutive share repurchase program of up to 5.0%, or 950,000 shares, of our common stock, which became effective upon the expiration of the first program on August 14, 2015. On February 23, 2016, the Board authorized a third share repurchase program which became effective on March 11, 2016, authorizing the repurchase of up to another 5.0%, or approximately 960,000 shares, of our common stock. On May 26, 2016, the Board authorized a fourth share repurchase program, authorizing the repurchase of up to another 5%, or approximately 921,000 shares, of our common stock effective February 23, 2017, which was the original expiration date of the third stock repurchase program. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Our ability to repurchase our common stock is limited during the time that the Merger is pending.
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Bank holding companies are required to maintain capital ratios in accordance with guidelines adopted by the Federal Reserve Board. The guidelines are commonly known as Risk-Based Capital Guidelines. On December 31, 2016, we exceeded all applicable capital requirements, having a total risk-based capital ratio of 15.66%, a Tier 1 risk-based capital ratio of 14.40%, a Tier 1 leverage ratio of 13.02%, and a CET1 risk-based capital ratio of 12.36%. Banking subsidiaries are also required to maintain capital ratios in accordance with guidelines adopted by their primary regulators. The general regulatory minimums to be well-capitalized are a total capital to risk weighted assets ratio of 10.00%, a Tier I risk-based
			
		
			
		
capital ratio of 8.00%, CET1 risk-based capital ratio of 6.5%, and a Tier 1 leverage ratio of 5.00%. As of December 31, 2016, we and Bank SNB each met the criteria for classification as a “well-capitalized” institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of us or Bank SNB by Federal bank regulators. See “Dividend Restrictions” on page 47 of this report.
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Liquidity
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Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of highly marketable assets, such as available for sale investments, in order to meet current and future cash flow needs as they become due. Additional sources of liquidity, including cash flow from the repayment of loans and maturities of investment securities, are also considered in determining whether liquidity is satisfactory. Other sources of liquidity can be provided by the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank (“FRB”), and correspondent lines of credit. Liquidity is also achieved through growth of deposits and liquid assets and accessibility to the capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, purchase securities, and operate the organization.
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In order to diversify our funding sources, we may from time-to-time post deposit rates via a non-brokered direct deposit listing service. These deposits are generally institutional in nature and accounts generally do not exceed the FDIC insurance threshold of $250,000.
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The following table indicates the amount of certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2016:
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The amount of certificates of deposits of $100,000 and more that matures within 12 months is $272.6 million.
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The following table illustrates, during the years presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $2.4 billion in 2016, $2.1 billion in 2015, and $1.9 billion in 2014.
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Sources and uses of cash are presented in the Consolidated Statements of Cash Flows on page 56 of this report. Total cash and cash equivalents decreased by $2.4 million to $75.7 million in 2016 from $78.1 million at year-end 2015. This decrease was the net result of cash used in investing activities of $131.5 million, primarily from purchases of available for sale securities and loans originated, net of principal payments, offset by cash provided by operating activities of $27.0 million and cash provided by financing activities of $102.0 million, primarily from increased deposits and other borrowings.
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Total cash and cash equivalents decreased by $62.8 million to $78.1 million in 2015 from $140.9 million at year-end 2014. This decrease was the net result of cash used in investing activities of $194.4 million, primarily from purchases of available for sale securities and bank owned life insurance and loans originated, net of principal payments, offset by cash provided by operating activities of $14.9 million and cash provided by financing activities of $116.7 million, primarily from increased deposits and other borrowings.
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Effects of Inflation
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The consolidated financial statements and related consolidated financial data in this report have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry that require the measurement of financial position and operating results in terms of historical dollars without considering fluctuations in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
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Dividend Restrictions
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Bank SNB is subject to legal and regulatory limitations on the amount of dividends that it may pay without prior approval of the Oklahoma State Banking Department and the Federal Reserve. Under these regulations, the total amount of dividends that may be paid in any calendar year by Bank SNB to us without Oklahoma State Banking Department approval is limited to the current year’s net profits, combined with the retained net profits of the preceding two years.
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Critical Accounting Policies
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Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information that is subject to change. Certain policies inherently rely more on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management is required to use estimates, assumptions, and judgments when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available.
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The most significant accounting policies we follow are presented in “Note 1 Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management has identified the allowance for loan losses, goodwill and other intangible assets, and income tax accounting policies to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revisions as new information becomes available.
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Allowance for Loan Losses - The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310.10.35, Receivables: Subsequent
			
		
			
		
Measurement, which requires that losses be accrued when it is probable that we will not collect all principal and interest payments according to the loan’s contractual terms.
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The allowance determination process requires significant judgment. Estimates of probable losses inherent in the loan portfolio can vary significantly from the amounts that actually occur. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, which may be the result of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the loan portfolio and the allowance. These reviews may result in additional provisions based on the agencies’ judgments based upon information available at the time of each examination. Because the loan portfolio contains a significant number of commercial mortgage and commercial real estate construction loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in the provision for loan losses and nonperforming assets, and may lead to material increases in charge-offs and the provision for loan losses in future periods.
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Our methodology for assessing the appropriateness of the allowance is in accordance with regulatory guidelines and GAAP, as described in “Provision for Loan Losses” on page 35 and in “Note 1: Summary of Significant Accounting and Reporting Policies” in the Notes to the Consolidated Financial Statements.
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Goodwill and Other Intangible Assets - Goodwill and other intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate impairment. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of our reporting units compared with its carrying value. We define reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As of December 31, 2016, we have eight reporting units. If the carrying value exceeds the fair value of a reporting unit, a second test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment.
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Other identifiable intangible assets are amortized on an accelerated basis over the years expected to be benefited, which we believe are up to ten years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their carrying value may not be recoverable based on a comparison to fair value. See “Note 7: Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements for further information.
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Income Taxes - Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to the income tax laws of the United States and various state jurisdictions. These tax laws are complex and require significant judgment and interpretation by the taxpayer.
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We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet. A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. The determination of the realizability of deferred taxes is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence.
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Income tax expense or benefit is estimated based on amounts expected to be owed to the various tax jurisdictions in which we conduct business. On a quarterly basis, management assesses the reasonableness of our effective tax rate based upon the current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. The tax expense or benefit is allocated among continuing operations and other comprehensive income (loss), as applicable. See “Note 13: Taxes on Income” in the Notes to the Consolidated Financial Statements for further information.
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Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
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Our income is largely dependent on our net interest income. We seek to maximize our 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.
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We attempt to manage interest rate risk while enhancing net interest margin by adjusting our 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, we may increase our interest rate risk position in order to increase our net interest margin. We monitor interest rate risk and adjust the composition of our rate-sensitive assets and liabilities in order to limit our exposure to changes in interest rates on net interest income over time. Our asset/liability committee reviews our interest rate risk position and profitability and recommends adjustments. Our asset/liability committee also reviews the securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions. Notwithstanding our 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.
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Interest rate sensitivity analysis measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods.
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The following table shows our interest rate sensitivity gaps for selected maturity or repricing periods at December 31, 2016:
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(1) The SBI Capital Trust II preferred securities have an associated interest rate swap contract in the amount of $25 million with a fixed interest rate of 6.15%. The swap is a hedging instrument that in essence establishes a fixed interest rate until the contract expires on April 7, 2018. Please see “Note 12: Derivative Instruments” in the Notes to the Consolidated Financial Statements.
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The percentage of rate-sensitive assets to rate-sensitive liabilities presents a static position as of a single day, is not necessarily indicative of our position at any other point in time, and does not take into account the sensitivity of yields and costs of specific assets and liabilities to changes in market rates. The foregoing analysis assumes that our mortgage-backed securities mature during the period in which they are estimated to be prepaid. No other prepayment or repricing assumptions have been applied to our interest-earning assets for this analysis.
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A principal objective of our asset/liability management effort is to balance the various factors that generate interest rate risk, thereby maintaining our interest rate sensitivity within acceptable risk levels. To measure our interest rate sensitivity position, we utilize 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.
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The earnings simulation model uses numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net income. Actual results differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions, cash flows, and management strategies, among other factors.
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The balance sheet is subject to quarterly testing for six alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, and 300 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in a current rate environment. The down rate scenarios are considered impractical in the current environment and have thus been excluded from the tables below. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at various interest rate shock levels.
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Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s 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.
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Estimated Change in Net Interest Income
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When compared to December 31, 2015, net interest income improved in each of the three interest rate scenarios. The measured changes in net interest income for all scenarios are in compliance with the established policy limits.
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The measures of equity value at risk indicate the ongoing economic value of equity considering the effects of interest rate changes on 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 our net assets.
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Estimated Change in Economic Value of Equity (EVE)
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As of December 31, 2016, the economic value of equity measure increased in one of the three interest rate scenarios when compared to December 31, 2015. The measured changes in economic value of equity for all scenarios are in compliance with the established policy limits.
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Item 8.
Item 8. Financial Statements and Supplementary Data
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Report of Independent Registered Public Accounting Firm
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Audit Committee, Board of Directors and Shareholders
Southwest Bancorp, Inc.
Stillwater, Oklahoma
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We have audited the accompanying consolidated statements of financial condition of Southwest Bancorp, Inc. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Southwest Bancorp, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of PCAOB, the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013 edition), issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2017, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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/s/ BKD LLP
Oklahoma City, Oklahoma
March 9, 2017
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Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
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The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited the accompanying Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity, and Cash Flows of Southwest Bancorp, Inc. (the Company) for the year ended December 31, 2014. These statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these statements based on our audits.
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We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
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In our opinion, the statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Southwest Bancorp, Inc. for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
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/s/ Ernst & Young, LLP
Tulsa, Oklahoma
March 10, 2015
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SOUTHWEST BANCORP, INC.
Consolidated Statements of Financial Condition
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SOUTHWEST BANCORP, INC.
Consolidated Statements of Operations
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SOUTHWEST BANCORP, INC.
Consolidated Statements of Comprehensive Income
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SOUTHWEST BANCORP, INC.
Consolidated Statements of Cash Flows
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SOUTHWEST BANCORP, INC.
Consolidated Statements of Shareholders’ Equity
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The accompanying notes are an integral part of these statements.
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SOUTHWEST BANCORP, INC.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2016, 2015 and 2014
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Note 1: Summary of Significant Accounting and Reporting Policies
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Organization and Nature of Operations - Southwest Bancorp Inc. (“we”, “our”, “us”, or “Southwest”), incorporated in 1981, is a financial holding company headquartered in Stillwater, Oklahoma engaged primarily in commercial and retail financial services in the states of Oklahoma, Texas, Kansas, and Colorado. The accompanying consolidated financial statements include the accounts of Bank SNB, an Oklahoma banking corporation established in 1894, and the consolidated subsidiaries of Bank SNB. Bank SNB is a wholly owned, direct subsidiary of ours. All significant intercompany balances and transactions have been eliminated in consolidation.
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On October 9, 2015, we completed the acquisition of Bancshares through the merger of Bancshares with and into us. The Bancshares Merger was consummated pursuant to the Bancshares Merger Agreement dated as of May 27, 2015. The Bancshares Merger expanded our presence in the Oklahoma City metro area with five additional banking centers, increasing our total to ten. It also expanded our geographic footprint to Colorado with three full-service banking centers and one loan production office in Denver.
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Basis of Presentation - The accounting and reporting policies conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. The Consolidated Financial Statements include the accounts of Southwest and all other entities in which we have a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
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Certain reclassifications have been made to prior year amounts on the Consolidated Statements of Operations to conform to current year presentation.
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We have evaluated subsequent events for potential recognition and disclosure through the issue date of the Consolidated Financial Statements included in this Annual Report on Form 10-K.
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Management Estimates - In preparing our financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates shown on the Consolidated Statements of Financial Condition and revenues and expenses during the periods reported. Actual results could differ significantly from those estimates. Changes in economic conditions could affect the determination of material estimates such as the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, income taxes, and the fair value of financial instruments.
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Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions, and federal funds sold. Interest-bearing balances held at depository institutions were $38.8 million at December 31, 2016 and $53.2 million at December 31, 2015. Federal funds sold are sold for one-to-four day periods.
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Cash paid for interest totaled $9.7 million in 2016, $7.0 million in 2015, and $6.9 million in 2014. Cash paid for income taxes totaled $9.4 million in 2016, $7.1 million in 2015, and $4.0 million in 2014. Noncash transactions included stock issued for the acquisition of Bancshares of $21.4 million in 2015 and transfer of loans to other real estate totaling $0.5 million in 2016 and $0.3 million in 2015 and $2.2 million in 2014.
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Bank SNB is required by the FRB to maintain average reserve balances. Cash and cash equivalents in the Consolidated Statements of Financial Condition include restricted amounts of $1.0 million and $7.0 million at December 31, 2016 and December 31, 2015, respectively.
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Investment Securities - Investments in debt and equity securities are identified as held to maturity or available for sale based on management considerations of asset/liability strategy, changes in interest rates and prepayment risk, the need to increase liquidity, and other factors, including management’s intent and ability to hold securities to maturity. We have the ability and intent to hold to maturity our investment securities classified as held to maturity. We had no investments held
			
		
			
		
for trading purposes for any period presented. Under certain circumstances (including the deterioration of the issuer’s creditworthiness, a change in tax law, or statutory or regulatory requirements), we may change the investment security classification. The classifications we utilize determine the related accounting treatment for each category of investments. Available for sale securities are accounted for at fair value with unrealized gains or losses, net of taxes, excluded from operations and reported as accumulated other comprehensive income or loss. Held to maturity securities are accounted for at amortized cost. Securities with limited marketability, such as FRB stock, FHLB stock, and certain other investments, are carried at cost and included in other assets.
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All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to operations over the contractual maturity or estimated life of the individual investment using the level yield method. Gain or loss on sale of investments is based upon the specific identification method. Income earned on our investments in state and political subdivisions generally is not subject to ordinary Federal income tax.
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In accordance with authoritative accounting guidance under ASC 320, Debt and Equity Securities, declines in fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. Under this guidance, we evaluate investment securities for other-than-temporary impairment on at least a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.
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Federal Reserve Bank and Federal Home Loan Bank Stock - Bank SNB is a member of its regional FRB and FHLB system. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional accounts. Both FRB and FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans - Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Loan origination fees and certain costs of originated loans are amortized as an adjustment to the yield over the term of the loan. Net unamortized deferred loan fees were $2.5 million at December 31, 2016 and $1.5 million at 2015. Loans are reported at the principal balance outstanding net of the unamortized deferred loan fees.
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In general, our policy for nonaccrual loans requires that accrued interest income on nonaccrual loans is written off after the loan is 90 days past due, and that subsequent interest income is recorded when cash receipts are received from the borrower. We identify past due loans based on contractual terms on a loan by loan basis.
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A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The allowance for loan losses related to loans that are evaluated for impairment is based either on the discounted cash flows using the loan’s initial effective interest rate or on the fair value of the collateral for certain collateral dependent loans. Smaller balance, homogeneous loans, including mortgage, and consumer, are collectively evaluated for impairment. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
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Loans Held for Sale -- We originate real estate mortgage loans for either portfolio investment or sale in the secondary market. During the period of origination, real estate mortgage loans are designated as held either for investment purposes or sale. Mortgage loans held for sale are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan.
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Loans Acquired through Business Combination with Deteriorated Credit Quality - The accounting guidance of ASC 310.30, Loan and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a business combination that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that we will be unable to collect all contractually required payment receivables. In accordance with this guidance, these loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield”, is recognized as interest income over the life of the loan using a method
			
		
			
		
that approximates the level-yield method. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference”, are not recognized as a yield adjustment, a loss accrual, or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
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Allowance for Loan Losses - The allowance for loan losses is a reserve established through a provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components, specific and general. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
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The specific component relates to loans that are individually classified as impaired. Loans deemed to be impaired are evaluated on an individual basis consistent with ASC 310.10.35, Receivables: Subsequent Measurement. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of the collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated value of the collateral. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and deemed as impaired, and classified as nonperforming, potential problem, or performing restructured as applicable. Charge-offs against the allowance for impaired loans are made when and to the extent the loan is deemed uncollectible.
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The general component of the allowance is calculated based on ASC 450, Contingencies. Loans not evaluated for specific allowance are segmented into loan pools by type of loan. The commercial real estate and real estate construction pools are further segmented by the market in which the loan collateral is located. Our primary markets are Oklahoma, Texas, Kansas, and Colorado, and loans secured by real estate in those states are included in the “in-market” pool, with the remaining defaulting to the “out-of-market” pool. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us. The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations.
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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. We are 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.
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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 but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods.
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Liability for Credit Losses on Unfunded Loan Commitments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
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The reserve for unfunded loan commitments is a liability on our Consolidated Statements of Financial Condition in other liabilities. The reserve is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. At December 31, 2016 and 2015, the balances were $2.5 million and $2.4 million, respectively.
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Premises and Equipment - Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful life of each asset. Useful lives range from 10 years to 40 years for buildings and improvements, and 3 years to 10 years for furniture, fixtures, and equipment. We review the carrying value of long-lived assets used in operations when changes in events or circumstances indicate that the assets might have become impaired. If circumstances required, the review would initially include a comparison of carrying value to the undiscounted cash flows estimated to be generated by those assets. If this review indicates that an asset is impaired, we would record a charge to operations to reduce the asset’s carrying value to fair value, which is based on estimated discounted cash flows. Long-lived assets that are held for disposal are valued at the lower of the carrying amount or fair value less costs to sell.
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Other Real Estate - Assets acquired through or instead of loan foreclosure are considered other real estate. Other real estate is initially recorded at the lesser of the carrying value or fair value less the estimated costs to sell the asset. Write-downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, and costs related to holding the property are expensed. Foreclosed property is subject to periodic revaluation based upon estimates of fair value. In determining the valuation of other real estate, management obtains independent appraisals for significant properties. Valuation adjustments are provided, as necessary, by charges to operations. Profits and losses from operations or sales of foreclosed property are recognized as incurred. At December 31, 2016 and 2015, the balances of other real estate were $0.4 million and $2.3 million, respectively.
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Goodwill and Other Intangible Assets - Intangible assets consist of goodwill, core deposit intangibles, and loan servicing rights. Goodwill and core deposit intangibles, which generally result from a business combination, are accounted for under the provisions of ASC 350, Intangibles - Goodwill and Other, and ASC 805, Business Combinations. Loan servicing rights are accounted for under the provisions of ASC 860, Transfers and Servicing.
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Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired and is assigned to reporting units. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if conditions indicate impairment may exist. The evaluation of possible impairment involves significant judgment based upon short-term and long-term projections of future performance of each reporting unit.
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Core deposit intangibles are amortized using an economic life method based on deposit attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The net book value of core deposit intangibles is adjusted for applicable branch sales, if any, and is evaluated for impairment when economic conditions indicate impairment may exist.
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When real estate mortgage loans and other loans are sold with servicing retained, an intangible servicing right is initially capitalized based on estimated fair value at the point of origination with the income statement effect recorded in gains on sales of loans. The servicing rights are amortized over the period of estimated net servicing income. Impairment of loan servicing rights is assessed based on the fair value of those rights. We review the carrying value of loan servicing rights quarterly for impairment. At least annually, we obtain estimates of fair value from outside sources to corroborate the results of the valuation model. At December 31, 2016 and 2015, the fair values of loan servicing rights were $4.2 million and $3.7 million, respectively.
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Fair Value Measurements - ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
			
		
			
		
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Derivative Financial Instruments - Our derivative credit risk policy and our hedging policy permits the use of various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. All derivatives are recorded at fair value on our balance sheet.
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To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. We consider a hedge to be highly effective if the change in fair value of the derivative hedging instrument is within 80% to 125% of the opposite change in the fair value of the hedged item attributable to the hedged risk. If derivative instruments are designated as hedges of fair values, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, we will formally assess whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, we will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value.
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Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us. If we enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates. The counterparty contracts are identical to customer contracts in terms of notional amounts, interest rates, and maturity dates, except for a fixed pricing spread or fee paid to us by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of such derivative instruments are recognized as either non-hedge derivative assets or liabilities in the Consolidated Statements of Financial Condition.
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Loan Servicing Income - We earn fees for servicing real estate mortgages and other loans owned by others. These fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned.
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Taxes on Income - We file consolidated income tax returns with our subsidiaries. Income tax expense is the total of the current year income tax due or refundable, adjusted for permanent differences between items reported in the financial statements and those reported for tax purposes and the change in deferred tax assets and liabilities. Under the asset and liability method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The net deferred tax asset is reflected as a component of other assets on the Consolidated Statements of Financial Condition.
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A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. Management reviewed all evidence and concluded that a valuation allowance was not needed.
Earnings per Common Share - ASC 260, Earnings Per Share, provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. We have determined that our unvested restricted stock awards are participating securities. Accordingly, earnings per common share is computed using the two-class method prescribed by ASC 260. Using this method, basic earnings per common share is computed based upon net income available to common shareholders divided by the weighted average number of common shares outstanding during each period, which exclude the outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of restricted stock awards using the treasury stock method. Restricted stock awards, 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 anti-dilutive. At December 31, 2016 and 2015, there were 6,573 and 38,145 anti-dilutive restricted stock awards outstanding, respectively.
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A reconciliation of the weighted-average common shares used in the calculations of basic and diluted earnings per common share for the reported periods is provided at “Note 15: Earnings per Common Share” on page 86.
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Share-Based Compensation - The Southwest Bancorp, Inc. 2008 Stock Based Award Plan (the “2008 Stock Plan”), provides selected key employees with the opportunity to acquire common stock through stock options or restricted stock awards. Compensation cost is recognized based on the fair value of these awards at the date of grant. The exercise price of all options granted under the 2008 Stock Plan is the fair market value on the grant date, while the market price of our common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Depending upon terms of the stock option agreements, stock options generally become exercisable on an annual basis and expire from five to ten years after the date of grant.
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The 2008 Stock Plan authorized awards for up to 800,000 shares of our common stock over its ten-year term.
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Comprehensive Income - Our comprehensive income (net income plus all other changes in shareholders’ equity from non-equity sources) consists of our net income, the after tax effect of changes in the net unrealized gains (losses) in our available for sale securities, reclassification adjustments for net (gains) losses, and changes in the accumulated gain (loss) on the effective cash flow hedging instrument.
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Simmons First National Corporation (Pending Merger) - On December 14, 2016, we entered into a Merger Agreement with Simmons, an Arkansas corporation, pursuant to which, and subject to its terms and conditions, Simmons will acquire all of our outstanding capital stock for $95.0 million in cash and 7,250,000 shares of Simmons’s common stock, representing an aggregate Merger consideration of approximately $564.4 million (based on Simmons’ common stock closing price as of December 13, 2016), subject to potential adjustments.
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Simmons conducts banking operations through 150 financial centers located in communities throughout Arkansas, Kansas, Missouri and Tennessee. As of December 31, 2016, Simmons had $8.4 billion in total assets, $5.6 billion in loans and $6.7 billion in deposits. The completion of the Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions.
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Note 2: Acquisitions
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On October 9, 2015, we completed the acquisition of Bancshares, through the merger of Bancshares with and into us. The Bancshares Merger was consummated pursuant to the Bancshares Merger Agreement dated as of May 27, 2015. The Bancshares Merger expanded our presence in the Oklahoma City metro area with five additional banking centers, increasing our total to ten. It also expanded our geographic footprint to Colorado with three full-service banking centers and one loan production office in Denver.
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Under the terms of the Bancshares Merger Agreement, at the effective time of the Bancshares Merger, all outstanding shares of Bancshares common stock were converted into the right to receive an aggregate merger consideration of $41.8 million, 51% paid in shares of our common stock, representing an aggregate 1,213,985 shares of our common stock, plus cash in lieu of any fractional shares, and 49% paid in cash in an aggregate amount equal to $20.4 million.
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The Bancshares Merger added $301.5 million in assets, $202.4 million in loans, $245.2 million in deposits, $12.3 million in goodwill, and $2.7 million in core deposit intangible.
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In connection with the Bancshares Merger, First Commercial Bank was merged with and into Bank SNB, with Bank SNB the surviving bank, and all systems, products, and services were successfully integrated to our platform.
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The following is a reconciliation of cash received from the acquisition of Bancshares as of the acquisition date:
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The acquisition of the net assets of Bancshares constitutes a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The following schedule is a breakdown of the assets acquired and liabilities assumed as of the acquisition date:
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The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:
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Cash and due from banks, interest-bearing deposits with other banks and federal funds sold- The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
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Investment securities - Investment securities were acquired from Bancshares with a $0.2 million adjustment to market value based upon quoted market prices or other observable inputs.
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Loans - Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.
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We evaluated $200.0 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, and those loans were recorded with a $4.5 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $7.8 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $3.3 million discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.
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Bank premises and equipment - Bank buildings and land were acquired with an adjustment to fair value. Other bank premises and equipment were acquired at the carrying amount of the assets.
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Cash value of life insurance - Cash value of life insurance was acquired at market value.
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Accrued interest receivable - Accrued interest receivable was acquired at market value.
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Deferred tax asset - The current and deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at our estimated federal income tax rate of 36.00%.
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Goodwill - The consideration paid as a result of the acquisition exceeded the fair value of the net assets acquired; therefore, the Company recorded $12.3 million of goodwill. Goodwill established prior to the acquisition was written off.
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Core deposit intangible - This intangible asset represents the value of the relationships that Bancshares had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $2.7 million of gross core deposit intangible.
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Other assets - Other assets were acquired at carrying value, which approximates market value.
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Deposits - The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. No fair value adjustment was applied for time deposits because the weighted average interest rate of Bancshare’s certificates of deposits were at the market rates for similar funding at the time of acquisition
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Other borrowings - The fair value of other borrowings is estimated based on borrowing rates currently available to us for borrowings with similar terms and maturities.
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Accrued interest payable and other liabilities - The fair value used represents the adjustment of certain estimated liabilities from Bancshares.
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Subordinated debentures - Subordinated debentures were acquired at carrying value, which approximates market value.
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The following unaudited pro forma condensed financial information presents our results of operations, including the effects of the purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of the period presented:
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(1) Subsequent to the Bancshares Merger date, activity related to Bancshares contributed pre-tax revenues of $2.9 million and incurred pre-tax expenses of $1.2 million, resulting in $1.1 million total contribution to our net income. We incurred pre-tax non-recurring expenses totaling $1.9 million, including: $0.5 million in personnel related expenses, $0.4 million in data processing expenses, $0.5 million in legal, accounting and investment banker expenses, and $0.5 million in marketing and other expenses.
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(2) The 2015 pro forma non-interest expense is adjusted to exclude $2.5 million of pre-tax non-recurring expenses incurred by Bancshares prior to the Bancshares Merger date attributed to the following: $0.7 million in employee related expenses, $0.4 million in legal expenses, and $1.4 million to discount a loan pursuant to a provision of the Bancshares Merger Agreement.
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Acquired Loans. Changes in the carrying amounts and accretable yields for all ASC 310.30 loans were as follows for the year ended December 31, 2016 and 2015.
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Note 3: Disposals
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During the second quarter of 2014, we sold a banking center in Overland Park, Kansas, to Fidelity Bank in Wichita, Kansas, and banking centers in Anthony and Harper, Kansas, to BancCentral, National Association, in Alva, Oklahoma. The sold banking centers had combined total deposits of $130.6 million and loans of $27.9 million.
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These transactions resulted in a net gain of $4.4 million, which is included under noninterest income in the gain on sale of bank branches, net as a separate line item on the Consolidated Statements of Operations.
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During 2016, we closed a banking center in Colorado Springs, Colorado, a banking center in Fort Worth, Texas, and a banking center in Frisco, Texas. We incurred $0.4 million in restructuring charges due to the banking center closures.
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Note 4: Investment Securities
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A summary of the amortized cost and fair values of investment securities follows:
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Residential mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.
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Securities with limited marketability, such as FRB stock, FHLB stock, and certain other investments, are carried at cost and included in other assets on our Consolidated Statements of Financial Condition. Total investments carried at cost were $14.6 million and $10.4 million at December 31, 2016 and 2015, respectively. There are no identified events or changes in circumstances that may have a significant adverse effect on the investments carried at cost.
			
		
			
		
A comparison of the amortized cost and approximate fair value of our investment securities by maturity date at December 31, 2016 follows:
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The foregoing analysis assumes that our residential mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to our investment securities for this analysis.
Gain or loss on sale of investments is based upon the specific identification method. Sales of securities available for sale are as follows:
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The following table shows securities with gross unrealized losses and their fair values by the length of time that the individual securities had been in a continuous unrealized loss position at December 31, 2016 and 2015. Securities whose market values exceed cost are excluded from this table.
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We evaluate 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 us to retain our investment in the issuer for a period of time sufficient to allow for an 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 we expect to receive full value for the securities. Furthermore, as of December 31, 2016, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that we will most likely not have to sell any such securities before a recovery of cost. The declines in fair value were attributable to increases in market interest rates over the yields available at the time the underlying securities were purchased or increases in spreads over market interest rates. Management does not believe any of the securities are impaired due to credit quality. Accordingly, as of December 31, 2016, management believes the impairment of these investments is not deemed to be other-than-temporary.
As required by law, available for sale investment securities are pledged to secure public and trust deposits, sweep agreements, borrowings from the FHLB, and for other applicable purposes. Securities with an amortized cost of $199.0 million and $174.0 million were pledged to meet such requirements at December 31, 2016 and 2015, respectively. Any amount over-pledged can be released at any time.
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Note 5: Loans and Allowance for Loan Losses
We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, Kansas, and Colorado. Our commercial lending operations are concentrated in Oklahoma City, Dallas, Tulsa, and other metropolitan markets in Texas, Kansas, Oklahoma, and Colorado. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see “Note 20: Operating Segments” for more detail regarding loans by market. At December 31, 2016 and 2015, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.
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Our loan classifications were as follows:
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Concentrations of Credit. At December 31, 2016, $608.6 million, or 32%, and $423.8 million, or 23%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industries, respectively. We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.
Loans Held for Sale. We had loans which were held for sale of $4.4 million and $7.5 million at December 31, 2016 and 2015, respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of the one-to-four family residential loans and loan servicing rights, if not retained, are primarily sold to one investor. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan.
			
		
			
		
Loan Servicing. We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $460.1 million and $432.3 million at December 31, 2016 and 2015, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.
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Nonperforming / Past Due Loans. The following table shows the recorded investment in loans on nonaccrual status.
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If interest on nonaccrual loans had been accrued, the interest income as reported in the accompanying Consolidated Statements of Operations would have increased by approximately $1.0 million, $0.8 million, and $0.7 million, for 2016, 2015, and 2014, respectively.
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Net cumulative charge-offs against nonaccrual loans at December 31, 2016 and 2015 were $3.3 million and $6.1 million, respectively.
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The following table shows the delinquency status of past due loans at the end of the respective reporting period.
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Impaired Loans. The following table presents loans individually evaluated for impairment by class of loans at the end of the respective reporting period.
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The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2016, 2015, and 2014.
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Included in interest income recognized on impaired loans are $0.9 million, $1.2 million, and $1.0 million, for December 31, 2016, 2015, and 2014, respectively.
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Troubled Debt Restructurings. The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months.
When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.
			
		
			
		
Troubled debt restructured loans outstanding as of December 31, 2016 and 2015 are as follows:
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At December 31, 2016 and 2015, we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring.
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Loans modified as troubled debt restructurings that occurred during the year ended December 31, 2016 and 2015 are shown in the following tables:
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The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.
As of December 31, 2016 and 2015, there were no loans modified as a troubled debt restructuring which subsequently defaulted. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.
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Credit Quality Indicators. To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings:
Special mention - Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans are considered nonperforming.
			
		
			
		
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Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of December 31, 2016 and 2015, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows:
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Allowance for Loan Losses. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method as of December 31, 2016, 2015 and 2014.
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Note 6: Premises and Equipment
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Year-end premises and equipment were as follows:
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Depreciation of premises and equipment totaled $2.8 million in 2016, $2.5 million in 2015, and $2.8 million in 2014.
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We lease certain equipment and premises for our operations. Future minimum annual rental payments required under operating leases, net of sublease agreements, that have initial or remaining lease terms in excess of one year as of December 31, 2016 were as follows:
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The total rental expense was $3.6 million, $2.9 million, and $2.4 million in 2016, 2015, and 2014, respectively.
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Note 7: Goodwill and Other Intangible Assets
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We have recorded goodwill and other identifiable intangible assets associated with purchase business combinations. Goodwill is not amortized, but is periodically evaluated for impairment. We perform an annual goodwill impairment test each year and assess qualitative factors on a quarterly basis that would indicate events or circumstances that an impairment might have taken place.
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At December 31, 2016 and 2015, goodwill totaled $13.5 million, of which $12.5 million of goodwill is reported in the Oklahoma Banking segment and $1.0 million is reported in the Texas Banking segment. In 2015, $12.3 million of goodwill was recorded as a result of the acquisition of Bancshares. Further information regarding operating segments can be found in “Note 20 Operating Segments”.
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Based on our annual goodwill impairment test through December 31, 2016, management does not believe any of its goodwill is impaired as of December 31, 2016. We did not recognize an impairment during the years ended December 31, 2016, 2015 and 2014.
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The following table presents the gross carrying amount of other intangible assets and accumulated amortization.
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Core deposit intangibles are amortized using an economic life method based on deposit attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The weighted average amortization period for core deposit intangibles is approximately 10 years. Amortization expense related to core deposit intangibles totaled $0.6 million in 2016, $0.3 million in 2015, and $0.4 million in 2014. In 2015, $2.7 million of core deposit intangibles was recorded as a result of the acquisition of Bancshares. As of December 31, 2016, economic conditions did not indicate that impairment existed for the core deposit intangibles and therefore no impairment evaluation was performed. We did not recognize any impairment during the years ended December 31, 2016, 2015, and 2014.
			
		
			
		
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During 2016, 2015, and 2014, we had recorded loan servicing rights amortization expense of $0.7 million, $0.6 million, and $0.4 million, respectively. As of December 31, 2016, mortgage loan servicing rights had a fair value of $4.2 million, which exceeded the book value of $3.5 million. Because the fair value exceeded the book value, there was no impairment charge at December 31, 2016. During the first three quarters of 2016, the mortgage loan servicing rights were written down to their fair values, resulting in total impairment charges of $0.6 million, which was included in noninterest income. As of December 31, 2015, mortgage loan servicing rights were written down to their fair values, resulting in an impairment charge of $0.1 million, which was included in noninterest income. We did not recognize any impairment during the year ended December 31, 2014.
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The estimated aggregate future amortization expense for other intangible assets remaining as of December 31, 2016 is as follows:
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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, we utilize 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, establishes a fair value hierarchy for 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 1Quoted prices in active markets for identical instruments.
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The estimated fair value amounts have been determined by us 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 amount we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. There were no significant changes in valuation methods used to estimate fair value during the year ended December 31, 2016.
A description of the valuation methodologies used for instruments measured at fair value on a recurring basis is as follows:
Available for sale securities - The fair value of U.S. Government and federal agency securities, equity securities, and residential mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value of
			
		
			
		
other investments such as obligations of state and political subdivisions is estimated based on quoted market prices, when available. We obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and bond’s terms and conditions, among other things. We review the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices.
Derivative instruments - We utilize an interest rate swap agreement to convert one of our variable-rate subordinated debentures to a fixed rate. This has been designated as a cash flow hedge. During 2014, we began offering an interest rate swap program that permits qualified customers to manage interest rate risk on variable rate loans with Bank SNB. Derivative contracts are executed between our customers and Bank SNB. Offsetting contracts are executed by Bank SNB and approved counterparties. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to us. The fair value of the interest rate swap agreements are obtained from dealer quotes.
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The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2016 and 2015.
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Certain financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of cost or fair value. Valuation methodologies for assets measured on a nonrecurring basis are as follows:
Impaired loans - Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 3 inputs based on third-party appraisals. Certain other impaired loans are remeasured and reported through a specific valuation allowance allocation of the allowance for loan losses based upon the net present value of cash flows.
Loans held for sale - Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. The fair value of loans held for sale is based on existing investor commitments.
Other real estate - Other real estate fair value is based on third-party appraisals for properties less the estimated costs to sell the asset.
			
		
			
		
Goodwill - Fair value of goodwill is based on the fair value of each of our reporting units to which goodwill is allocated compared with their respective carrying value. There has been no impairment during 2016 or 2015; therefore, no fair value adjustment was recorded through earnings.
Core deposit premiums - There has been no impairment during 2016 or 2015; therefore, no fair value adjustment was recorded through earnings.
Mortgage loan servicing rights - Mortgage loan servicing rights are carried at the lower of cost or market. There is no active trading market for loan servicing rights. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. A cash flow model is used to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income, and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The prepayment model is updated for changes in market conditions.
Assets that are measured at fair value on a nonrecurring basis as of December 31, 2016 and 2015 are summarized below.
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Impaired loans measured at fair value with a carrying amount of $19.7 million were written down to a fair value of $13.2 million, resulting in a life-to-date impairment of $6.5 million. As of December 31, 2015, impaired loans measured at fair value with a carrying amount of $25.9 million were written down to the fair value of $21.6 million at December 31, 2015, resulting in a life-to-date impairment charge of $4.3 million.
No impairment was recognized for other real estate during the period ended December 31, 2016. As of December 31, 2015, other real estate assets were written down to their fair values, resulting in an impairment charge of approximately $0.1 million, which was included in noninterest expense for the year ended December 31, 2015.
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As of December 31, 2016, mortgage loan servicing rights had a fair value of $4.2 million, which exceeded the book value of $3.5 million. Because the fair value exceeded the book value, there was no impairment charge at December 31, 2016. During the first three quarters of 2016, the mortgage loan servicing rights were written down to their fair values, resulting in total impairment charges of $0.6 million, which was included in noninterest income. As of December 31, 2015,
			
		
			
		
mortgage loan servicing rights were written down to their fair values, resulting in an impairment charge of $0.1 million, which was included in noninterest income.
ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The methodologies used in estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above. The methodologies for the other financial instruments are discussed below:
Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities held to maturity - The investment securities held to maturity are carried at cost. The fair value of the held to maturity securities is estimated based on quoted market prices or dealer quotes.
Loans, net of allowance - Fair values are estimated for certain homogenous categories of loans adjusted for differences in loan characteristics. Our loans have been aggregated by categories consisting of commercial, real estate, 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.
Investments included in other assets - The estimated fair value of investments included in other assets, which primarily consists of investments carried at cost, approximates their carrying values.
Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Other liabilities and accrued interest payable - The estimated fair value of other liabilities, which primarily includes trade accounts payable, employee benefits, and accrued interest payable, approximates their carrying values.
Other borrowings - Included in other borrowings are FHLB advances and securities sold under agreements to repurchase. The fair value for fixed rate FHLB advances is based upon discounted cash flow analysis using interest rates currently being offered for similar instruments. The fair values of other borrowings are the amounts payable at the statement of financial condition date, as the carrying amount is a reasonable estimate of fair value due to the short-term maturity rates.
Subordinated debentures - All subordinated debentures have floating rates that reset quarterly. The fair value of the floating rate subordinated debentures approximates carrying value at December 31, 2016 and December 31, 2015.
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The carrying values and estimated fair values of our financial instruments segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are as follows:
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Note 9: Deposits
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The following table summarizes deposits as of December 31, 2016 and 2015.
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The total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2016 and 2015 was $0.3 million for both years.
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The aggregate amounts of time deposits in denominations of $250,000 or more at December 31, 2016 and 2015 were $122.0 million and $95.4 million, respectively.
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Some of our interest-bearing deposits were obtained through brokered transactions and we participate in the Certificate of Deposit Account Registry Service (“CDARS”). CDARS deposits totaled $29.0 million at December 31, 2016 and $22.5 million at December 31, 2015. There were capital market certificate of deposits of $35.6 million at December 31, 2016 and $17.3 million at December 31, 2015.
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Scheduled time deposit maturities as of December 31, 2016 are as follows:
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Note 10: Borrowed Funds
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We have available various forms of other borrowings for cash management and liquidity purposes. These forms of borrowings include short-term federal funds purchased and securities sold under agreements to repurchase, and advances from the FHLB and the FRB. The following table summarizes borrowed funds for the periods indicated:
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We have approved federal funds purchase lines totaling $60.0 million with three financial entities. We sell securities under agreements to repurchase with us retaining custody of the collateral. Collateral consists of direct obligations of U.S. Government and Federal Agency issues, which are designated as pledged with our safekeeping agent. The type of
			
		
			
		
collateral required, the retention of the collateral, and the security sold, minimize our risk of exposure to loss. These transactions are for one-to-four day periods. At December 31, 2016 and 2015, the amount of collateral pledged is $61.5 million and $58.9 million, respectively.
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We have entered into an agreement with the FHLB to obtain advances from the FHLB from time to time. At December 31, 2016, Bank SNB had an outstanding balance of $138.0 million in advances from the FHLB. The terms of the agreement are set forth in the Advance, Pledge and Security Agreement between Bank SNB and FHLB (the “Agreement”). The FHLB requires that we pledge collateral on such advances. Under the terms of the Agreement, the discounted value of the collateral, as defined by the FHLB, should at all times be at least equal to the amount borrowed by us. Such advances outstanding are subject to a blanket collateral arrangement, which requires the pledging of eligible collateral to secure such advances. Such collateral principally includes certain loans and securities. At December 31, 2016 and 2015, loans pledged under the Agreement were $577.7 million and $447.9 million, and investment securities pledged (at carrying value) were $0 for both years. Scheduled minimum future principal payments to the FHLB as of December 31, 2016 are as follows: $138.0 million in 2017.
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We are qualified to borrow funds from the FRB through their Borrower-In-Custody program. Collateral under this program consists of pledged selected commercial and industrial loans. Currently, the collateral will allow us to borrow up to $106.7 million. At December 31, 2016 and 2015, we had no outstanding FRB borrowings.
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Note 11: Trust Preferred Securities and Subordinated Debentures
At December 31, 2016 and 2015, we had the following issues of trust preferred securities outstanding and subordinated debentures owed to the Trusts.
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On June 26, 2003, our subsidiary, OKSB Statutory Trust I, sold to investors in a private placement offering $20.0 million of adjustable rate trust preferred securities (the “OKSB Trust Preferred”). The OKSB Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus 3.10%. In addition to these adjustable rate securities, OKSB Statutory Trust I sold $0.6 million of trust common equity to Southwest. The aggregate proceeds of $20.6 million were used to purchase an equal principal amount of adjustable rate subordinated debentures that bear interest, adjustable quarterly, at 90-day LIBOR plus 3.10% (the “OKSB Subordinated Debentures”). After deducting underwriter’s compensation and noninterest expenses of the offering, the net proceeds were available to us to increase capital and for general corporate purposes. Interest payments on the OKSB Subordinated Debentures are deductible for federal income tax purposes.
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On October 14, 2003, our subsidiary, SBI Capital Trust II, sold to investors in a private placement offering $25.0 million of adjustable rate trust preferred securities (the “SBI II Trust Preferred”). The SBI II Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus 2.85%. In addition to these adjustable rate securities, SBI Capital Trust II sold $0.8 million of trust common equity to us. The aggregate proceeds of $25.8 million were used to purchase an equal principal amount of our adjustable rate subordinated debentures that bear interest, adjustable quarterly 90-day LIBOR plus 2.85% (the “SBI II Subordinated Debentures”). The proceeds were available to us to increase capital and for general
			
		
			
		
corporate purposes. Interest payments on the SBI II Subordinated Debentures are deductible for federal income tax purposes.
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On September 4, 2003, FCBI Statutory Trust I sold to investors in a private placement offering $5.0 million of adjustable rate trust preferred securities (the “FCBI I Trust Preferred”). The FCBI I Trust Preferred bear interest, adjustable quarterly, at 90-day LIBOR plus 3.00%. In addition to these adjustable rate securities, FCBI Statutory Trust I sold $0.2 million of trust common equity. The aggregate proceeds of $5.2 million were used to purchase an equal principal amount of our adjustable rate subordinated debentures that bear interest, adjustable quarterly 90-day LIBOR plus 3.00% (the “FCBI I Subordinated Debentures”). The proceeds were available to us to increase capital and for general corporate purposes. Interest payments on the FCBI I Subordinated Debentures are deductible for federal income tax purposes. These trust preferred security and subordinated debentures were inherited with the acquisition of FCBI and were redeemed on February 8, 2016.
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At December 31, 2016, we had an aggregate of $46.4 million of subordinated debentures outstanding and had an asset of $1.4 million representing our total investment in the common equity issued by the Trusts. The sole assets of the Trusts are the subordinated debentures and the liabilities of the Trusts of the OKSB Trust Preferred and SBI II Trust Preferred. We have, through various contractual arrangements, unconditionally guaranteed payment of all obligations of our Trusts with respect to our OKSB Trust Preferred and our SBI II Trust Preferred.
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The OKSB Trust Preferred, the OKSB Subordinated Debentures, the SBI II Trust Preferred, and the SBI II Subordinated Debentures, mature at or near the thirtieth anniversary date of their issuance. However, if certain conditions are met, the OKSB Trust Preferred and the OKSB Subordinated Debentures and the SBI II Trust Preferred and the SBI II Subordinated Debentures may be called at our discretion with thirty days’ notice.
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We, OKSB Statutory Trust I, and SBI Capital Trust II believe that, taken together, our obligations under the Trust Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the Subordinated Debentures, the Indentures and the Agreements as to Expenses and Liabilities, entered into in connection with the offering of the Trust Preferred and the Subordinated Debentures, in the aggregate constitute a full and unconditional guarantee by us of the obligations of OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred.
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OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated Debentures, which are its sole assets. We own all of the 619 outstanding common securities of OKSB Statutory Trust I; the liquidation value is $1,000 per share.
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SBI Capital Trust II is a Delaware statutory trust created for the purpose of issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated Debentures, which are its sole assets. We own all of the 774 outstanding common securities of SBI Capital Trust II; the liquidation value is $1,000 per share.
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FCBI Statutory Trust I is a statutory trust created for the purpose of issuing the FCBI I Trust Preferred and purchasing the FCBI I Subordinated Debentures, which are its sole assets. All trust assets were redeemed on February 8, 2016.
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Each of the Trust Preferred issuances meets the regulatory criteria for Tier I capital, subject to Federal Reserve guidelines that limit the amount of the Trust Preferred and cumulative perpetual preferred stock to an aggregate of 25% of Tier I capital. At December 31, 2016, $45.0 million of the Trust Preferred was included in Tier I capital.
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We de-consolidate our investments in OKSB Statutory Trust I, SBI Capital Trust II, and FCBI Statutory Trust I (the “Trusts”) in this Annual Report. Due to this required de-consolidation, the trust preferred securities are not presented on the Consolidated Statements of Financial Condition and the subordinated debentures are presented on the Consolidated Statements of Financial Condition as a separate liability category.
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The terms of the debentures allow us to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. These terms also allow us to resume payments at the end of any deferral period, or to extend the deferral up to the maximum 20 quarters in total. No deferral can extend past the maturity date of the debenture.
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Note 12: Derivative Instruments
We utilize derivatives instruments to manage exposure to various types of interest rate risk for us and our customers within policy guidelines. All derivative instruments are carried at fair value, in which credit risk is considered in determining fair value.
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Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by our asset/liability management and executive loan committees. Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps with each counterparty. Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.
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Customer Risk Management Interest Rate Swaps
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Our qualified customers have the opportunity to participate in our interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with us. We enter into such agreements with customers, then offsetting agreements are executed between us and approved dealer counterparties to minimize our market risk from changes in interest rates. The counterparty contracts are identical to customer contracts in terms of notional amounts, interest rates, and maturity dates, except for a fixed pricing spread or fee paid to us by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of these derivative instruments are recognized as either non-hedge derivative assets or liabilities in the Consolidated Statements of Financial Condition.
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We have entered into nine customer interest rate swap agreements that effectively convert the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of December 31, 2016, these loans had an outstanding balance of $124.0 million. We have entered into offsetting agreements with dealer counterparties. The following table summarizes the fair values of derivative contracts recorded as “non-hedge derivative assets” and “non-hedge derivative liabilities” in the Consolidated Statements of Financial Condition.
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The floating rate paid in connection with these interest rate swap agreements is a contractual percentage rate spread to one-month LIBOR or to the Prime rate as of December 31, 2016. From time to time it may be necessary to post collateral with our dealer counterparties to secure the market values of these contracts. As of December 31, 2016, there was no collateral requirement with any of our dealer counterparties given the current market values of these contracts. These interest rate swaps are not designated as hedging instruments.
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Interest Rate Swap on Trust Preferred Securities
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We have an interest rate swap agreement with a total notional amount of $25.0 million. The interest rate swap contract was designated as a cash flow hedging instrument with the objective of protecting the overall cash flow from our quarterly interest payments on the SBI Capital Trust II preferred securities throughout the seven year period beginning February 11, 2011 and ending April 7, 2018 from the risk of variability of those payments resulting from changes in the three-month LIBOR. Under the swap, we will pay a fixed interest rate of 6.15% and receive a variable interest rate of three-month LIBOR plus a margin of 2.85% on a total notional amount of $25.0 million, with quarterly settlements. The rate received by us as of December 31, 2016 was 3.73%.
The estimated fair value of the interest rate derivative contract outstanding as of December 31, 2016 and 2015 resulted in a pre-tax loss of $0.7 million and $1.4 million, respectively, and was included in other liabilities in the Consolidated Statements of Financial Condition.
The effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument, a $0.4 million gain and a $0.1 million gain for the year ended December 31, 2016 and 2015, respectively, is included in other
			
		
			
		
comprehensive income, net of tax, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other noninterest income or other noninterest expense. No ineffectiveness related to the interest rate derivative was recognized during either reporting period.
Net cash flows as a result of the interest rate swap agreement were $0.7 million for the year ended December 31, 2016 and $0.8 million for each of the years ended December 31, 2015 and 2014 and were included in interest expense on subordinated debentures.
We posted cash collateral with our counterparty related to the derivative contract in excess of the required $0.7 million and $1.4 million at December 31, 2016 and 2015, respectively.
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There are no credit-risk-related contingent features associated with our derivative contract.
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Note 13: Taxes on Income
The components of taxes on income follow:
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A reconciliation from the expected tax expense (benefit) using the U.S. Federal income tax rate of 35% to consolidated effective income tax expense (benefit) follows:
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The calculated year-to-date effective tax rate is 35.7% for 2016, 36.0% for 2015, and 37.5% for 2014.
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At December 31, 2013, we had $10.7 million federal net operating loss carryforward expiring in 2031, $53.1 million of state net operating loss carryforward expiring in 2031, and $0.6 million of state net operating loss carryforward expiring in 2021. In addition, we had $2.5 million alternative minimum tax credit that can be carried forward indefinitely. During 2014, we fully utilized the remaining federal net operating loss carryforward and the alternative minimum tax credit that had been carried forward. At December 31, 2016, we had $10.3 million of state net operating loss carryforward expiring in 2031.
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A deferred tax asset or liability is recognized for the tax consequences of temporary differences in the recognition of certain income and expense items for financial statement reporting purposes. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. It was determined that no valuation allowance was required for both 2016 and 2015.
			
		
			
		
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Net deferred tax assets of $13.2 million and $14.0 million at December 31, 2016 and 2015, respectively, are reflected in the accompanying Consolidated Statements of Financial Condition in other assets.
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Temporary differences that give rise to the deferred tax assets include the following:
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We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal or state tax examinations for years before 2013. Additionally, as procedurally required, our company’s 2010 and 2011 federal returns were examined in connection with the 2011 net operating loss carryback and no adjustments were required.
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Unrecognized Tax Benefits - ASC 740, Income Taxes, provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. As of December 31, 2016, we have no unrecognized tax benefits related to Federal or State income tax matters and do not anticipate any changes within the next twelve months. Additionally, no interest and penalties have been accrued related to uncertain tax positions.
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Note 14: Shareholders’ Equity
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We have reserved for issuance 150,000 shares of common stock pursuant to the terms of the Employee Stock Purchase Plan. The Employee Stock Purchase Plan allows our employees to acquire additional common shares through payroll deductions. From July 1999 to August 2009, shares issued out of this plan came from treasury shares, subsequent shares issued came from the reserved shares. As of December 31, 2016, 61,115 total shares had been issued and 52,500 total treasury shares had been reissued under this plan. As of December 31, 2015, 59,873 total shares had been issued and 52,500 total treasury shares had been reissued under this plan.
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We have reserved 800,000 shares of common stock pursuant to the terms of the 2008 Stock Plan. The 2008 Stock Plan provides selected key employees with the opportunity to acquire common stock. As of December 31, 2016, 603,545 new
			
		
			
		
shares had been issued and 25,725 treasury shares had been reissued by the 2008 Stock Plan. As of December 31, 2015, 512,101 new shares had been issued and 25,725 treasury shares had been reissued by the 2008 Stock Plan.
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Stock Repurchase Program - On May 25, 2016, the Board authorized our fourth stock repurchase program since August 2014. The program authorizes the repurchase of up to another 5.0%, or approximately 921,000 shares, of our outstanding common stock and became effective February 23, 2017, which was the original expiration date of the third program. During 2016, we repurchased 1,398,026 shares for a total of $22.1 million, and since August 2014, we have repurchased a total of 2,519,584 shares for a total of $40.8 million. Repurchases under the program are available at the discretion of management based upon market, business, legal, and other factors. Our ability to repurchase our common stock is limited during the time that the Merger is pending.
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Note 15: Earnings per Common Share
The following table shows the computation of basic and diluted earnings per common share:
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At December 31, 2016 and December 31, 2015, there were 6,573 and 38,145 anti-dilutive restricted stock awards outstanding, respectively. There were no anti-dilutive restricted stock awards outstanding at December 31, 2014.
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Note 16: Capital Requirements and Regulatory Matters
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We and Bank SNB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our and Bank SNB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and Bank SNB must meet specific capital guidelines that involve quantitative measures of our and Bank SNB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our and Bank SNB’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require us and Bank SNB to maintain minimum amounts of Total, Tier I Capital (as defined in the regulations), and CET1 Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined).
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Management believes that, as of December 31, 2016 and December 31, 2015, we and Bank SNB met all capital adequacy requirements.
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As of December 31, 2016 and December 31, 2015, Bank SNB was categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, CET1 risk-based, and Tier I leverage ratios as set forth in the following table.
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A summary of actual capital amounts and ratios as of December 31, 2016 are presented below.
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A summary of actual capital amounts and ratios as of December 31, 2015 are presented below.
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The approval of the Oklahoma State Banking Department and the Federal Reserve Bank is required if the total of all dividends declared by Bank SNB in any calendar year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, Bank SNB may not pay a dividend if, after paying the dividend, Bank SNB would be undercapitalized.
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Note 17: Employee Benefits
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We sponsor a 401(k) defined contribution savings plan. The plan permits employees to make salary deferral contributions and Roth deferral contributions and permits us to make matching contributions and nonelective contributions. For salary deferral contributions and Roth deferral contributions, employees may become participants in the plan immediately upon their hire date. For the matching contributions, employees who have completed 30 days of service and have attained the age of 21 may become participants in the plan. For the nonelective contributions, employees who have completed one year of service and have attained the age of 21 may become participants in the plan. The plan is subject to the Employee Retirement Income Security Act of 1974, as amended. The plan permits participants to make before or after-tax
			
		
			
		
contributions in an amount not exceeding 90% of eligible compensation and subject to dollar limits from Internal Revenue Service regulations.
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Matching contributions and minimum contributions, if any, become vested based on employees’ years of service with us. The vested percentage of matching contributions is determined by employees’ completed years of service: less than one year equals 0% vested, one year equals 33% vested, two years equal 66% vested, and three or more years equal 100% vested. Nonelective contributions and minimum contributions, if any, also become vested based on employees’ years of service with us. The vested percentage of nonelective contributions is determined by employees’ completed years of service: less than two years equal 0% vested, two years equal 20% vested, three years equal 40% vested, four years equal 60% vested, and five or more years equal 100% vested. Employees that terminate employment with us will not be entitled to any portion of their accounts that are not vested. The portion not yet vested will be considered a forfeiture. If the employees returns to work for us before five consecutive one-year breaks in service, the forfeited portions of their accounts may be restored if they repay any distributions received at termination. For those that did not receive a distribution and are reemployed by us, their accounts will automatically be restored.
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During 2015 and 2014, we made an annual nonelective contribution of 3% of eligible compensation. We made contributions of $0.7 million and $0.6 million in 2015 and 2014, respectively. Effective January 1, 2016, we changed our plan to permit us to make a matching contribution equal to 50% of the first 8% of employees’ pre-tax or Roth salary deferral contributions up to a maximum of 4% of their salaries on an annual basis. We may choose to make a nonelective contribution in an amount in the same ratio that employees’ salaries bear to the total salary of all participants in the plan. The amount of the contribution, if any, is determined each plan year and announced to all participants. During 2016, we made matching contributions of $0.8 million and no nonelective contributions.
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Stock Options - We recorded no share-based compensation expense with respect to stock options for the years ended December 31, 2016, 2015, and 2014. The share-based compensation is calculated using the accrual method, which treats each vesting tranche as a separate award and amortizes expense evenly from grant date to vest date for each tranche.
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There were no outstanding options as of December 31, 2016 and 2015.
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No stock options were exercised in 2016, 2015 and 2014.
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Restricted Stock - Restricted shares granted as of December 31, 2016, 2015 and 2014 were 546,895, 462,024, and 453,987, respectively. We recognized $1.5 million for the year ended December 31, 2016 and $1.3 million for the year ended December 31, 2015 and $0.6 million for the year ended December 31, 2014, in compensation expense, related to all restricted shares outstanding. At December 31, 2016, there was $1.6 million of total unrecognized compensation expense related to restricted shares granted under the 2008 Stock Plan. Of the total unrecognized compensation expense at December 31, 2016, $1.0 million will be recognized in 2017, and the remainder will be recognized the following two years.
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The 2016 and 2015 grants of restricted stock have a vesting period between one to three years. The restrictions on the shares expire one year after the award date or upon the earlier to occur of satisfaction of vesting conditions, a change in control of us, or the permanent and total disability or death of the participant. We recognize compensation expense over the restricted period.
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Supplemental Executive Retirement Plan - Through the acquisition of Bancshares, we inherited a nonqualified supplemental executive retirement plan for certain officers. The plan is closed to any future employees and is funded by the bank owned life insurance acquired from Bancshares. This plan provides for postretirement salary and life insurance benefits, as determined by the plan document. As of December 31, 2016, the accrued deferred compensation was $1.4 million.
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Note 18: Related Party Transactions
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Directors and officers of us and Bank SNB were customers of, and had transactions with, us in the ordinary course of business, and similar transactions are expected in the future. All loans included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
			
		
			
		
transactions with other persons and in management’s opinion did not involve more than normal risk of loss or present other unfavorable features. Certain directors, and companies in which they have ownership interests, had indebtedness to us totaling $14.2 million and $26.1 million at December 31, 2016 and 2015, respectively. During 2016, $26.9 million of new loans and advances on existing loans were made to these persons and repayments totaled $38.9 million. During 2015, $41.2 million of new loans and advances on existing loans were made to these persons and repayments totaled $24.2 million.
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At December 31, 2016 and 2015, directors, officers and other related parties had demand, non-interest bearing deposits of $1.8 million and $2.1 million, respectively, savings and interest-bearing transaction accounts of $13.2 million and $14.0 million, respectively, and time certificates of deposit of $0 and $0.5 million, respectively.
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Note 19: Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies
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Financial Instruments with Off-Balance-Sheet Risk - In the normal course of business, we make use of a number of different financial instruments to help meet the financial needs of our customers. In accordance with U.S. generally accepted accounting principles, these transactions are not presented in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit and standby and commercial letters of credit. The following table provides a summary of our off-balance sheet financial instruments:
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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 us to honor a financial commitment to a third party should our customer fail to perform. Many loan commitments and most standby letters of credit expire unfunded, and, therefore, total commitments do not represent our future funding obligations. Loan commitments and letters of credit are made under normal credit terms, including interest rates and collateral prevailing at the time, and usually require the payment of a fee by the customer. Commercial letters of credit are commitments generally issued to finance the movement of goods between buyers and sellers. Our 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. We do not anticipate any material losses as a result of the commitments.
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Litigation - In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.
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Severance Compensation Plan and Change in Control Agreements - We have adopted a Severance Compensation Plan and a Change of Control Agreement (the “Plans”) for the benefit of certain officers and key members of management. The Plan’s purpose is to protect and retain certain qualified employees in the event of a change in control and to reward those qualified employees for loyal service to us by providing severance compensation to them upon their involuntary termination of employment after a change in control of Southwest. At December 31, 2016, we have not recorded any amounts in the Consolidated Financial Statements relating to the Plans. If a change of control were to occur, the maximum amount payable to certain officers and key members of management would approximate $12.1 million.
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Note 20: Operating Segments
We operate four principal segments: Oklahoma Banking, Texas Banking, Kansas Banking, and Other Operations. The Oklahoma Banking segment provides deposit and lending services and consists of residential mortgage lending services to customers. Due to its size and the management structure, Colorado Banking is included within Oklahoma Banking. The Texas Banking segment and the Kansas Banking segment provide deposit and lending services. Other Operations includes our funds management unit and corporate investments. Prior to the fourth quarter of 2015, we disclosed a Mortgage Banking segment, which included 1-4 family mortgages and the available for sale loans. For segment reporting, the Mortgage Banking segment has been combined with and into the Oklahoma Banking segment due to those loans being managed from that location. Prior period numbers have been adjusted to reflect this change. This adjustment has no financial statement impact.
The primary purpose of the funds management unit is to manage our overall internal liquidity needs and interest rate risk. Each segment borrows funds from or provides funds to the funds management unit as needed to support its operations.
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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 FHLB advances.
The accounting policies of each reportable segment are the same as ours. 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 factors. There were no significant changes in 2016 due to funds transfer pricing, capital assignments, or expense allocations.
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The following table summarizes financial results by operating segment:
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Note 21: Parent Company Condensed Financial Information
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Following are the condensed financial statements of Southwest Bancorp, Inc. (“Parent Company only”) for the periods indicated:
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Note 22: Commitments and Contingencies
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Customer Risk Management Interest Rate Swap
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On September 9, 2014, we entered into an agreement to provide one of our commercial borrowers a customer interest rate swap that effectively converts the loan interest rate from floating rate based on LIBOR to a fixed rate for the customer. As of December 31, 2016, the floating rate loan had an outstanding balance of $14.7 million. The option to execute the swap is conditional on compliance with the loan and swap agreements, and will be subject to the terms of the International Swaps and Derivatives Association Master Agreement. The fixed pay amount will be based on the market rates at the time of execution, and it is our intention to simultaneously execute an offsetting trade with an approved swap dealer counterparty with identical terms.
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We have seven risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution. As of December 31, 2016, the current notional amount for these seven transactions total $34.7 million.
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Legal Action
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On March 18, 2011, an action entitled Ubaldi, et al. v SLM Corporation (“Sallie Mae”), et al., Case No. 3:11-cv-01320 EDL (the “Ubaldi Case”) was filed in the U.S. District Court for the Northern District of California as a putative class action with respect to certain loans that the plaintiffs claim were made by Sallie Mae. The loans in question were made by various banks, including Bank SNB, and sold to Sallie Mae. Plaintiffs claim that Sallie Mae entered into arrangements with chartered banks in order to evade California law and that Sallie Mae is the de facto lender on the loans in question and, as the lender on such loan, Sallie Mae charged interest and late fees that violates California usury law and the California Business and Professions Code. Sallie Mae has denied all claims asserted against it and has stated that it intends to vigorously defend the action. On March 26, 2014, the Court denied the plaintiffs’ request to certify the class; however, the Court permitted the plaintiffs to amend the filing to redefine the class. Plaintiffs filed a renewed motion on June 23,
			
		
			
		
2014. On December 19, 2014, the Court issued a decision on the renewed motion, certifying a class with respect to claims of improper late fees, but denying class certification with respect to plaintiffs’ usury claims. Plaintiffs thereafter filed a motion seeking leave to amend their complaint to add additional parties, which Sallie Mae opposed, and, on March 24, 2015, the Court denied the plaintiffs’ motion. On June 5, 2015, the law firm Cohen Milstein Sellers & Toll based in Washington, D.C. entered its appearance as co-counsel on behalf of plaintiffs.
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Bank SNB is not specifically named in the action. However, in the first quarter of 2014, Sallie Mae provided Bank SNB with a notice of claims that have been asserted against Sallie Mae in the Ubaldi Case (the “Notice”). Sallie Mae asserts in the Notice that Bank SNB may have indemnification and/or repurchase obligations pursuant to the ExportSS Agreement dated July 1, 2002 between Sallie Mae and Bank SNB, pursuant to which the loans in question were made by Bank SNB. Bank SNB has substantial defenses with respect to any claim for indemnification or repurchase ultimately made by Sallie Mae, if any, and intends to vigorously defend against any such claims.
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Due to the uncertainty regarding (i) the size and scope of the class, (ii) the particular class members, (iii) the late fees charged to particular class members, (iv) the theories, if any, under which the plaintiffs might prevail, (v) whether Sallie Mae will make a claim against us for indemnification or repurchase, and (vi) the likelihood that Sallie Mae would prevail if it makes such a claim, we cannot estimate the amount or the range of losses that may arise as a result of the Ubaldi Case.
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In the normal course of business, we are at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management currently does not expect that the outcome of such actions will have a material adverse effect on our financial position; however, we are not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known.
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Note 23: New Authoritative Accounting Guidance
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In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a five-step model that entities must follow to recognize revenue. The guidance would have become effective for us on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. The guidance will now become effective for us on January 1, 2018, and is not expected to have a material impact on our financial statements and disclosures.
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In January 2016, the FASB issued ASU 2016-01, Recognition and Measurements of Financial Assets and Financial Liabilities. This ASU requires that all equity investments be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This ASU also requires that an entity present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The guidance becomes effective for us on January 1, 2018, and we are evaluating the impact of this ASU on our financial statements and disclosures.
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In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance becomes effective for us on January 1, 2019. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are evaluating the impact of this ASU on our financial statements and disclosures.
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In March 2016, the FASB issued ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This ASU clarifies that a change in the counterparty of a derivative contract (i.e., a novation) in a hedge accounting relationship does not, in and of itself, require dedesignation of the hedge accounting relationship. This guidance becomes effective for us on January 1, 2017, and it is not expected to have a material impact on our financial statements and disclosures.
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In March 2016, the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. This guidance becomes effective for us on January 1, 2017, and it is not expected to have a material impact on our financial statements and disclosures.
﻿
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance becomes effective for us on January 1, 2017, and it is not expected to have a material impact on our financial statements and disclosures.
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In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. While this ASU does not change the core principles of the guidance in Topic 606, it does clarify the guidance related to identifying performance obligations as well as the accounting for licenses of intellectual property. This guidance becomes effective for us on January 1, 2017, and it is not expected to have a material impact on our financial statements and disclosures.
﻿
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives Hedging (Topic 815), Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update). This ASU rescinds from the FASB Accounting Standards Codification certain SEC Observer comments that are codified in FASB ASC Topic 605, Revenue Recognition, and ASC 932, Extractive Activities - Oil and Gas, effective upon an entity’s adoption of FASB ASC 606, Revenue from Contracts with Customers. This ASU also rescinds the SEC Staff Announcement: Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share under Topic 815,” which is codified in FASB ASC Topic 815, Derivatives and Hedging, effective on adoption of FASB ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity. This guidance becomes effective for us on January 1, 2018, and it is not expected to have a material impact on our financial statements and disclosures.
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In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. While this ASU does not change the core principles of the new revenue recognition standard, it does make the standard more operational and clarifies the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters. This guidance becomes effective for us on January 1, 2018, and it is not expected to have a material impact on our financial statements and disclosures.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that estimates credit losses on most financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity securities, using the current expected credit loss (CECL) model. Under this model, entities will estimate credit losses over the financial instrument’s entire contractual term from the date of initial recognition of that instrument. The ASU also requires incremental disclosures on how the entity developed its estimates. This guidance becomes effective for us on January 1, 2020. We are evaluating the impact of this ASU on our financial statements and disclosures.
﻿
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance specifically addresses eight classification issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon bonds;
			
		
			
		
contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (COLI) policies, including bank-owned life insurance (BOLI) policies; distributions received from equity method investments; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of the ASU on our financial statements and disclosures.
﻿
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The ASU requires companies to recognize the income tax consequences of an intercompany asset transfer when the transfer occurs. The amendments in this ASU do not change accounting for the pre-tax effects of intra-entity asset transfers under Topic 810, Consolidation, and do not apply to intra-entity inventory transfers. The economic consequences of intra-entity asset sales-other than inventory-will be recognized in the period in which the transaction occurs and no longer deferred. A reporting entity’s effective tax rate likely will be affected due to the immediate recognition of the seller’s taxes and buyer’s deferred taxes, particularly when the transaction has no effect on consolidated pre-tax income. This guidance becomes effective for us on January 1, 2018. We are evaluating the impact of this ASU on our financial statement disclosures.
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In January 2016, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is generally expected to result in fewer transactions qualifying as business combinations. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not considered a business. If this threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create outputs. This guidance becomes effective for us on January 1, 2018, and is not expected to have a material impact on our financial statements and disclosures.
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Item 9.
Item 9. Change in and disagreements with accountants on accounting and financial disclosures
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None.
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Item 9A.
Item 9A. Controls and Procedures
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Management’s Assessment of the Effectiveness of Disclosure Controls and Procedures
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As required by SEC rules, our management evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. Our Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.
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Management’s Report on Internal Control over Financial Reporting
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As required by SEC rules, our management evaluated the effectiveness of our internal control over financial reporting as defined in SEC Rule 13a-15 as of December 31, 2016. Our Chief Executive Officer and Chief Financial Officer participated in the evaluation, which was based upon the criteria for effective internal control over financial reporting included in the “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
﻿
The report by our independent registered public accounting firm, BKD LLP, on our internal control over financial reporting is included on page 97.
			
		
			
		
﻿
Report of Independent Registered Public Accounting Firm
﻿
Audit Committee, Board of Directors and Shareholders
Southwest Bancorp, Inc.
Stillwater, Oklahoma
﻿
﻿
We have audited Southwest Bancorp, Inc.’s (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013 edition), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
﻿
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion
﻿
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; 2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
﻿
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
﻿
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013 edition), issued by COSO.
﻿
We have also audited, in accordance with the standards of the PCAOB, the consolidated financial statements of the Company and our report dated March 9, 2017, expressed an unqualified opinion thereon.
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﻿
						
						
﻿
/s/ BKD LLP
Oklahoma City, Oklahoma
March 9, 2017
						
						
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Item 9B.
Item 9B. Other Information
﻿
None.
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﻿
PART III
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Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
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The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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Item 11.
Item 11. Executive Compensation
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The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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﻿
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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﻿
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
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The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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﻿
ITEM 14.
ITEM 14. pRINCIPAL aCCOUNTING fEES AND sERVICES
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The information required by this Item is incorporated herein by reference to the Proxy Statement (Schedule 14A) for its 2017 Annual Meeting of Shareholders to be filed with the SEC within 120 days of our fiscal year-end.
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PART IV
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Item 15.
Item 15. Exhibits, Financial Statement Schedules
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(a) Documents Filed as Part of this Report
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(1) Financial Statements. The following financial statements are filed as part of this report:
Independent Registered Public Accounting Firm’s Reports for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Financial Condition at December 31, 2016 and 2015
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Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015, and 2014
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Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
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Notes to the Consolidated Financial Statements for the Years Ended December 31, 2016, 2015, and 2014
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(2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.
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(3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
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Exhibit
Number
						
						
Exhibit Description
﻿
3.1
						
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 5.1 to Current Report on Form 8-K filed October 2, 2012)
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3.2
						
Amended and Restated Bylaws of Southwest Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed December 27, 2012)
*
10.1
						
Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-97850))
*
10.2
						
Southwest Bancorp, Inc. and Affiliates Amended and Restated Severance Compensation Plan (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed January 2, 2008)
*
10.3
						
Stillwater National Bank and Trust Company 2002 and 2003 Deferred Compensation Plans (incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002)
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10.4
						
Indemnification Agreements by and between Southwest Bancorp, Inc. and James E. Berry II, Thomas D. Berry, Russell W. Teubner, and John Cohlmia (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K for the fiscal year ended December 31, 2005)
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10.5
						
Indemnification Agreements by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
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10.6
						
Indemnification Agreements by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
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10.7
						
Director’s Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10 to Current Report on Form 8-K filed January 3, 2007)
*
10.8
						
Amendment to Director’s Deferred Compensation Plan by and between Southwest Bancorp, Inc. and James M. Johnson (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 2, 2008)
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10.9
						
Audit Committee Financial Expert Agreement by and between Southwest Bancorp, Inc. and David S. Crockett, Jr. (incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 2006)
*
10.10
						
Southwest Bancorp, Inc. 2008 Stock Based Award Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
*
10.11
						
Southwest Bancorp, Inc. Form of Restricted Stock Agreement Amendments (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
*
10.12
						
Change of Control Agreement by and between Southwest Bancorp, Inc. and Priscilla Barnes dated August 3, 2012 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2012)
*
10.13
						
Amendment to Change of Control Agreement dated December 15, 2015 by and between Southwest Bancorp, Inc. and Priscilla Barnes (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed December 15, 2015)
*
10.14
						
Employment Agreement dated August 30, 2012 by and among Southwest Bancorp, Inc., the Stillwater National Bank and Trust Company, Bank of Kansas, and Mark W. Funke (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed September 5, 2012)
*
10.15
						
Amendment to Employment Agreement dated February 24, 2015 by and among Southwest Bancorp, Inc., Bank SNB, and Mark W. Funke (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed February 26, 2015
*
10.16
						
Amendment to Employment Agreement dated December 15, 2015 by and among Southwest Bancorp, Inc., Bank SNB, and Mark W. Funke (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed December 15, 2015)
*
10.17
						
Mandatory Retirement Age Policy-Chief Executive Officer (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed September 5, 2012)
			
		
			
		
*
10.18
						
Employment Agreement dated November 15, 2012 by and among Southwest Bancorp, Inc., Stillwater National Bank and Trust Company, Bank of Kansas, and Joe T. Shockley, Jr. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed November 16, 2012)
*
10.19
						
Amendment to Employment Agreement dated December 15, 2015 by and among Southwest Bancorp, Inc., Bank SNB, and Joe T. Shockley, Jr. (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed December 15, 2015)
*
10.20
						
Description of Stillwater National Bank and Trust Company 2013 Elective Non-Qualified Deferred Compensation Plan (incorporated by reference to Current Report on Form 8-K filed December 27, 2012)
*
10.21
						
Description of Southwest Bancorp, Inc. Executive Leadership Team Incentive Plan (incorporated by reference to Current Report on Form 8-K filed December 27, 2012)
*
10.22
						
Description of Amendment to Southwest Bancorp, Inc. Executive Leadership Team Incentive Plan (incorporated by reference to Current Report on Form 8-K filed February 26, 2015)
*
10.23
						
Change of Control Agreement by and between Southwest Bancorp, Inc. and Brent Bates dated July 27, 2012 (incorporated by reference to Exhibit 10.22 to Annual Report on Form 10-K for the fiscal year ended December 31, 2013)
*
10.24
						
Amendment to Change of Control Agreement dated December 15, 2015 by and between Southwest Bancorp, Inc. and Brent Bates (filed herewith)
*
10.25
						
Change of Control Agreement by and between Southwest Bancorp, Inc. and Rusty LaForge dated July 27, 2012 (incorporated by reference to Exhibit 10.23 to Annual Report on Form 10-K for the fiscal year ended December 31, 2013)
*
10.26
						
Amendment to Change of Control Agreement dated December 15, 2015 by and between Southwest Bancorp, Inc. and Rusty LaForge (filed herewith)
﻿
10.27
						
Agreement and Plan of Reorganization, dated as of May 27, 2015, by and among Southwest Bancorp, Inc., First Commercial Bancshares, Inc., and First Commercial Bank (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 27, 2015)
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10.28
						
First Amendment to Agreement and Plan of Reorganization, dated as of June 23, 2015, by and among Southwest Bancorp, Inc., First Commercial Bancshares, Inc., and First Commercial Bank (incorporated by reference to Exhibit 2.2 to Registration Statement on Form S-4 (File No. 333-205521))
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10.29
						
Agreement and Plan of Merger by and between Southwest and Simmons First National Corporation, dated as of December 14, 2016 (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed December 14, 2016)
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Subsidiaries of the Registrant
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23 (a), (b)
						
Consent of Independent Registered Public Accounting Firms
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31(a), (b)
						
Rule 13a-14(a)/15d-14(a) Certifications
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32(a), (b)
						
18 U.S.C. Section 1350 Certifications
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Exhibit
Number
						
						
Exhibit Description
﻿
						
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements
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* Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
			
		
			
		
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Signatures
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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﻿
SOUTHWEST BANCORP, INC.
﻿
﻿
						
March 9, 2017
by: /s/ Mark W. Funke
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Mark W. Funke
﻿
Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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﻿
Officers
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﻿
						
						
/s/ Mark W. Funke
						
March 9, 2017
Mark W. Funke
						
						
Director and Chief Executive Officer
						
						
(Principal Executive Officer)
						
						
﻿
						
						
/s/ Joe T. Shockley, Jr.
						
March 9, 2017
Joe T. Shockley, Jr.
						
						
Executive Vice President and Chief Financial Officer
						
						
(Principal Financial and Accounting Officer)
						
						
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Directors
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