FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SOUTHWEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Oklahoma		73-1136584
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

608 South Main Street, Stillwater, Oklahoma		74074
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (405) 742-1800

Title of Each Class		Name of Each Exchange on which Registered
Common Stock, par value $1.00 per share		The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o YES þ NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o YES þ NO*

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o YES o NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by a check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

(Check one):

Large Accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES þ NO

The registrant’s Common Stock is traded on the NASDAQ Global Select Market under the symbol OKSB. The aggregate market value of approximately 18,322,516 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2010, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $243.5 million based on the closing sales price of $13.29 per share of the registrant’s Common Stock on that date. Solely for purposes of this calculation, it is assumed that directors, officers, and 5% stockholders of the registrant (other than institutional investors) are affiliates.

As of the close of business on March 4, 2011, 19,438,290 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated by Reference

Part III: Portions of the definitive Proxy Statement relating to registrant’s Annual Meeting of Shareholders, to be held on April 28, 2011, are incorporated by reference to the extent described therein.

*

The registrant is required to file reports pursuant to Section 13 of the Act.

 

 

SOUTHWEST BANCORP, INC.

Index
Forward-Looking Statements			2
Form 10-K Cross Reference Sheet of Material Incorporated by Reference			2
Southwest Bancorp, Inc.			4
About this Report			4
Five Year Summary of Selected Financial Data			5
Securities Listing, Prices, and Dividends			7
Management’s Discussion and Analysis of Financial Conditions and Results of Operations			9
Quantitative and Qualitative Disclosures about Market Risk			30
Controls and Procedures			32
Reports of Independent Registered Public Accounting Firm			34
Consolidated Financial Statements and Supplementary Data			35
Other Material Required by Form 10-K			77
Business			77
Board of Directors of Southwest Bancorp, Inc. and Stillwater National Bank & Trust Company			87
Board of Directors of Bank of Kansas			87
Executive Officers			88
Risk Factors			90
Properties			99
Exhibits and Financial Statement Schedules			101
Signatures			104
EX-21
EX-23
EX-24
EX-31.A
EX-31.B
EX-32.A
EX-32.B
EX-99.A
EX-99.B

Forward-Looking Statements

Southwest Bancorp, Inc. (“Southwest”) makes forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include: statements of Southwest’s goals, intentions, and expectations; estimates of risks and of future costs and benefits; expectations regarding future financial performance of Southwest and its operating segments; assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs; liquidity, contractual obligations, off-balance sheet risk, and interest rate risk; estimates of value of acquired assets, deposits, and other liabilities; and statements of Southwest’s ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon: the amount and timing of future changes in interest rates, market behavior, and other economic conditions; future laws and regulations and accounting principles; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Southwest’s past growth and performance do not necessarily indicate its future results. Please see the discussion of Risk Factors on page 90 and Critical Accounting Policies on page 9.

Form 10-K Cross Reference Sheet of Material Incorporated by Reference

The following table shows the location in this Annual Report on Form 10-K or the accompanying Proxy Statement of the information required to be disclosed by the United States Securities and Exchange Commission (“SEC”) Form 10-K. Where indicated below, the information has been incorporated by reference in this Report from the Proxy Statement that accompanies it. Other portions of the Proxy Statement are not included in this Report. This Report is not part of the Proxy Statement. References are to pages in this report unless otherwise indicated.

		Item of Form 10-K		Location
Part I
Item 1.		Business		“Forward-Looking Statements” on page 2, “About this Report” on page 4, and “Business” on pages 77 through 86.
Item 1A.		Risk Factors		“Risk Factors” on pages 90 through 97.
Item 1B.		Unresolved Staff Comments		None.
Item 2.		Properties		“Properties” on pages 99 through 101.
Item 3.		Legal Proceedings		Note 16 “Commitments and Contingencies” on page 72.
Item 4.		Submission of Matters to a Vote of Security Holders		Not applicable. No matter was submitted to a vote of security holders during the fourth quarter of 2010.
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		“Securities Listing, Prices, and Dividends” on page 7.
Item 6.		Selected Financial Data		“Five Year Summary of Selected Financial Data” on pages 5 and 6.
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 9 through 30.
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk		“Quantitative and Qualitative Disclosures about Market Risk” on pages 30 through 32.
Item 8.		Financial Statements and Supplementary Data		Pages 35 through 76.

Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		Not applicable. During the past two years or any subsequent period there has been no change in or reportable disagreement with the independent registered public accounting firm for Southwest or any of its subsidiaries.
Item 9A.		Controls and Procedures		“Controls and Procedures” on page 32.
Item 9B.		Other Information		Not applicable. The registrant reported all items required to be reported in a Form 8-K during the fourth quarter of 2010.
Part III
Item 10.		Directors, Executive Officers and Corporate Governance		The material labeled “Election of Directors” on pages 3 through 7, “Board Meetings and Committees” and “Board Leadership, Structure and Role in Oversight” on pages 7 through 10, “Section 16(a) Beneficial Ownership Reporting Compliance” on page 32, “Code of Ethics” on page 34, “Shareholder Proposals and Communications” on page 35, and “Report of the Audit Committee” on page 33 of the Proxy Statement is incorporated by reference in this Report.
Item 11.		Executive Compensation		The material labeled “Director Compensation” on page 12, “Executive Compensation” on pages 27 through 31, “Compensation Discussion and Analysis” on pages 15 through 23, and “Compensation Committee Report” on pages 24 through 26 of the Proxy Statement is incorporated by reference in this Report.
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		The material labeled “Common Stock Owned by Directors and Executive Officers” on pages 13 and 14 and “Owners of More than 5% of Southwest’s Common Stock” on page 14 of the Proxy Statement is incorporated by reference in this Report. Information regarding securities authorized for issuance under equity compensation plans is included under “Equity Compensation Plan Information” on page 8 of this report.
Item 13.		Certain Relationships and Related Transactions and Director Independence		The material labeled “Director Independence” on pages 10 and 11 and “Certain Transactions” on pages 31 and 32 of the Proxy Statement is incorporated by reference in this Report.
Item 14.		Principal Accountant Fees and Services		The material labeled “Relationship with Independent Public Accountants” on pages 32 and 33 of the Proxy Statement is incorporated by reference in this Report.
Part IV
Item 15.		Exhibits, Financial Statement Schedules

Southwest Bancorp, Inc.

Southwest Bancorp, Inc. (“Southwest”) is the bank holding company for the Stillwater National Bank and Trust Company (“Stillwater National”) and Bank of Kansas. Through its subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services, and specialized cash management and other financial services from offices in Oklahoma, Texas, and Kansas, and on the internet through SNB DirectBanker^®. We operate six offices in Texas, eleven offices in Oklahoma, and eight offices in Kansas.

Southwest focuses on converting its strategic vision into long-term shareholder value. Our vision includes a commercial banking model and a community banking model focused on more traditional banking operations in our three-state market.

During 2009, Bank of Kansas entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire substantially all loans as well as certain other related assets of First National Bank of Anthony, Anthony, Kansas (“FNBA”) in an FDIC-assisted transaction. Bank of Kansas and the FDIC entered into loss sharing agreements that provide Bank of Kansas with significant protection against credit losses from loans and related assets acquired in the transaction. Assets covered under the loss sharing agreements with the FDIC, including the amounts of expected reimbursements from the FDIC under these agreements, are referred to as “covered” assets.

Our area of expertise includes the special financial needs of healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. We established a strategic focus on healthcare in 1974. We provide credit and other services, such as deposits, cash management, and document imaging for physicians and other healthcare practitioners to start or develop their practices and finance the development and purchase of medical offices, clinics, surgical care centers, hospitals, and similar facilities.

We also focus on commercial real estate mortgage and construction credits. We do not focus on one-to-four family residential development loans or “spec” residential property credits. Additionally, subprime lending has never been a part of our business strategy, and our exposure to subprime loans and subprime lenders is minimal.

Southwest’s banking philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customer needs for speed, efficiency, and information and complement more traditional banking products. Southwest has developed a highly automated lockbox, imaging, and information service for commercial customers called “SNB Digital Lockbox”, and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds.

Southwest maintains close relationships with businesses, professionals and their principals to serve their banking needs throughout their business development and professional lives.

Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest became a public company in late 1993. Southwest’s common stock is traded on the NASDAQ Global Select Market under the symbol OKSB. Southwest Capital Trust II’s public offering of trust preferred securities is traded on the NASDAQ Global Select Market under the symbol OKSBP.

About this Report

This report comprises the entire 2010 Form 10-K, other than exhibits, as filed with the SEC. The 2010 Annual Report to shareholders, including this report, and the annual proxy materials for the 2011 annual meeting are being distributed together to shareholders. Copies of exhibits and additional copies of the Form 10-K can be obtained free of charge by writing to Laura Robertson, Southwest Bancorp, Inc., P.O. Box 1988, Stillwater, OK 74076. This report is provided along with the annual Proxy Statement for convenience of use and to decrease costs, but is not part of the proxy materials. The SEC has not approved or disapproved this Report or passed upon its accuracy or adequacy.

Five Year Summary of Selected Financial Data

The following table presents Southwest’s selected consolidated financial data for each of the five years in the period ended December 31, 2010. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of Southwest, including the accompanying Notes to the Consolidated Financial Statements, presented elsewhere in this report.

		For the Year Ended December 31,
(Dollars in thousands, except per share data)		2010				2009				2008				2007				2006
Operations Data
Interest income		$	142,807			$	150,399			$	162,794			$	177,068			$	169,760
Interest expense			35,476				51,708				73,075				84,471				76,808
Net interest income			107,331				98,691				89,719				92,597				92,952
Provision for loan losses			35,560				39,176				18,979				8,947				12,187
Gain on sales of loans and securities, net (1)			2,736				5,888				3,566				4,923				3,689
Noninterest income (2)			15,828				16,048				12,572				11,510				12,973
Noninterest expense (3)			63,633				60,858				62,488				65,108				56,021
Income before taxes			26,702				20,593				24,390				34,975				41,406
Taxes on income			9,738				7,611				9,489				13,597				15,409
Net income		$	16,964			$	12,982			$	14,901			$	21,378			$	25,997
Net income available to common shareholders		$	12,777			$	8,837			$	14,658			$	21,378			$	25,997
Dividends
Preferred stock		$	3,500			$	3,500			$	243			$	—			$	—
Common stock			—				1,398				5,519				5,299				4,681
Ratio of total dividends to net income			20.63	%			37.73	%			38.67	%			24.79	%			18.00	%
Per Common Share Data
Basic earnings		$	0.71			$	0.60			$	1.01			$	1.49			$	1.84
Diluted earnings			0.71				0.60				1.00				1.46				1.79
Cash dividends			—				0.10				0.38				0.37				0.33
Book value (4)			15.97				16.46				16.18				15.16				13.87
Weighted average common shares outstanding:
Basic, net of unvested restricted stock			17,848,610				14,625,847				14,471,242				14,291,041				14,151,624
Diluted, net of unvested restricted stock			17,894,011				14,689,517				14,641,521				14,606,149				14,483,941
Financial Condition Data (4)
Investment securities		$	272,929			$	263,439			$	264,166			$	256,608			$	270,519
Noncovered portfolio loans (5)			2,331,293				2,539,294				2,494,506				2,145,557				1,602,726
Loans held for sale (5)			35,194				43,134				56,941				66,275				188,464
Total noncovered loans (5) (6)			2,366,487				2,582,428				2,551,447				2,211,832				1,791,190
Covered portfolio loans (7)			53,628				85,405				—				—				—
Interest-earning assets			2,734,062				3,015,915				2,817,496				2,478,429				2,079,380
Total assets			2,820,541				3,108,291				2,879,762				2,564,298				2,170,628
Interest-bearing deposits			1,875,546				2,267,901				1,918,181				1,801,512				1,511,196
Total deposits			2,252,728				2,592,730				2,180,122				2,058,579				1,765,611
Other borrowings			94,602				103,022				295,138				218,356				138,094
Subordinated debentures			81,963				81,963				81,963				46,393				46,393
Total shareholders’ equity (8)			377,812				309,778				302,203				217,609				197,510
Common shareholders’ equity			310,088				242,741				235,811				217,609				197,510
Financial Ratios
Return on average assets			0.57	%			0.43	%			0.54	%			0.94	%			1.18	%
Return on average total shareholders’ equity			4.72				4.20				6.40				10.19				13.99
Return on average common equity			4.37				3.65				6.44				10.19				13.99
Net interest margin			3.67				3.38				3.36				4.20				4.42
Efficiency ratio (9)			50.54				50.45				59.03				59.72				51.11
Average assets per employee (10)		$	6,942			$	6,411			$	6,206			$	4,661			$	5,117

Selected Financial Data (Continued)

		At December 31,
(Dollars in thousands, except per share data)		2010				2009				2008				2007				2006
Asset Quality
Net loan charge-offs (4)		$	32,744			$	16,536			$	8,790			$	6,656			$	8,706
Net loan charge-offs to average portfolio loans			1.29	%			0.63	%			0.37	%			0.37	%			0.59	%
Noncovered:
Allowance for loan losses (4)		$	65,229			$	62,413			$	39,773			$	29,584			$	27,293
Allowance for loan losses to portfolio loans			2.80	%			2.46	%			1.59	%			1.38	%			1.70	%
Nonperforming loans (4) (11)		$	107,083			$	106,197			$	63,983			$	29,571			$	29,357
Nonperforming loans to portfolio loans			4.59	%			4.18	%			2.56	%			1.38	%			1.83	%
Allowance for loan losses to nonperforming loans			60.91				58.77				62.16				100.04				92.97
Nonperforming assets (4) (12)		$	144,805			$	124,629			$	70,075			$	32,250			$	31,230
Nonperforming assets to portfolio loans and other real estate			6.11	%			4.87	%			2.80	%			1.50	%			1.95	%
Covered:
Nonperforming loans (4) (7) (11)		$	10,806			$	13,458			$	—			$	—			$	—
Nonperforming loans to portfolio loans			20.15	%			15.76	%			—				—				—
Nonperforming assets (4) (7) (12)		$	14,993			$	18,206			$	—			$	—			$	—
Nonperforming assets to portfolio loans and other real estate			25.93	%			20.19	%			—				—				—
Capital Ratios
Average shareholders’ equity to average assets
Total			11.99	%			10.34	%			8.49	%			9.21	%			8.47	%
Common			9.74				8.11				8.30				9.21				8.47
Tier I capital to risk-weighted assets (4) (13)			17.78				13.28				13.01				9.71				12.25
Total capital to risk-weighted assets (4) (13)			19.06				14.55				14.26				10.97				13.50
Leverage ratio (13)			15.55				12.42				13.06				10.23				10.91

Securities Listing, Prices, and Dividends

Stock Listing

Common shares of Southwest Bancorp, Inc. are traded on the National Association of Security Dealers (NASDAQ) Global Select Market under the symbol OKSB.

Trust preferred securities of Southwest Capital Trust II are traded on the NASDAQ Global Select Market under the symbol OKSBP.

Transfer Agents and Registrars

For Southwest Bancorp, Inc.: Computershare Investor Services, LLC 2 North LaSalle St. Chicago, IL 60602		For Southwest Capital Trust II: U.S. Bank Trust National Association 300 East Delaware Avenue Wilmington, DE 19801

Recent Stock Prices, Dividends, and Equity Compensation Plan Information

Shareholders received no quarterly cash dividends in 2010 and received quarterly cash dividends totaling $2.4 million in 2009.

The Board of Directors decides whether or not to pay dividends on common stock, and the amount of any such dividends, each quarter. In making its decision on dividends, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. The ability of Southwest to pay dividends depends upon regulatory approval and cash resources which include dividend payments from its subsidiaries. For information regarding the ability of Stillwater National and Bank of Kansas to pay dividends to Southwest and the restrictions on bank dividends under federal banking laws, see “Note 12 Capital Requirements & Regulatory Matters” in the Notes to the Consolidated Financial Statements, “Certain Regulatory Matters” on page 29 of this report, and “Risk Factors” beginning on page 90 of this report.

Shares issued under the employee stock purchase plan, which commenced on January 1, 1996, totaled 6,806 in 2010 and 8,158 in 2009, while issuances pursuant to the stock plans were 64,381 and 164,895 in the respective years.

As of February 28, 2011, there were approximately 4,600 holders of record of Southwest’s common stock. The following table sets forth the common stock dividends declared for each quarter during 2010 and 2009, and the range of high and low closing trade prices for the common stock for those periods.

						2010												2009
										Dividend												Dividend
		High				Low				Declared				High				Low				Declared
For the Quarter Ending:
March 31		$	10.00			$	5.96			$	—			$	13.00			$	5.46			$	0.0238
June 30			16.20				8.16				—				10.61				6.46				0.0238
September 30			15.61				11.08				—				14.84				8.43				0.0238
December 31			13.61				8.91				—				14.28				6.08				0.0238

Stock Performance

The following table compares the cumulative total return on a hypothetical investment of $100 in Southwest’s common stock at the closing price on December 31, 2005 through December 31, 2010, with the hypothetical cumulative total return on the NASDAQ Stock Market Index (U.S. Companies) and the NASDAQ Bank Index for the comparable period.

		12/31/05				12/31/06				12/31/07				12/31/08				12/31/09				12/31/10
Southwest		$	100			$	141			$	94			$	69			$	37			$	66
NASDAQ Bank Index			100				112				89				65				54				64
NASDAQ Stock Market Index (U.S.)			100				109				119				57				83				98

Equity Compensation Plan Information

The following table presents disclosure regarding equity compensation plans in existence at December 31, 2010, consisting of the 1999 stock option plan, which has expired but has outstanding options that may still be exercised, and the 2008 stock based award plan, both of which were approved by the shareholders.

Number of

securities

available for

future issuance

Number of

under equity

securities to be

Weighted average

compensation plans

issued upon

exercise price of

excluding

exercise of

outstanding

securities

outstanding options

options, warrants

reflected in column

warrants and rights

and rights

(a)

Plan category

(a)

(b)

(c)

Plans approved by shareholders

202,215

$

20.98

747,994

Plans not approved by shareholders

—

—

—

Total

202,215

$

20.98

747,994

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following discussion and analysis presents the more significant factors affecting Southwest’s financial conditions as of December 31, 2010 and 2009 and results of operations for each of the years in the three-year period ended December 31, 2010. This discussion and analysis should be read in conjunction with Southwest’s consolidated financial statements, notes thereto, and other financial information appearing elsewhere in this report.

Critical Accounting Policies

Southwest’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information that is subject to change. Certain policies inherently rely more on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management is required to use estimates, assumptions, and judgments when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available.

The most significant accounting policies followed by Southwest are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, estimates, assumptions, and judgments underlying those amounts, management has identified the Allowance for Loan Losses and Goodwill and Intangible Assets accounting policies to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revisions as new information becomes available.

Allowance for Loan Losses — The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310.10.35, Receivables: Subsequent Measurement, which requires that losses be accrued when it is probable that Southwest will not collect all principal and interest payments according to the loan’s contractual terms.

The allowance determination process requires significant judgment. Estimates of probable losses inherent in the loan portfolio can vary significantly from the amounts that actually occur. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by Southwest, periodically review the loan portfolio and the allowance. These reviews may result in additional provisions based on the agencies’ judgments based upon information available at the time of each examination. Because the loan portfolio contains a significant number of commercial mortgage and commercial real estate construction loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in the provision for loan losses and nonperforming assets, and may lead to material increases in charge-offs and the provision for loan losses in future periods.

Southwest’s methodology for assessing the appropriateness of the allowance is in accordance with regulatory guidelines and U.S. generally accepted accounting principles, as described in “Provision for Loan Losses” on page 15 and in Note 1 of the Notes to the Consolidated Financial Statements.

Goodwill and Intangible Assets — Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of Southwest’s reporting units compared with its carrying value. Southwest defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As of December 31, 2010, Southwest has eight reporting units, of which three have goodwill allocated to them. If the carrying value exceeds the fair value of a reporting unit, a second test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to their carrying values. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the years expected to be benefited, which Southwest believes are up to ten years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their carrying value may not be recoverable based on a comparison to fair value. Based on Southwest’s annual goodwill impairment test as of October 1, 2010 and updated through December 31, 2010, management does not believe any of its goodwill is impaired as of December 31, 2010.

The step one test includes an analysis of estimated fair value of reporting units to the aggregate market capitalization of Southwest. Southwest engaged an independent third party to assist in the step one fair market valuations, using both the customary market approaches and the discounted cash flow (income) approach, for the Kansas and Texas reporting units, to which $6.6 million of goodwill has been assigned.

The independent step one valuation indicated that as of the October 1, 2010 annual assessment date, the fair value of the Kansas reporting unit was less than its carrying amount, indicating a potential impairment. Consequently, further goodwill impairment testing was required under a step two hypothetical purchase price allocation and analysis to determine the amount of impairment existing, if any. The step two market participant discounts and purchase adjustments applied to the Kansas reporting unit for various categories of loans (such as performing and nonperforming) and deposits, as well as other assets and liabilities, resulted in an implied fair value of goodwill greater than the carrying amount of goodwill. Southwest concluded that there was no goodwill impairment for the Kansas reporting unit as of October 31, 2010 (and as updated through December 31, 2010). Approximately $5.6 million of Southwest’s total goodwill of $6.8 million came from its acquisition of Bank of Kansas during 2007.

The step one fair value of the Texas reporting unit as of the October 1, 2010 annual assessment date (and as updated through December 31, 2010) was greater than the carrying amount, indicating goodwill was not impaired and no step two analysis was required for this reporting unit.

While Southwest believes no impairment existed at December 31, 2010, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability if significantly negative or unfavorable, could have a material adverse effect on the outcome of Southwest’s impairment evaluation and financial condition or future results of operations.

Non-GAAP Financial Measures

None of the financial measures used in this report are defined as non-GAAP financial measures under federal securities regulations. Other banking organizations, however, may present such non-GAAP financial measures, which differ from measures based upon U.S. generally accepted accounting principles. For example, such non-GAAP measures may exclude certain income or expense items in calculating operating income or efficiency ratios or may increase yields and margins to reflect the benefits of tax-exempt earning assets. Readers of this report should be aware that non-GAAP ratios and other measures presented by some banking organizations or financial analysts may not be directly comparable to similarly named ratios or other measures used by Southwest or other banking organizations.

Executive Overview

In 2010, Southwest’s loans, deposits, and assets declined. Southwest’s shareholders’ equity increased as a result of the current year common stock offering and results of operations. Southwest’s net income increased primarily as a result of increased net interest income, controlled noninterest expense, and a decrease in the required provision for loan losses.

Southwest is dedicated to the resolution of problem credits, the maintenance of capital and liquidity, stability in net interest income, and control of operating expenses. Southwest continues to manage the loan portfolio through the difficult credit climate with an ongoing, disciplined workout process focused on addressing the challenges of the commercial real estate construction and commercial mortgage sectors. Southwest is encouraged that the state economic factors for the principal markets in Oklahoma, Texas, and Kansas continue to outperform most of the nation. Southwest continues to make loans in each market with an emphasis on healthcare lending and carefully controlled real estate collateralized credits.

In April 2010, Southwest sold 4,600,000 shares of common stock in a public offering resulting in net proceeds of approximately $54.3 million. The proceeds of the offering were used to increase Southwest’s working capital and for general corporate purposes, including investment in Southwest’s banking subsidiaries.

Results of Operations

Net income available to common shareholders totaled $12.8 million, or $0.71 diluted per common share, in 2010 compared to $8.8 million, or $0.60 diluted per common share, in 2009 and $14.7 million, or $1.00 diluted per common share, in 2008.

The following table presents components of consolidated net income and selected ratios for the years 2010, 2009, and 2008 and the annual changes between those years.

					2010 Change								2009 Change
(Dollars in thousands, except per share data)		2010				From 2009				2009				From 2008				2008
Operations Data
Interest income		$	142,807			$	(7,592	)		$	150,399			$	(12,395	)		$	162,794
Interest expense			35,476				(16,232	)			51,708				(21,367	)			73,075
Net interest income			107,331				8,640				98,691				8,972				89,719
Provision for loan losses			35,560				(3,616	)			39,176				20,197				18,979
Noninterest income			18,564				(3,372	)			21,936				5,798				16,138
Noninterest expense			63,633				2,775				60,858				(1,630	)			62,488
Income before taxes			26,702				6,109				20,593				(3,797	)			24,390
Taxes on income			9,738				2,127				7,611				(1,878	)			9,489
Net income		$	16,964			$	3,982			$	12,982			$	(1,919	)		$	14,901
Net income available to common shareholders		$	12,777			$	3,940			$	8,837			$	(5,821	)		$	14,658
Per Common Share Data
Basic earnings		$	0.71			$	0.11			$	0.60			$	(0.41	)		$	1.01
Diluted earnings			0.71				0.11				0.60				(0.40	)			1.00
Financial Condition Data — Averages
Investment securities		$	261,124			$	15,668			$	245,456			$	6,803			$	238,653
Total loans			2,573,442				(94,329	)			2,667,771				238,642				2,429,129
Interest-earning assets			2,922,645				3,605				2,919,040				247,404				2,671,636
Total assets			2,998,744				11,274				2,987,470				244,571				2,742,899
Interest-bearing deposits			2,112,068				3,224				2,108,844				227,759				1,881,085
Total deposits			2,443,066				49,038				2,394,028				244,173				2,149,855
Other borrowings			96,141				(85,541	)			181,682				(92,424	)			274,106
Subordinated debentures			81,963				—				81,963				17,899				64,064
Total shareholders’ equity			359,535				50,583				308,952				76,121				232,831
Selected Ratios
Return on average assets			0.57	%			0.14	%			0.43	%			(0.11	)%			0.54	%
Return on average total shareholders’ equity			4.72				0.52				4.20				(2.20	)			6.40
Return on average common equity			4.37				0.72				3.65				(2.79	)			6.44
Net interest margin			3.67				0.29				3.38				0.02				3.36

Net income available to common shareholders for 2010 increased $4.0 million, or 45%, compared to 2009. The increase was primarily the result of an $8.6 million increase in net interest income driven by an improved net interest margin and a $3.6 million decrease in the provision for loan losses, offset in part by a $3.4 million decrease in noninterest income, a $2.8 million increase in noninterest expense, and a $2.1 million increase in income tax expense. Net income available to common shareholders for 2009 decreased $5.8 million, or 40%, compared to 2008. The decrease was primarily due to a $20.2 million increase in the provision for loan losses and a $3.9 million increase in dividends on the preferred stock that was issued in December 2008, offset in part by a $9.0 million increase in net interest income, a $5.8 million increase in noninterest income, a $1.9 million decrease in income tax expense, and a $1.6 million decrease in noninterest expense.

Details of the changes in various components of net income are further discussed below.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is Southwest’s largest source of revenue representing 85% of total revenue in 2010. Net interest margin is net interest income as a percentage of average earning assets for the period. Net interest income and net interest margin increase or decrease as a result of changes in the levels of interest rates, the volume and the mix of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets funded by noninterest-bearing funding sources.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Southwest’s loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, began 2008 at 7.25% and decreased 200 basis points in the first quarter, 25 basis points in the second quarter, and 175 basis points in the fourth quarter to end the year at 3.25%. During 2009 and 2010, the prime interest rate remained at 3.25% for the entire year. Southwest’s loan portfolio is also impacted, to a lesser extent, by changes in the London Interbank Offered Rate (“LIBOR”). At December 31, 2010, the one-month and three-month U.S. dollar LIBOR rates were 0.26% and 0.30%, respectively, while at December 31, 2009, the rates were 0.23% and 0.25%, respectively and at December 31, 2008, the rates were 1.08% and 1.83%, respectively.

The intended federal fund rate, which is the cost of immediately available overnight funds, dropped in a similar manner to the prime interest rate. It began 2008 at 4.25% and decreased 200 basis points in the first quarter, 25 basis points in the second quarter and 175 basis points in the fourth quarter to the end of the year at 0.25%. During 2009 and 2010, the intended federal funds rate remained between zero and 0.25% for the entire year.

Net interest income for 2010 was $107.3 million, an increase of $8.6 million, or 9%, from the $98.7 million earned in 2009. Net interest margin was 3.67% for the year ended December 31, 2010, an increase of twenty-nine basis points from 2009. Included in 2010 net interest income was a net recovery of $1.0 million from the resolution of nonperforming loans and additional discount accretion on loans and the loss share receivable, offset in part by interest reversals on nonaccrual loans. These net recoveries increased net interest margin by 3 basis points.

Net interest income for 2009 was $98.7 million, an increase of $9.0 million, or 10%, from the $89.7 million earned in 2008. Net interest margin was 3.38% for the year ended December 31, 2009, an increase of two basis points from 2008. Included in 2009 net interest income was a recovery of $1.9 million in interest from the successful resolution of a nonperforming loan. Net interest margin would have been 6 basis points lower without this recovery. Also included in net interest income was the recognition of discount income of $0.8 million due to prepayment and collection of loans acquired in the FNBA transaction in excess of the recorded value at the date of the acquisition. This increased net interest margin by 3 basis points.

Net interest income for 2008 was $89.7 million, a decrease of $2.9 million, or 3%, from the $92.6 million earned in 2007. Net interest margin was 3.36% for the year ended December 31, 2008, a decrease of eighty-four basis points from 2007. The decrease in net interest income and net interest margin was the result of the competitive pressures and governmental actions that caused rates on deposits and other funding sources to decrease less than the drop in rates on earning assets, and our rate sensitivity position. The resulting margin compression produced a drop in net interest income.

Interest rate spread, which represents the difference between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities, was 3.34% for 2010, compared to 2.97% for 2009 and 2.80% for 2008.

Southwest has seen growth in noninterest-bearing deposit accounts which are an alternative funding source to interest-bearing deposits and other borrowings. The average balance of noninterest-bearing deposit accounts increased to $331.0 million in 2010 from $285.2 million in 2009 and $268.8 million in 2008.

For further analysis of asset sensitivity please see tables showing the effects of changes in interest rates and changes in volume of interest related assets and liabilities on page 15 of this report and the discussion of Quantitative and Qualitative Disclosures about Market Risk on pages 30 through 32 of this report.

The following table provides information relating to Southwest’s average consolidated statements of financial condition and reflects the interest income on interest-earning assets, interest expense of interest-bearing liabilities, and the average yields earned and rates paid for the periods indicated. Yields and rates are derived by dividing income or expense reflected in the Consolidated Statements of Operations by the average daily balance of the related assets or liabilities, respectively, for the periods presented. Nonaccrual loans have been included in the average balances of total loans.

The changes in the composition of interest-earning assets and their funding sources reflect market demand and management’s efforts to maximize net interest margin while controlling interest rate, credit, and other risks.

Consolidated Average Balances, Yields and Rates

										For the Year Ended December 31,
(Dollars in thousands)						2010												2009												2008
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate (1)				Balance				Interest				Rate (1)				Balance				Interest				Rate (1)
Assets
Total loans (2) (3)		$	2,573,442			$	133,918				5.20	%		$	2,667,771			$	141,239				5.29	%		$	2,429,129			$	152,719				6.29	%
Investment securities			261,124				8,660				3.32				245,456				9,146				3.73				238,653				9,986				4.18
Other interest-earning assets			88,079				229				0.26				5,813				14				0.24				3,854				89				2.31
Total interest-earning assets			2,922,645				142,807				4.89				2,919,040				150,399				5.15				2,671,636				162,794				6.09
Other assets			76,099												68,430												71,263
Total assets		$	2,998,744											$	2,987,470											$	2,742,899
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits		$	98,589			$	468				0.47	%		$	83,813			$	476				0.57	%		$	75,950			$	584				0.77	%
Money market accounts			508,583				3,911				0.77				485,383				4,954				1.02				538,148				12,620				2.35
Savings accounts			25,609				64				0.25				21,010				78				0.37				13,930				69				0.50
Time deposits			1,479,287				23,824				1.61				1,518,638				36,811				2.42				1,253,057				47,749				3.81
Total interest-bearing deposits			2,112,068				28,267				1.34				2,108,844				42,319				2.01				1,881,085				61,022				3.24
Other borrowings			96,141				2,079				2.16				181,682				4,049				2.23				274,106				7,242				2.64
Subordinated debentures			81,963				5,130				6.26				81,963				5,340				6.52				64,064				4,811				7.51
Total interest-bearing liabilities			2,290,172				35,476				1.55				2,372,489				51,708				2.18				2,219,255				73,075				3.29
Noninterest-bearing demand deposits			330,998												285,184												268,770
Other liabilities			18,039												20,845												22,043
Shareholders’ equity			359,535												308,952												232,831
Total liabilities and shareholders’ equity		$	2,998,744											$	2,987,470											$	2,742,899
Net interest income						$	107,331											$	98,691											$	89,719
Interest rate spread											3.34	%											2.97	%											2.80	%
Net interest margin (4)											3.67	%											3.38	%											3.36	%
Ratio of average interest- earning assets to average interest-bearing liabilities											127.62	%											123.04	%											120.38	%

The following table analyzes Southwest’s 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.

Effect of Volume and Rate Changes on Net Interest Income

		2010 vs. 2009												2009 vs. 2008
		Increase				Due to Change								Increase				Due to Change
		Or				In Average:								Or				In Average:
(Dollars in thousands)		(Decrease)				Volume				Rate				(Decrease)				Volume				Rate
Interest earned on:
Loans receivable (1) (2)		$	(7,321	)		$	(4,937	)		$	(2,384	)		$	(11,480	)		$	14,095			$	(25,575	)
Investment securities			(486	)			560				(1,046	)			(840	)			278				(1,118	)
Other interest-earning assets			215				214				1				(75	)			31				(106	)
Total interest income			(7,592	)			186				(7,779	)			(12,395	)			14,203				(26,598	)
Interest paid on:
Interest-bearing demand			(8	)			77				(85	)			(108	)			56				(164	)
Money market accounts			(1,043	)			227				(1,270	)			(7,666	)			(1,134	)			(6,532	)
Savings accounts			(14	)			15				(29	)			9				29				(20	)
Time deposits			(12,987	)			(903	)			(12,084	)			(10,938	)			8,728				(19,666	)
Other borrowings			(1,970	)			(1,853	)			(117	)			(3,193	)			(2,181	)			(1,012	)
Subordinated debentures			(210	)			—				(210	)			529				1,223				(694	)
Total interest expense			(16,232	)			(1,739	)			(14,493	)			(21,367	)			4,756				(26,123	)
Net interest income		$	8,640			$	1,925			$	6,714			$	8,972			$	9,447			$	(475	)

Provision for Loan Losses

The provision for loan losses is the amount of expense that, based on Southwest’ judgment, is required to maintain the allowance for loan losses at an appropriate level based upon the inherent risks in the loan portfolio. The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate, after the effects of net charge-offs for the period. Net charge-offs for the year ended December 31, 2010 were $32.7 million, an increase of $16.2 million, or 98%, over the $16.5 million recorded for the year ended December 31, 2009. The provision for loan losses for the year ended December 31, 2010 was $35.6 million, representing a decrease of $3.6 million, or 9%, from the $39.2 million recorded for the year ended December 31, 2009. See the section captioned “Allowance for Loan Losses” on page 25 of this report for further analysis of the provision for loss losses.

Noninterest Income

Noninterest income was $18.6 million for 2010, a 15% decrease when compared with 2009. Noninterest income in 2009 increased 36% when compared with 2008.

						2010 Change								2009 Change
(Dollars in thousands)		2010				From 2009				2009				From 2008				2008
Service charges and fees		$	12,404			$	700			$	11,704			$	678			$	11,026
Other noninterest income			763				(3,581	)			4,344				2,798				1,546
Gain on sales of loans			2,736				(227	)			2,963				299				2,664
Gain on sales/calls of investment securities			2,661				(264	)			2,925				2,023				902
Total noninterest income		$	18,564			$	(3,372	)		$	21,936			$	5,798			$	16,138

Service charges and fees — Service charges and fees increased $0.7 million, or 6%, in 2010 as a result of increased interchange service charges, increased brokerage fees, increased loan servicing fees, and decreased amortization of mortgage servicing rights, which includes the impairments that occurred in 2009.

Service charges and fees increased $0.7 million, or 6%, in 2009 as a result of increased commercial account service charges due to a reduction in earnings credits on balances caused by decreased interest rates and the acquisition of FNBA, offset in part by decreased brokerage fees.

Other noninterest income — Other noninterest income includes consulting income and other miscellaneous income items. The 2010 decrease of $3.6 million, or 82%, was primarily the result of decreased consulting income in 2010 and the gain on acquisition that occurred in 2009. The 2009 increase of $2.8 million, or 181%, includes the $3.3 million gain recognized on the FDIC-assisted acquisition of FNBA.

Gain on sales of loans — Gain on sales of loans includes the net gains recognized from the sale of student loans, mortgage loans, and other commercial loans that are classified as held for sale. For 2010, the decrease was the result of reduced sales of student loans and decreased sales of mortgage loans, while for 2009 the increase was the result of increased sales of mortgage loans, offset in part by a reduction in sales of student loans.

Gain on sales/calls of investment securities — Gain on sales of investment securities includes a $2.7 million and $2.9 million gain recognized as the result of the sale of investment securities during 2010 and 2009, respectively. The 2008 gain on sales of investment securities includes a $1.2 million gain due to the redemption of certain VISA USA common shares, offset in part by a securities loss of $0.4 million recorded due to the other than temporary impairment of two investment securities during the year.

Noninterest Expense

Noninterest expense was $63.6 million for 2010, an increase of $2.8 million, or 5%, from 2009. Noninterest expense decreased $1.6 million, or 3%, in 2009 from 2008.

						2010 Change								2009 Change
(Dollars in thousands)		2010				From 2009				2009				From 2008				2008
Salaries and employee benefits		$	29,916			$	617			$	29,299			$	(4,031	)		$	33,330
Occupancy			11,171				(466	)			11,637				765				10,872
FDIC and other insurance			5,788				243				5,545				3,457				2,088
Other real estate, net			2,218				2,088				130				(16	)			146
Provision for unfunded loan commitments			(1,603	)			(1,373	)			(230	)			(865	)			635
Other general and administrative			16,143				1,666				14,477				(940	)			15,417
Total noninterest expense		$	63,633			$	2,775			$	60,858			$	(1,630	)		$	62,488

Salaries and employee benefits — Salaries and employee benefits increased $0.6 million, or 2%, in 2010 primarily as a result of increased employee insurance expense. The number of full-time equivalent employees decreased from 466 at the beginning of the year to 432 as of December 31, 2010.

Salaries and employee benefits decreased $4.0 million, or 12%, in 2009 primarily as a result of decreased salary expense and decreased profit sharing and bonus accruals. The number of full-time equivalent employees increased from 442 at the beginning of the year to 466 as of December 31, 2009.

Occupancy — Occupancy expense decreased $0.5 million, or 4%, in 2010 primarily due to decreased depreciation expense. Occupancy expense increased $0.8 million, or 7%, in 2009 due to increased building rental expense, depreciation expense, security service expense, and janitorial service expense. Approximately $0.5 million of the increase in 2009 was the result of the FNBA acquisition.

FDIC and other insurance — Southwest’s bank subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates. The increase in FDIC and other insurance expense for 2010 is due to higher average deposit balances and a decrease in asset quality. The increase in 2009 was due to a special assessment of 5 basis points, resulting in an additional $1.4 million, the FDIC raised the current assessment rates uniformly by 7 basis points for the 2009 assessment, and an additional 10 basis point assessment was paid on transaction accounts exceeding $250,000 under the Temporary Liquidity Guaranty Program.

Other real estate, net — During 2010, Southwest acquired and sold properties; however, the net effect of current year transactions caused an increase in other real estate expenses. Other real estate was $41.9 million at December 31, 2010, compared to $23.2 million at December 31, 2009. The decreased other real estate expenses in 2009 occurred as Southwest received income from the sales of previously acquired properties.

Provision for unfunded loan commitments — The provision for unfunded loan commitments is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. The $1.4 million and $0.9 million decreases in 2010 and 2009, respectively, are due to declines in the level of commitments when compared to prior years.

Other general and administrative — Other general and administrative expenses increased $1.7 million, or 12%, in 2010 after declining $0.9 million, or 6%, in 2009. The increase in 2010 is primarily the result of increased consulting fees and increased legal fees associated with loan and other real estate transactions. The decline in 2009 is primarily the result of an increase in deferred expense recognition related to loan origination costs.

Operating Segments

		For the Year Ended December 31,
(Dollars in thousands)		2010				2009				2008
Oklahoma banking		$	14,864			$	12,160			$	12,505
Texas banking			4,523				10,722				7,551
Kansas banking			884				424				(1,122	)
Other states banking			(1,958	)			(1,618	)			2,756
Secondary market			980				(148	)			(144	)
Other operations			(2,329	)			(8,558	)			(6,645	)
Consolidated net income		$	16,964			$	12,982			$	14,901
Oklahoma banking		$	871,393			$	933,150			$	966,243
Texas banking			982,845				1,054,404				947,603
Kansas banking			289,642				359,633				304,855
Other states banking			241,041				277,512				275,805
Secondary market			35,194				43,134				56,941
Consolidated total loans		$	2,420,115			$	2,667,833			$	2,551,447
Oklahoma banking		$	899,269			$	950,355			$	984,298
Texas banking			976,383				1,044,324				945,907
Kansas banking			389,813				441,114				310,503
Other states banking			231,590				275,653				272,599
Secondary market			37,483				45,148				61,149
Other operations			286,003				351,697				305,306
Consolidated total assets		$	2,820,541			$	3,108,291			$	2,879,762
Oklahoma banking		$	1,565,124			$	1,640,839			$	1,394,008
Texas banking			160,181				160,064				133,745
Kansas banking			270,271				283,506				146,182
Secondary market			1,389				1,527				1,550
Other operations			255,763				506,794				504,637
Consolidated total deposits		$	2,252,728			$	2,592,730			$	2,180,122

Southwest has six reportable operating segments: Oklahoma Banking, Texas Banking, Kansas Banking, Other States Banking, loans originated for sale in the secondary market (“Secondary Market”), and Other Operations. These business segments were identified through the products and services that are offered within each segment and the geographic area they serve.

Portfolio loans are allocated based upon the state of the borrower or the location of the real estate in the case of real estate loans. Loans included in the Other States Banking segment are portfolio loans attributable to states other than Oklahoma, Texas, or Kansas and primarily consist of healthcare and commercial real estate credits. These out of state loans are administered by offices in Oklahoma, Texas, or Kansas.

Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital by asset, deposit, or revenue category based on Credit, Interest Rate, Market, Operational, and Liquidity Risks.

The contribution of the Oklahoma Banking segment increased $2.7 million, or 22%, in 2010, as a result of a $7.9 million decrease in the provision for loan losses, offset in part by a $1.7 million increase in noninterest expense, a $1.3 million increase in income taxes, a $1.1 million decrease in net interest income, and a $1.0 million decrease in other noninterest income. Oklahoma Banking segment net income decreased $0.3 million, or 3%, in 2009, as a result of a $3.6 million decrease in net interest income and a $2.6 million increase in the provision for loan losses, offset in part by a decrease of $4.8 million in noninterest expense and a decrease of $0.7 million in income taxes.

The contribution of the Texas Banking segment decreased $6.2 million, or 58%, in 2010, primarily as a result of a $10.2 million increase in the provision for loan losses, offset in part by a $3.9 million decrease in income taxes. The contribution of the Texas Banking segment increased $3.2 million, or 42%, in 2009, primarily as a result of an

$8.4 million increase in net interest income and decreased noninterest expense of $1.9 million, offset in part by an increased provision for loan losses of $5.2 million and increased taxes of $1.8 million.

The contribution of the Kansas Banking segment increased $0.5 million, or 108%, in 2010 as a result of a $4.4 million decrease in the provision for loan losses and increased net interest income of $0.9 million, offset in part by a $2.0 million decrease in noninterest income, which included the $3.3 million recognized gain on the FDIC-assisted acquisition of FNBA in 2009, a $2.5 million increase in noninterest expense, and an increase in income taxes of $0.4 million. The contribution of the Kansas Banking segment increased $1.5 million, or 138%, in 2009 primarily as a result of a $6.0 million increase in noninterest income, which included the $3.3 million recognized gain on the FDIC-assisted acquisition of FNBA, and a $5.4 million increase in net interest income. These increases were offset in part by a $5.7 million increase in noninterest expense and a $3.7 million increase in the provision for loan losses.

The contribution of the Other States Banking segment decreased by $0.3 million, or 21%, in 2010 primarily as a result of decreased net interest income of $1.2 million, offset in part by a $1.4 million decrease in the provision for loan losses. The contribution of the Other States Banking segment decreased by $4.4 million, or 159%, in 2009 primarily as a result of an $8.7 million increased provision for loan losses, offset in part by a $3.0 million decrease in taxes and a $1.1 million decrease in noninterest expenses.

At December 31, 2010, Southwest’s eleven Oklahoma offices accounted for $871.4 million in loans, or 37% of total portfolio loans, the six Texas offices accounted for $982.8 million in loans, or 41% of total portfolio loans, the eight Kansas offices accounted for $289.6 million in loans, or 12% of total portfolio loans, and the Other States Banking segment accounted for $241.0 million in loans, or 10% of total portfolio loans.

For 2010, the Secondary Market segment contributed net income of $1.0 million. The Secondary Market segment incurred a loss of $0.1 million in 2009. The increase occurred primarily as a result of decreased noninterest expense as a result of the reduction in student loan activities due to the changes in federal regulation.

For 2010 and 2009, the Other Operations segment, which includes Southwest’s fund management unit, incurred a loss of $2.3 million and $8.6 million, respectively. The value of funds provided and cost of funds borrowed from the funds management unit by the operating segments are internally priced at rates that approximate market rates for funds with similar duration.

The segment disclosures above and in Note 17 of the Notes of the Consolidated Financial Statements show that the Oklahoma Banking, Texas Banking, Kansas Banking, and Other States Banking segments provide the majority of consolidated net interest income and net income, and for the year ended December 31, 2010 accounted for approximately $2.5 billion, or 89%, of total assets.

The segment disclosures are based upon a number of assumptions and allocations of expense. Southwest allocates resources and evaluates performance of its segments after allocation of funds, indirect expenses, taxes, and capital costs. Capital is assigned to each of the segments using a risk-based capital pricing methodology that assigns capital ratios by asset, deposit, or revenue category based on credit risk, interest rate risk, market risk, operational risk, and liquidity risk.

Taxes on Income

Southwest’s income tax expense for fiscal years 2010, 2009, and 2008 was $9.7 million, $7.6 million, and $9.5 million, respectively. Southwest’s effective tax rates have been lower than statutory federal and state statutory rates primarily because of the organization of a real estate investment trust in July 2001, as well as tax credits generated by certain lending and investment activities, and tax-exempt income on municipal obligations and loans.

Financial Condition

Southwest’s total assets decreased by $287.8 million, or 9%, to $2.8 billion at December 31, 2010, compared to $3.1 billion at December 31, 2009 after increasing by $228.5 million, or 8%, between December 31, 2009 and December 31, 2008. The decline in assets in 2010 was primarily attributable to the $247.7 million, or 9%, decrease in total loans and the $51.4 million, or 43%, decrease in cash.

Investment Securities Portfolio

Southwest maintains an investment securities portfolio consisting of securities issued by U.S. Government sponsored entities, state and political subdivisions, and mortgage-backed and other investments. Mortgage-backed securities consist of agency securities underwritten and guaranteed by Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”). Investment securities are held in safekeeping by an independent custodian.

Investment securities assigned to the available for sale portfolio are generally used to supplement Southwest’s liquidity, provide a prudent yield, and provide collateral for public deposits and other borrowing facilities. Unrealized net gains and losses on available for sale securities are recorded as an adjustment to equity, net of taxes, but are not reflected in the current earnings of Southwest. If management determines any impairment in any available for sale security is “other-than-temporary,” a securities loss will be recognized as a charge to earnings. If a security is sold, any gain or loss is recorded as a credit or charge to earnings and the equity adjustment is reversed. At December 31, 2010, Southwest held $248.2 million in securities classified as available for sale with an unrealized gain of $1.6 million, net of taxes of $0.6 million, related to these securities included in shareholders’ equity.

Investment securities assigned to the held to maturity portfolio earn a prudent yield, provide liquidity from maturities and paydowns, and provide collateral to pledge for federal, state, and local government deposits and other borrowing facilities. The held to maturity investment portfolio at December 31, 2010 included $14.3 million in fixed-rate securities. If management determines any impairment in any held to maturity security is “other-than-temporary,” a securities loss will be recognized as a charge to earnings.

Southwest had no trading securities at December 31, 2010, 2009, and 2008.

A summary of the investment securities portfolio is as follows for the years ended December 31, 2010, 2009, and 2008.

		At December 31,
(Dollars in thousands)		2010				2009				2008
U.S. Government obligations		$	1,108			$	1,100			$	999
Federal agency securities			65,374				75,385				79,197
Obligations of states and political subdivisions			14,537				7,523				10,098
Residential mortgage-backed securities			180,017				159,146				154,013
Other investments			11,893				20,285				19,859
Total investment securities		$	272,929			$	263,439			$	264,166
Available for sale (fair value)		$	248,221			$	237,703			$	238,037
Held to maturity (amortized cost)			14,304				6,670				7,343
Other investments (cost)			10,404				19,066				18,78
Total investment securities		$	272,929			$	263,439			$	264,166

Southwest does not have any material amounts of investment securities or other interest-earning assets, other than loans, that would have been classified as nonperforming if such assets were loans or which were recognized by management as potential problem assets based upon known information about possible credit problems of the borrower or issuer.

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 Southwest’s investment portfolio at December 31, 2010. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed securities are based on expected maturities. Expected maturities differ from contractual maturities because borrowers of the underlying mortgages may have the right to call or prepay obligations with or without prepayment penalties. The securities of no single issuer (other than the United States or its agencies), or in the case of securities issued by state and political subdivisions, no source or group of sources of repayment, accounted for more than 10% of shareholders’ equity of Southwest at December 31, 2010.

										After One								After Five
		One Year								Year through								Years through								After												Total Investment
		or Less								Five Years								Ten Years								Ten Years												Securities
(Dollars in thousands)		Cost				Yield				Cost				Yield				Cost				Yield				Cost				Yield				Cost				Market				Yield
Held to Maturity:
Obligations of states and political subdivisions		$	2,470				3.22	%		$	5,344				1.84	%		$	6,490				2.39	%		$	—				—	%		$	14,304			$	14,029				2.33	%
Total		$	2,470				3.22	%		$	5,344				1.84	%		$	6,490				2.39	%		$	—				—	%		$	14,304			$	14,029				2.33	%
Available for Sale:
U.S. government obligations		$	1,099				1.20	%		$	—				—	%		$	—				—	%		$	—				—	%		$	1,099			$	1,108				1.20	%
Federal agency securities			4,010				2.24				19,341				2.63				31,600				2.57				10,571				2.27				65,522				65,374				2.52
Obligations of states and political subdivisions			150				3.88				26				3.35				55				—				—				—				231				233				4.57
Residential mortgage-backed securities			20,995				2.70				118,004				3.09				38,989				2.87				707				5.83				178,695				180,017				3.01
Other securities			—				—				11,506				—				—				—				—				—				11,506				11,893				—
Total		$	26,254				2.58	%		$	148,877				2.79	%		$	70,644				2.74	%		$	11,278				2.49	%		$	257,053			$	258,625				2.74	%
Total		$	28,724							$	154,221							$	77,134							$	11,278							$	271,357			$	272,654