-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q4RcKVekhTNm6rAU+amS9xlPK+M4VKcNLZXSXQaZVBgmN3RneeroZP9Fw1hiXIIU auQ1Y78GTQOuFOvnt1FBnw== 0001005150-03-000673.txt : 20030328 0001005150-03-000673.hdr.sgml : 20030328 20030328121252 ACCESSION NUMBER: 0001005150-03-000673 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST BANCORP INC CENTRAL INDEX KEY: 0000914374 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 731136584 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23064 FILM NUMBER: 03623587 BUSINESS ADDRESS: STREET 1: 608 SOUTH MAIN STREET CITY: STILLWATER STATE: OK ZIP: 74074 BUSINESS PHONE: 4053722230 MAIL ADDRESS: STREET 1: 608 SOUTH MAIN STREET CITY: STILLWATER STATE: OK ZIP: 74074 10-K 1 form10k.txt FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 2002 Commission File Number 0-23064 SOUTHWEST BANCORP, INC. (Exact name of registrant as specified in its charter) Oklahoma 73-1136584 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 608 South Main Street, Stillwater, Oklahoma 74074 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (405) 372-2230. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share --------------------------------------- (Title of Class) 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. YES X 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. [ ] Indicate by a check mark if the registrant is an accelerated filer. YES X NO ----- ----- The registrant's Common Stock is traded on the NASDAQ National Market under the symbol OKSB. The aggregate market value of approximately 4,468,000 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2002, the last day of the registrant's most recently completed second fiscal quarter, was approximately $121,7 million based on the closing sales price of $27.231 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 are affiliates. As of the close of business on March 7, 2003, 5,862,861 shares of the registrant's Common Stock were outstanding. Documents Incorporated by Reference Parts I and II: Portions of the Annual Report to Shareholders for the year ended December 31, 2002 (the "Annual Report"). Part III: Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 24, 2003 (the "Proxy Statement"). CAUTION ABOUT FORWARD-LOOKING STATEMENTS Southwest Bancorp, Inc. ("Southwest") makes forward-looking statements in this Form 10-K that are subject to risks and uncertainties. These forward-looking statements include: o Statements of goals, intentions, and expectations; o Estimates of risks and of future costs and benefits; o Assessments of loan quality and of probable loan losses; and o 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 or are affected by: o Management's estimates and projections of future interest rates and other economic conditions; o Future laws and regulations; and o 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 results of operations do not necessarily indicate its future results. PART I ITEM 1. BUSINESS General Southwest is a financial holding company headquartered in Stillwater, Oklahoma. Southwest provides commercial and consumer banking services through its banking subsidiary, Stillwater National Bank & Trust Company ("Stillwater National" or the "Bank") and management consulting services through Business Consulting Group, Inc. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest is registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). As such, Southwest is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Southwest became a financial holding company during 2000 pursuant to the Holding Company Act. The Bank is a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the "OCC"). The Bank's deposit accounts are insured by the Bank Insurance Fund (the "BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by law. Southwest has filed applications to establish a new federal savings bank, SNB Bank of Wichita, to be headquartered in Wichita, Kansas. SNB Bank of Wichita will be subject to supervision and regulation by the Office of Thrift Supervision ("OTS"). Products and Services Southwest offers a wide variety of commercial and consumer lending and deposit services. Southwest has developed internet banking services, called SNB DirectBanker(R), for consumer and commercial customers, a highly automated lockbox, imaging and information service for commercial customers called "Business Mail Processing," and a deposit product that automatically sweeps excess funds from commercial demand deposit accounts and invests them in short-term borrowings ("Sweep Repurchase Agreements"). The commercial loans offered by Southwest include (i) commercial real estate loans, (ii) working capital and other commercial loans, (iii) construction loans, and (iv) Small Business Administration ("SBA") guaranteed loans. Consumer lending services include (i) government-guaranteed student loans, (ii) residential real estate loans and mortgage banking services, and (iii) personal lines of credit and other installment loans. Southwest also offers deposit and personal banking services, including (i) commercial deposit services such as Business Mail Processing, commercial checking, money market, and other deposit accounts, and (ii) retail deposit services such as certificates of deposit, money market accounts, checking accounts, NOW accounts, savings accounts and automatic teller machine ("ATM") access. Trust services, personal brokerage and credit cards are offered through independent institutions. 1 Strategic Focus Southwest's banking philosophy is to provide a high level of customer service, a wide range of financial services, and products responsive to customer needs. This philosophy has led to the development of a line of deposit and lending products that responds to customer needs for speed, efficiency and information. These include Southwest's Sweep Repurchase Agreements, Business Mail Processing, and Southwest's SNB DirectBanker(R) and other internet banking products, which complement Southwest's more traditional banking products. Southwest also emphasizes marketing to highly educated, professional and business persons in its markets. Southwest seeks to build close relationships with businesses, professionals and their principals and to service their banking needs throughout their business development and professional lives. Organization Southwest's business operations are conducted through five regional divisions that offer commercial, consumer, and real estate lending services and, where authorized, retail and commercial deposit products in their market areas, and a home office that provides technology driven products, residential mortgages, and government-guaranteed student loans. Southwest's support and control functions are centralized, although each region includes support and control staff. The organizational structure is designed to facilitate high customer service, prompt response, efficiency, and appropriate, uniform credit standards and other controls. Regional Divisions. The five regional divisions are the Stillwater division, the Central Oklahoma division, based in Oklahoma City; the Tulsa and Eastern Oklahoma division; the Texas division, based in metropolitan Dallas; and the Kansas Division, based in Wichita. The Stillwater division serves the Stillwater market as a full-service community bank emphasizing both commercial and consumer lending. The other four divisions pursue a more focused marketing strategy, targeting managers, professionals and businesses for lending, and offering more specialized services. All of the regional divisions focus on commercial and consumer financial services to local businesses and their senior employees and to other managers and professionals living and working in Southwest's market areas. Southwest has a high-service philosophy. Loan officers often meet at the customer's home or place of business to close loans. Third-party courier services often are used to collect commercial deposits. Home Office Business Operations. Southwest manages and offers products that are technology based, or that otherwise are more efficiently offered centrally, through its home office. These include products that are marketed through the regional offices, such as Southwest's internet banking product for commercial and retail customers (SNB DirectBanker(R)), commercial information and item processing services (Business Mail Processing), residential mortgage loans, and products marketed and managed directly by central staff, such as student lending and cash dispensing machines. Southwest's technology products are marketed both to existing customers and to help develop new customer relationships. Use of these products by customers enables Southwest to serve its customers more effectively, use its resources more efficiently, and increase fee income. Southwest also manages its mortgage and student lending operations through its home office. Southwest markets its student lending program directly to financial aid directors at colleges and universities throughout the United States. These loans are generally sold as they enter repayment. Southwest also originates first mortgage loans for sale to the Federal National Mortgage Association ("FNMA") or private investors. Servicing on these loans may be released in connection with the sale. Support and Control Functions. Support and control functions are centralized, although each regional division has support and control personnel. Southwest's philosophy of customer service extends to its support and control functions. Senior managers headquartered in the Stillwater offices travel to Oklahoma City, Tulsa, Dallas, and Wichita to help in marketing and management. Southwest's Chief Executive Officer, Chief Lending Officer, and others meet in committee in the regional offices to consider credit proposals in order to ensure customers are given prompt decisions while maintaining uniform credit standards. Banking Offices Banking Offices. Southwest has seven full-service banking offices, two of which are located in each of Stillwater and Tulsa, Oklahoma, and one each in Oklahoma City and Chickasha, Oklahoma, and Frisco, Texas; loan production offices in Wichita, Kansas and on the campuses of the University of Oklahoma 2 Health Sciences Center and Oklahoma State University-Tulsa; a marketing presence in the Student Union at Oklahoma State University-Stillwater; and on the Internet, through SNB DirectBanker(R). See "Item 2. Properties." Before 1999, laws of the State of Oklahoma limited the number and location of de novo branches that a bank could establish. Southwest has developed and continues to pursue a business strategy that does not rely on an extensive branch network. National banks in Oklahoma now have broad ability to establish de novo branches anywhere in the state. Southwest established its offices in Frisco, Texas and Wichita, Kansas in 2002. Regulation, Supervision, and Governmental Policy Following is a brief summary of certain statutes and regulations that significantly affect Southwest and Stillwater National. A number of other statutes and regulations affect Southwest and Stillwater National but are not summarized below. Bank Holding Company Regulation. Southwest is registered as a bank holding company under the Holding Company Act and, as such, is subject to supervision and regulation by the Federal Reserve. As a bank holding company, Southwest is required to furnish to the Federal Reserve annual and quarterly reports of its operations and additional information and reports. Southwest is also subject to regular examination by the Federal Reserve. Under the Holding Company Act, a bank holding company must obtain the prior approval of the Federal Reserve before (i) 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. Under the Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of Southwest or Stillwater National. For purposes of the Holding Company Act, "control" is defined as ownership of more than 25% of any class of voting securities of Southwest or Stillwater National, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of Southwest or Stillwater National. The federal Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act), to file a written notice with the Federal Reserve before the person or persons acquire control of Southwest or Stillwater National. The Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a 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. However, bank holding companies such as Southwest that qualify as financial holding companies under the Holding Company Act also may engage in a broad range of additional non-bank activities. Southwest qualified as a financial holding company in 2000. The activities of Southwest are subject to these legal and regulatory limitations under the Holding Company Act and Federal Reserve regulations. Non-bank and financially related activities of bank holding companies, including companies that become financial holding companies, also may be subject to regulation and oversight by regulators other than the Federal Reserve. The Federal Reserve also has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding company. The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "Regulatory Capital Requirements." 3 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. Bank Regulation. As a national bank, Stillwater National is subject to the primary supervision of the OCC under the National Bank Act. The prior approval of the OCC is required for a national bank to establish or relocate an additional branch office or to engage in any merger, consolidation, or significant purchase or sale of assets. Before 1999, laws of the State of Oklahoma severely limited the number and location of de novo branches that a bank could establish. National banks in Oklahoma now have broad ability to establish de novo branches anywhere in the state as a result of changes in state laws enacted in 1999, and interpretations of those laws by the OCC. The OCC regularly examines the operations and condition of Stillwater National, including but not limited to its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of Stillwater National's depositors and the BIF. In addition, Stillwater National is required to furnish quarterly and annual reports to the OCC. The OCC's enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. The OCC has adopted regulations regarding the capital adequacy of national banks, which require national banks to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "Regulatory Capital Requirements." No national bank may pay dividends from its paid-in capital. All dividends must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. The National Bank Act further restricts the payment of dividends out of net profits by prohibiting a national bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until one-tenth of a bank's net profits for the preceding half year in the case of quarterly or semi-annual dividends, or the preceding two half-year periods in the case of annual dividends, are transferred to the surplus fund. The approval of the OCC is required prior to the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for that year combined with its retained net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. In addition, Stillwater National is prohibited by federal statute from paying dividends or making any other capital distribution that would cause Stillwater National to fail to meet its regulatory capital requirements. Further, the OCC also has authority to prohibit the payment of dividends by a national bank when it determines that their payment would be an unsafe and unsound banking practice. Stillwater National is a member of the Federal Reserve System and its deposits are insured by the FDIC to the legal maximum of $100,000 for each insured depositor. Some of the aspects of the lending and deposit business of Stillwater National that are subject to regulation by the Federal Reserve and the FDIC include reserve requirements and disclosure requirements in connection with personal and mortgage loans and deposit accounts. In addition, Stillwater National 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. Stillwater National is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, Southwest and other affiliates, and on investments in their stock or other securities. These restrictions prevent Southwest and Stillwater National's other affiliates from borrowing from Stillwater National unless the loans are secured by specified collateral, and require those transactions to have terms comparable to terms of arms-length transactions with third persons. In addition, secured loans and other transactions and investments by Stillwater National are generally limited in amount as to Southwest and as to any other affiliate to 10% of Stillwater National's capital and surplus and as to Southwest and all other affiliates together to an aggregate of 20% of Stillwater National's capital and surplus. Certain exemptions to these limitations apply to extensions of credit by, and other transactions between, Stillwater National and its subsidiaries. These 4 regulations and restrictions may limit Southwest's ability to obtain funds from Stillwater National for its cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses. Under OCC regulations, national banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards; prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting requirements. A bank's real estate lending policy must reflect consideration of the Guidelines for Real Estate Lending Policies (the "Guidelines") adopted by the federal bank 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. The FDIC has established a risk-based deposit insurance premium assessment system for insured depository institutions. Under the system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, based upon the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well-capitalized, adequately capitalized, or undercapitalized -- based on the data reported to regulators. Well-capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well-capitalized institutions but that satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Institutions that do not qualify as either well-capitalized or adequately capitalized are deemed to be undercapitalized. Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk it poses to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions with demonstrated weaknesses that, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. Stillwater National has been informed that it is in the lowest-cost/best risk assessment category for the first assessment period of 2003. Regulatory Capital Requirements. The Federal Reserve and the OCC have established guidelines for maintenance of appropriate levels of capital by bank holding companies and national banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets. The regulations of the Federal Reserve and the OCC require bank holding companies and national banks, respectively, 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 bank 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 tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall assessment of capital. The risk-based capital rules of the Federal Reserve and the OCC require bank holding companies and national banks to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders' equity, certain perpetual preferred stock (noncumulative perpetual preferred stock with respect to banks), and minority interests in the equity accounts of consolidated subsidiaries; less all intangible assets, except for certain mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify as Tier 1 capital; long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory 5 convertible securities; subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax net unrealized gains on available for sale equity securities. The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses that may be included in capital to 1.25% of total risk-weighted assets. The federal bank regulatory agencies, including the OCC, have established a joint policy regarding the evaluation of commercial banks' capital adequacy for interest rate risk. Under the policy, the OCC's assessment of a bank's capital adequacy includes an assessment of Stillwater National's exposure to adverse changes in interest rates. The OCC has determined to rely on its examination process for such evaluations rather than on standardized measurement systems or formulas. The OCC may require banks that are found to have a high level of interest rate risk exposure or weak interest rate risk management systems to take corrective actions. Management believes its interest rate risk management systems and its capital relative to its interest rate risk are adequate. Federal banking regulations also require banks with significant trading assets or liabilities to maintain supplemental risk-based capital based upon their levels of market risk. Stillwater National did not have any trading assets or liabilities during 2002, 2001 or 2000, and was not required to maintain such supplemental capital. The OCC has established regulations that classify national banks by capital levels and provide for the OCC to take various "prompt corrective actions" to resolve the problems of any bank that fails to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if Stillwater National 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 national bank that falls within any of the three undercapitalized categories established by the prompt corrective action regulation is subject to severe regulatory sanctions. As of December 31, 2002, Stillwater National was well-capitalized as defined in the OCC's regulations. For information regarding Southwest's and Stillwater National's compliance with their respective regulatory capital requirements, see "Management's Discussion and Analysis -- Capital Resources" on page 12 of the Annual Report, and, in the Notes to Consolidated Financial Statements in the Annual Report "Note 6-Long-Term Debt" on page 33 and "Note 9- Capital Requirements" on pages 35 and 36. Supervision and Regulation of Mortgage Banking Operations Southwest's mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development ("HUD"), the Federal Housing Administration ("FHA"), the Veterans' Administration ("VA"), and FNMA with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as Southwest are required annually to submit to FNMA, FHA and VA financial statements, and each regulatory entity has its own financial requirements. Southwest's 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, 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. 6 Southwest's mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors. Competition Stillwater National encounters competition in seeking deposits and in obtaining loan, cash management, investment and other customers. The level of competition for deposits is high. Stillwater National's principal competitors for deposits are other financial institutions, including other banks, credit unions, and savings institutions. 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 in recent years 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 banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts. Stillwater National also competes in its lending activities with other financial institutions such as securities firms, insurance companies, savings institutions, credit unions, small loan companies, finance companies, mortgage companies and other sources of funds. Many of Stillwater National's 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 Stillwater National in providing certain services. A number of the financial institutions with which Stillwater National competes in lending, deposit, investment, cash management and other activities are larger than Stillwater National or have a significantly larger market share. The new offices in Dallas and Wichita compete for loans, deposits and other services against local and nationally based financial institutions, many of who have much larger market shares and widespread office networks. In recent periods, competition has increased in Stillwater National's Oklahoma market areas as new entrants and existing competitors have sought to more aggressively expand their loan and deposit market share. The business of mortgage banking is highly competitive. Southwest competes for loan originations with other financial institutions, such as mortgage bankers, state and national commercial banks, savings and loan associations, credit unions and insurance companies. Many of Southwest's competitors have financial resources that are substantially greater than those available to Southwest. Southwest competes principally by providing competitive pricing, by motivating its sales force through the payment of commissions on loans originated, and by providing high quality service to builders, borrowers, and realtors. The Holding Company Act permits the Federal Reserve to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than that holding company's home state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Holding Company Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Holding Company Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. The State of Oklahoma allows out-of-state financial institutions to establish branches in Oklahoma, subject to certain limitations. Financial holding companies may engage in banking as well as types of securities, insurance, and other financial activities that had been prohibited for bank holding companies under prior law. Banks with or without holding companies also are authorized to establish and operate financial subsidiaries that may engage in most financial activities in which financial holding companies may engage. Competition may increase as bank holding companies and other large financial service companies take advantage of the new activities and provide a wider array of products. Employees As of December 31, 2002, Southwest and Stillwater National employed 324 persons on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others. None of Southwest's or Stillwater National's employees is represented by a union or covered under a 7 collective bargaining agreement. Management of Southwest and Stillwater National consider their employee relations to be excellent. Executive Officers The following table sets forth information regarding the executive officers of Southwest and Stillwater National who are not directors. [
Name Age Position - ---- --- --------- Kerby E. Crowell......................... 53 Executive Vice President, Chief Financial Officer and Secretary of Southwest and the Bank John M. Frazee........................... 46 President, Kansas LPO Steve Gobel.............................. 50 Executive Vice President Rex E. Horning........................... 51 President, Stillwater Division of the Bank Jerry L. Lanier.......................... 54 Executive Vice President and Chief Lending Officer of the Bank Len McLaughlin........................... 50 President, Texas Division of the Bank Joseph P. Root........................... 38 President, Central Oklahoma Division of the Bank Kimberly G. Sinclair..................... 47 Executive Vice President and Chief Administrative Officer of the Bank Richard E. Webb.......................... 47 Executive Vice President of the Bank, President of Business Consulting Group, Inc. Charles H. Westerheide................... 54 Executive Vice President and Treasurer of the Bank
The principal occupations and business experience of each executive officer of Southwest are shown below. Kerby E. Crowell has served as Executive Vice President, Treasurer and Chief Financial Officer of Southwest and the Bank since 1986, and became Secretary of Southwest and the Bank in 2000. Mr. Crowell joined the Bank in 1969. He is a Past President and Board member of the Oklahoma City Chapter of the Financial Executives Institute, and a member of the Payments and Technology Committee of the Independent Community Bankers of America and the Federal Reserve's Industry Advisory Group on Electronic Check Presentment. He is past President and Director of the Oklahoma 4-H Foundation, Inc., Director and past President of the Payne County Affiliate of the American Diabetes Association, past President of the Stillwater Breakfast Kiwanis Club, the Bank Administration Institute's Northern Oklahoma Chapter, and the North Central Chapter of Certified Public Accountants, and past Vice Chairman of the Independent Community Bankers of America's Bank Services Committee. Mr. Crowell is also a graduate of the Leadership Stillwater Class XI. John M. Frazee serves as President of the Kansas Loan Production Office of Stillwater National. Prior to joining Stillwater National in April 2002, Mr. Frazee served as Senior Vice President-Commercial Lending and in other positions with Commerce Bank, Wichita, Kansas from 1996. Previously Mr. Frazee served in a variety of credit and operational capacities with Bank of America (formerly BANK IV) from 1983 to 1996. Mr. Frazee currently serves as Vice President of Rainbows United, secretary treasurer of the Wichita Public Building Commission, President of the Maize USD 266 Board of Education, and serves on the boards of the YMCA, Wichita Area Builders Association and the Certified Commercial Investment Member (CCIM) Institute. He is a member of the Wichita Area Chamber of Commerce. Steven M. Gobel serves as Executive Vice President and Associate Chief Financial Officer of Stillwater National. From 1990 until joining Stillwater National in September 2000, Mr. Gobel served as a Senior Vice President Finance and in other positions with Bank of America and predecessor institutions in Oklahoma and Kansas (previous institutions included NationsBank, Boatmen's Bank of St. Louis, Bank IV of Wichita, Kansas and Fourth National Bank of Tulsa). Mr. Gobel is a past member of the Board of Directors of the YMCA of Greater Tulsa 8 and a past member and Chairman of the Board of Managers for the Downtown Branch of the YMCA of Greater Tulsa. From 1987 to 1990, Mr. Gobel served as a Vice President and Manager of Financial Reporting and Financial Planning for Sooner Federal Savings and Loan of Oklahoma. He is a Certified Public Accountant and prior to 1987 spent twelve years working for International Public Accounting Firms (previously Touche Ross and Coopers & Lybrand) in Tulsa, Oklahoma, New York City, New York, and Milwaukee, Wisconsin. Rex E. Horning was appointed President of the Stillwater Division of the Bank in May 2001. Mr. Horning previously served as Senior Vice President of Central National Bank and Commerce Bank in Wichita, Kansas from 1998 to May 2001, and as President and Chief Executive Officer of First State Bank and Trust Company, Pittsburg, Kansas, from 1991 to 1998. Mr. Horning currently serves on the Board of Directors of the Oklahoma State University Alumni Association, the Executive Committee of the Stillwater Chamber of Commerce and is president-elect of the Oklahoma State University College of Business Associates. Jerry L. Lanier was appointed Executive Vice President and Chief Lending Officer in 2001. Mr. Lanier previously served as Executive Vice President-Credit Administration beginning in December 1999, supervising this area Company-wide, and from January 1998 to December 1999, served as Senior Vice President in Credit Administration. From 1992 until joining the Bank in 1998, Mr. Lanier was a consultant specializing in loan review. During this same period he also served as court-appointed receiver for a number of Oklahoma-based insurance companies. From 1982-1992, Mr. Lanier served as President of American National Bank and Trust Co. of Shawnee, Oklahoma including service as Chief Executive Officer from 1987-92. From 1970-1981, he was a National Bank Examiner for the OCC in Oklahoma City, Oklahoma and Dallas, Texas, and, while an examiner, served as Regional Director of Special Surveillance from 1979 to 1981. Mr. Lanier has served as United Way Drive Chairman and President; Chairman of the Shawnee Advisory Board of Oklahoma Baptist University; Director of the Shawnee Chamber of Commerce; Director and Chairman of the Youth and Family Resource Center; and President and Trustee of the Shawnee Educational Foundation. Len McLaughlin was appointed as President of SNB Bank of Dallas, the Dallas Division of the Bank, in May, 2002. Mr. McLaughlin previously served as President and CEO of First Independent National Bank in Plano, Texas, and as President/CEO of Preston National Bank in Dallas, Texas. From 1989 to 1998, Mr. McLaughlin was with Compass Bancshares, serving as President of a subsidiary bank, Central Bank N.A. in Anniston, Alabama; and later as Chief Retail Executive for Compass Bank in Dallas, Texas. Mr. McLaughlin began his banking career with First National Bank of Boston's Dallas, Texas office. He has served as Chairman of the March of Dimes fund drive, United Way Fund Drive Chairman, President of the local chapter of the American Cancer Society, Director of the Little Light House, and is Honorary Co-Chairman of the Business Advisory Council of the National Republican Congressional Committee. Joseph P. Root was appointed President of the Central Oklahoma Division of the Bank in 1997. Previously, Mr. Root was Senior Vice President in the Central Oklahoma division. Prior to joining the Bank in 1992, Mr. Root served as Credit Analyst from November 1987 to April 1989 and Private Banking Officer from May 1989 to July 1992 with Comerica Bank in Dallas, Texas. He is a member of the Advisory Board of the Greater Oklahoma City Chamber of Commerce, a member of the State Chamber of Commerce of Oklahoma and the Oklahoma City Men's Dinner Club and is a Director and President Elect of Infant Crisis, Services, Inc., a local charitable organization that provides basic necessities to underprivileged children. Kimberly G. Sinclair was appointed Chief Administrative Officer in 1995 and has been Executive Vice President of the Bank since 1991. Prior to 1991, she had been Senior Vice President and Chief Operations Officer of the Bank since 1985. Ms. Sinclair joined the Bank in 1975. She is a member of the Stillwater Junior Service Sustainers, and serves on the Board of Directors for the Stillwater United Way. She is past Treasurer of the Board of Trustees of the Stillwater Public Education Foundation, and a graduate of the Leadership Stillwater Class IX. She has been an Ambassador with the Stillwater Chamber of Commerce and active with the Pioneer Booster Club and Stillwater PTA. Richard E. Webb was appointed Executive Vice President of the Bank in October 2001 and President of Business Consulting Group, Inc., a subsidiary of Southwest, in January 2002. Previously, Mr. Webb was Chief Executive Officer of the Webb Group, LLC, a management consulting firm, beginning in 1998, and Director of Research and Product development of the Institute for Retail Excellence, from 1998 until 2000. From 1996 until organizing the Webb Group, LLC., Mr. Webb was a National Partner, Retail Operations for KPMG Consulting. Mr. Webb is a Registered Professional Engineer, is an Association Member of the National Retail Association, and is a member of Downtown Main Street, Stillwater, and of the Stillwater Chamber of Commerce. He is a graduate of Leadership Tulsa, Class VII. 9 Charles H. Westerheide was appointed Executive Vice President and Treasurer of the Bank in 2000. Prior to that he served as Senior Vice President and Treasury Manager. He joined the Bank in 1997 coming from Bank of America (previously NationsBank), Wichita, Kansas (previously BankIV), where he served as Treasury/Funding Manager. Prior to joining BankIV, Mr. Westerheide served as Executive Vice President and Chief Financial Officer of Security Bank and Trust Co., Ponca City, Oklahoma. Mr. Westerheide has held a number of community leadership positions including Chairman of the Ponca City Chamber of Commerce, President of the Ponca City Foundation for Progress, Inc., and a director and officer of numerous community foundations and clubs. Mr. Westerheide is a graduate of Leadership Oklahoma, Class II. Tabular Financial Information The following tabular financial information should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in the Annual Report and incorporated by reference in Items 7 and 8 of this Form 10-K. 10 Rate/Volume Analysis The following table analyzes changes in interest income and interest expense of Southwest for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior period's rate); and (ii) changes in rates (changes in rate multiplied by the prior period's volume). Changes in rate-volume (changes in rate multiplied by the changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each.
Year ended Year ended December 31, 2002 December 31, 2001 Compared to Compared to December 31, 2001 December 31, 2000 -------------------------------- ------------------------------ Increase (decrease) attributable to change in: Yield/ Net Yield/ Net Volume Rate Change Volume Rate Change -------------------------------- ------------------------------ (dollars in thousands) Interest earned on: Loans receivable (1) $ 5,759 $(17,106) $ (11,347) $ 3,284 $ (9,914) $(6,630) Investment securities (1,366) (1,195) (2,561) 704 (850) (146) Other interest-earning assets 33 (30) 3 (50) (48) (98) -------------------------------- ------------------------------ Total interest income 4,426 (18,331) (13,905) 3,938 (10,812) (6,874) Interest paid on: NOW accounts 50 (487) (437) 31 (485) (454) Money market accounts 2,062 (2,143) (81) 1,366 (1,670) (304) Savings accounts 5 (59) (54) 12 (27) (15) Time deposits (1,481) (13,267) (14,748) (1,867) (3,841) (5,708) Short-term borrowings (784) (2,157) (2,941) 1,547 (3,354) (1,807) Long-term debt -- -- -- -- -- -- -------------------------------- ------------------------------ Total interest expense (148) (18,113) (18,261) 1,089 (9,377) (8,288) -------------------------------- ------------------------------ Net interest income $ 4,574 $ (218) $4,356 $ 2,849 $ (1,435) $ 1,414 ================================ ==============================
(1) Average balances include nonaccrual loans. Fees included in interest income on loans receivable are not considered material. Interest on tax-exempt loans and securities is not shown on a tax-equivalent basis because it is not considered material. 11 Investment Portfolio Composition
At December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- (Dollars in thousands) U.S. Government and agency obligations $104,409 $105,423 $106,210 Obligations of states and political subdivisions 27,679 36,842 41,026 Mortgage-backed securities 41,751 70,657 70,567 Other securities 14,850 14,424 11,989 -------- -------- -------- Total investment securities $188,689 $227,346 $229,792 ======== ======== ======== Available for sale (fair value) $148,476 $167,545 $156,947 Held to maturity (amortized cost) 31,154 49,893 64,406 Federal Reserve Bank and Federal Home Loan Bank Stock 9,059 9,908 8,439 -------- -------- -------- Total investment securities $188,689 $227,346 $229,792 ======== ======== ========
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. 12 Investment Portfolio Maturity 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, 2002. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed securities are based on expected maturities. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers on 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, 2002.
One Year or Less Two through Five Years Five through Ten Years -------------------- ---------------------- ---------------------- Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- (Dollars in thousands) Held to Maturity: U.S. government and agency obligations $ 3,005 4.53% $ 5,063 5.37% $ -- --% Obligations of states and political subdivisions 12,215 4.22 10,871 4.43 -- -- -------- -------- -------- Total 15,220 4.28 15,934 4.73 -- -- -------- -------- -------- Available for Sale: U.S. government and agency obligations 42,034 5.07 49,512 4.81 2,500 4.04 Obligations of states and political subdivisions 940 4.86 3,400 4.42 -- -- Mortgage-backed securities 22,157 5.30 15,455 5.10 737 4.09 Other securities -- -- 11,612 3.74 -- -- -------- -------- -------- Total 65,131 5.15 79,979 4.69 3,237 4.05 -------- -------- -------- Total investment securities $ 80,351 $ 95,913 $ 3,237 ======== ======== ======== More than Ten Years Total Investment Securities -------------------- ------------------------------ Amortized Average Amortized Market Average Cost Yield Cost Value Yield --------- ------- --------- ------- ------- (Dollars in thousands) Held to Maturity: U.S. government and agency obligations $ -- --% $ 8,068 $ 8,335 5.06% Obligations of states and political subdivisions -- -- 23,086 23,665 4.32 -------- -------- -------- Total -- -- 31,154 32,000 4.51 -------- -------- -------- Available for Sale: U.S. government and agency obligations -- -- 94,046 96,341 4.90 Obligations of states and political subdivisions -- -- 4,340 4,593 4.52 Mortgage-backed securities 2,567 4.18 40,916 41,751 5.13 Other securities 3,286 4.55 14,898 14,850 3.92 -------- -------- -------- Total 5,853 4.39 154,200 157,535 4.86 -------- -------- -------- Total investment securities $ 5,853 $185,354 $189,535 ======== ======== ========
13 Loan Portfolio The following table presents the composition of Southwest's loan portfolio, net of unearned interest:
At December 31, 2002 2001 2000 --------------------- --------------------- --------------------- Amount % Amount % Amount % ----------- ------ ----------- ------ ----------- ------ (Dollars in thousands) Real estate mortgage - Commercial $ 374,999 34.06% $ 301,578 32.39% $ 276,525 30.30% One to four family residential 102,423 9.30 106,206 11.41 107,360 11.76 Real estate construction 130,001 11.81 91,897 9.87 103,951 11.39 Commercial 348,879 31.68 312,577 33.58 311,953 34.19 Installment and consumer - Government-guaranteed student loans 119,064 10.81 91,841 9.86 77,846 8.53 Other 25,746 2.34 26,947 2.89 34,915 3.83 ----------- ------ ----------- ------ ----------- ------ 1,101,112 100.00% 931,046 100.00% 912,550 100.00% ====== ====== ====== Less: Allowance for loan loss (11,888) (11,492) (12,125) ----------- ----------- ----------- Total $ 1,089,224 $ 919,554 $ 900,425 =========== =========== =========== At December 31, 1999 1998 --------------------- --------------------- Amount % Amount % ----------- ------ ----------- ------ (Dollars in thousands) Real estate mortgage - Commercial $ 263,216 30.86% $ 275,729 34.75% One to four family residential 102,973 12.07 83,657 10.55 Real estate construction 85,511 10.03 76,544 9.65 Commercial 296,415 34.77 252,341 31.81 Installment and consumer - Government-guaranteed student loans 69,873 8.19 65,242 8.22 Other 34,820 4.08 39,806 5.02 ----------- ------ ----------- ------ 852,808 100.00% 793,319 100.00% ====== ====== Less: Allowance for loan loss (11,190) (10,401) ----------- ----------- Total $ 841,618 $ 782,918 =========== ===========
Potential Nonperforming Loans. Those performing loans considered potential nonperforming 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 over the next six months, amounted to approximately $28.9 million at December 31, 2002, compared to $55.8 million at December 31, 2001, and $53.1 million at December 31, 2000. Loans may be monitored by management and reported as potential nonperforming loans for an extended period of time during which management continues to be uncertain as to the ability of certain borrowers to comply with the present loan repayment terms. These loans are subject to continuing management attention and are considered by management in determining the level of the allowance for loan losses. 14 Allocation of the Allowance for Loan Losses Southwest's methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances and an unallocated allowance. Additional information regarding this methodology, the allowance for loan losses, and the related provision for loan losses is included in the Annual Report on pages 8 and 9 under the caption "Provision for Loan Losses," and in Note 1 on page 25 and Note 3 on page 31 . The following table presents a five-year history for the allocation of the allowance for loan losses along with the percentage of total loans and leases in each category (dollars in thousands).When measured against the total allowance, general reserves increased to 11.3% at December 31, 2002 from 4.9% at December 31, 2001, and decreased from 25.0% at December 31, 2000.
At December 31, -------------------------------------------------------------------------- 2002 2001 2000 ---------------------- ---------------------- ---------------------- Percent of Percent of Percent of Loans in Loans in Loans in Each Each Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------- ----------- ------- ----------- ------- ----------- (Dollars in thousands) Real estate mortgage - Commercial $ 4,076 34.06% $ 2,277 32.39% $ 916 30.30% One to four family residential 509 9.30 557 11.41 546 11.76 Real estate construction 1,405 11.81 750 9.87 3,003 11.39 Commercial 4,271 31.68 6,680 33.58 4,286 34.19 Installment and consumer - Government-guaranteed student loans 59 10.81 46 9.86 -- 8.53 Other 225 2.34 298 2.89 347 3.83 Unallocated 1,343 884 3,027 ------- ------ ------- ------ ------- ------ Total $11,888 100.00% $11,492 100.00% $12,125 100.00% ======= ====== ======= ====== ======= ====== At December 31, ------------------------------------------------- 1999 1998 ---------------------- ----------------------- Percent of Percent of Loans in Loans in Each Each Category to Category to Amount Total Loans Amount Total Loans ------- ----------- ------- ------------ (Dollars in thousands) Real estate mortgage - Commercial $ 1,128 30.86% $ 851 34.75% One to four family residential 602 12.07 321 10.55 Real estate construction 1,893 10.03 912 9.65 Commercial 4,028 34.77 5,353 31.81 Installment and consumer - Government-guaranteed student loans 56 8.19 -- 8.22 Other 491 4.08 510 5.02 Unallocated 2,992 2,454 ------- ------ ------- ------ Total $11,190 100.00% $10,401 100.00% ======= ====== ======= ======
15 Management believes that the allowance for loan losses is adequate. However, the determination of the allowance requires significant judgment, and estimates of probable losses inherent in the loan portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the assets comprising the loan and lease portfolio and changes in the financial condition of borrowers that 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 Stillwater National, periodically review the Bank's loan portfolio and allowance for loan losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination Certificates of Deposit of $100,000 or More The following table indicates the amount of Southwest's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2002: Maturity Period Amount --------------------------------- -------- (Dollars in thousands) Three months or less (1) $109,669 Over three through six months (1) 97,146 Over six through 12 months (1) 55,477 Over 12 months 46,913 -------- Total $309,205 ======== (1) The amount of certificates of deposit that mature within 12 months is $262.3 million. The Company does not have any liquidity concerns as a result of the volume of these maturities. Other Material The Letter to Shareholders from the CEO on page 2 of the Annual Report, the information set forth on pages 4 through 15 and page 17 of the Annual Report, Note 1-"Summary of Significant Accounting and Reporting Policies" on pages 24 through 27 of the Annual Report, Note 3-"Loans" on pages 29 through 31 of the Annual Report, and Note 5-"Other Borrowed Funds" on pages 32 and 33 of the Annual Report are incorporated herein by reference. Availability of filings through Southwest's Website Southwest provides internet access to annual reports on form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, through its Investor Relations website, at www.oksb.com (This site also is accessible through the Bank's website at www.banksnb.com.). Access to these reports is provided by means of a link to a third party vendor that maintains a database of such filings. In general, Southwest intends that these reports be available a soon as reasonably practicable after they are filed with or furnished to the SEC. However, technical and other operational obstacles or delays caused by the vendor may delay their availability. The SEC maintains a website (www.sec.gov) where these filings also are available through the SEC's EDGAR system. There is no charge for access to these filings through either Southwest's 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. ITEM 2. PROPERTIES Page 44 of the Annual Report (listing executive and other offices) is hereby incorporated by reference. The Corporate Headquarters, Drive-in and Mortgage Lending, Chickasha Branch, and Tulsa Utica Branch are owned. Other facilities are held under lease or similar arrangement. 16 ITEM 3. LEGAL PROCEEDINGS Note 14--"Commitments and Contingencies" on pages 38 and 39 of the Annual Report is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 2002, through solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The following table presents disclosure regarding equity compensation plans in existence at December 31, 2002, consisting only of the 1994 stock option plan (expired but having outstanding options that may still be exercised) and the 1999 stock option plan, both of which were approved by the shareholders (described further under the caption "Stock Option Plan" in Note 1 to the consolidated financial statements).
Equity Compensation Plan Information - -------------------------------------------------------------------------------------------------------------------- Plan category Number of securities to be Weighted average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options, warrants and future issuance under warrants and rights rights equity compensation plans (a) (b) excluding securities reflected in column (a) (c) - -------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 653,324 $14.25 182,328 - ----------------------------------------------------------- ---------------------------- --------------------------- Equity compensation plans not approved by security holders 0 0 0 - ----------------------------------------------------------- ---------------------------- --------------------------- Total 653,324 $14.25 182,328 - ----------------------------------------------------------- ---------------------------- ---------------------------
As of March 7, 2003, there were approximately 2,200 holders of record of Southwest's Common Stock. The section titled "Stock Information" on page 44 of the Annual Report is hereby incorporated by reference. For information regarding regulatory restrictions on Stillwater National's and, therefore, Southwest's payment of dividends, see Note 9 -- "Capital Requirements" on pages 35 and 36 of the Annual Report, which is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The table titled "Selected Consolidated Financial Data" on pages 3 and 4 of the Annual Report is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 4 through 15 of the Annual Report are hereby incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section titled "Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk" on pages 13 through 14 of the Annual Report is hereby incorporated by reference. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 18 through 23 of the Annual Report are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. During the past two years or any subsequent period there has been no change in or reportable disagreement with the certifying accountants for Southwest or any of its subsidiaries. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and nominees for directors of Southwest and compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions titled "Proposal I--Election of Directors" on pages 2 through 6 of the Proxy Statement, and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 15 of the Proxy Statement, and is hereby incorporated by reference. Information concerning the executive officers of Southwest is included under the caption titled "Item 1. Business -- Executive Officers" of this report and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding the compensation of Southwest's directors and executive officers is included under the captions "Director Compensation," on page 7 and "Executive Compensation and Other Benefits," and "Stock Performance Comparisons" on pages 10 through 14 of the Proxy Statement, and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding beneficial ownership of Southwest's common stock by certain beneficial owners and directors and executive officers of Southwest is included under the caption "Common Stock Owned by Directors and Executive Officers" on pages 8 and 9 of the Proxy Statement and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions with management is included under the caption "Certain Transactions" on page 14 of the Proxy Statement and is hereby incorporated by reference. ITEM 14. CONTROLS AND PROCEDURES Within the ninety days prior to the filing of this report, Southwest's management, under the supervision and with the participation of Southwest's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of Southwest's disclosure controls and procedures, as defined in Rule 13a-14 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Southwest's disclosure controls and procedures were adequate. There were no significant changes (including corrective actions with regard to significant or material weaknesses) in Southwest's internal controls or in other factors subsequent to the date of the evaluation that could significantly affect those controls. 18 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report (1) Financial Statements. The consolidated financial statements of Southwest included in the Annual Report to Shareholders for the year ended December 31, 2002, are incorporated herein by reference in Item 8 of this Report. The remaining information appearing in the Annual Report to Shareholders is not deemed to be filed as part of this Report, except as expressly provided herein. The following financial statements are filed as a part of this report: Independent Auditors' Report for the Years Ended December 31, 2002 and 2001 Consolidated Statements of Financial Condition at December 31, 2002 and 2001 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001, and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000 Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001, and 2000 (2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. (3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K. No. Exhibit - --- ------- 3.1 Amended and Restated Certificate of Incorporation of Southwest Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 3.2 Bylaws of Southwest Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No. 33-71168)) 4.1 Rights Agreement, dated as of April 22, 1999, between Southwest Bancorp, Inc. and Harris Trust & Savings Bank, as rights agent and Form of Certificate of Designations setting forth terms of Class B, Series 1 Preferred Stock of Southwest Bancorp, Inc. referred to in the rights agreement (incorporated by reference to Exhibits 1 and 2 to Current Report on Form 8-K dated April 22, 1999) *10.1 Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-97850)) *10.2 Severance Compensation Plan (incorporated by reference as Exhibit 10.2 to Registration Statement on Form S-1 (File No. 33-71168)) *10.3 Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated by reference from Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended December 31, 1993) *10.4 Southwest Bancorp, Inc. 1999 Stock Option Plan (incorporated by reference from Exhibit 4 to Registration Statement on Form S-8 (File No. 333-92143)) *10.5 Stillwater National Bank and Trust Company 2002 and 2003 Deferred Compensation Plans. *10.6 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan and Agreement dated December 19, 2002. 13 Annual Report to Shareholders for the Year Ended December 31, 2002 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 19 24 Power of Attorney 99 Certifications pursuant to 18 U.S.C. Section 1350 * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K. Southwest filed no Reports on Form 8-K during the quarter ended December 31, 2002. (c) Exhibits. See (a)(3) above for all exhibits filed herewith and the Exhibit Index. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHWEST BANCORP, INC. March 27, 2003 By: /s/ Rick Green ----------------------- Rick Green Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Rick Green March 27, 2003 - --------------------------------------- Rick Green Director and Chief Executive Officer (Principal Executive Officer) /s/ Kerby E. Crowell March 27, 2003 - --------------------------------------- Kerby E. Crowell Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) A majority of the directors of Southwest executed a power of attorney appointing Rick Green as their attorney-in-fact, empowering him to sign this report on their behalf. This power of attorney has been filed with the Securities and Exchange Commission under Part IV, Exhibit 24 of this Form 10-K for the year ended December 31, 2002. This report has been signed below by such attorney-in-fact as of March 27, 2003. By: /s/ Rick Green ------------------------------------ Rick Green Attorney-in-Fact for Majority of the Directors of Southwest 21 CERTIFICATIONS I, Rick Green, President and Chief Executive Officer of Southwest Bancorp, Inc. ("Southwest"), certify that: 1. I have reviewed this annual report on Form 10-K of Southwest; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Rick Green ----------------------- Rick Green President and Chief Executive Officer 22 I, Kerby E. Crowell, Executive Vice President and Chief Financial Officer of Southwest Bancorp, Inc. ("Southwest"), certify that: 1. I have reviewed this annual report on Form 10-K of Southwest; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Kerby E. Crowell ---------------------------- Kerby E. Crowell Executive Vice President and Chief Financial Officer 23 EX-10.5 3 ex10-5.txt EXHIBIT 10.5 EXHIBIT 10.5 STILLWATER NATIONAL BANK AND TRUST COMPANY 2002 AND 2003 DEFERRED COMPENSATION PLANS THE STILLWATER NATIONAL BANK AND TRUST COMPANY DEFERRED COMPENSATION PLAN (2002 PLAN AGREEMENT) Deferred Compensation Agreement AGREEMENT, made this 31st day of December, 2001, by and between Rick Green. (the "Participant"), and Stillwater National Bank and Trust Company (the "Bank"). WHEREAS, the Bank has established the Stillwater National Bank and Trust Company Deferred Compensation Plan (the "Plan"), and the Participant is eligible to participate in said Plan: NOW THEREFORE, it is mutually agreed as follows: 1. The Participant, by the execution hereof, agrees to participate in the Plan upon the terms and conditions set forth therein, and, in accordance therewith, makes the following elections: a. The amount of compensation which the Participant hereby elects to defer is (i) _____ percent (____%) of the amount otherwise earned from the date of this Agreement forward, (ii) all amounts of compensation in excess of $ per (month/quarter/year[cross inapplicable periods]), (iii) _____ percent (____%) of any salary reduction contributions that the Participant would have made to the Bank's tax-qualified defined contribution or profit-sharing plan except for applicable tax law limitations on plan contributions, and/or (iv) ____ percent (____%) of any bonus paid following the date hereof during the remainder of the calendar year. This election will continue in force until revoked by the Participant in a writing sent to the Bank, or until the Participant ceases service with the Bank, or until the Plan is terminated by appropriate corporate action, whichever shall first occur. b. Until distributed to the Participant, the amounts deferred pursuant to paragraph 2.a. hereof shall appreciate or depreciate for each calendar quarter in a calendar year as though they were invested as follows: ____% in an uninsured, nondeposit fund account having an annual return for each calendar quarter equal to one percentage point (1.00%) less than the annualized average interest rate earned (non-taxable equivalent) by the Bank on average interest-earning assets for the previous calendar quarter, as calculated in good faith by the Bank. ____% in a fund invested in common stock of Southwest Bancorp, Inc. (the "Stock Fund"). c. The amounts deferred and any related accumulated income on such deferrals shall be distributed beginning during the first 15 days of January of: [Choose One] ( ) the calendar year immediately following the year in which the Participant ceases service with the Bank. ( ) the year in which the Participant attains 72 years of age. ( ) the later of the calendar year immediately following the year in which the Participant ceases service with the Bank, and ______________, ______(a specific date not later than the year in which the Participant will attain 72 years of age). d. The Participant, pursuant to the Plan, hereby elects to have the amount deferred and any related accumulated earnings distributed as follows: [Choose One] ( ) monthly over a ten-year period ( ) monthly over a five-year period (must be less than ten (10) years) ( ) in a lump sum e. All distributions made pursuant to the Plan and this Agreement will be made in cash. 2. The Participant hereby designates: _______________________ to be his or her beneficiary and to receive the balance of any unpaid deferred compensation and related earnings. 3. Except for the beneficiary designation made in paragraph 2 hereof (which may be revised at any time and from time to time), the elections made herein shall be irrevocable with respect to (i) the time and method of payment of the amounts deferred during the term of the Agreement, and (ii) the deemed future investment on such amounts. Any changes to the elections made herein by said Participant will be limited to the range of choices offered herein, and shall be prospective only. 4. The Bank agrees to make payment of the amount due the Participant in accordance with the terms of the Plan and the elections made by the Participant herein. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above-written. PARTICIPANT ------------------------------ Participant STILLWATER NATIONAL BANK AND TRUST COMPANY By ____________________________ Its ___________________________ 2 THE STILLWATER NATIONAL BANK AND TRUST COMPANY DEFERRED COMPENSATION PLAN (2003 PLAN AGREEMENT) Deferred Compensation Agreement AGREEMENT, made this 30th day of December, 2002, by and between Rick Green (the "Participant"), and Stillwater National Bank and Trust Company (the "Bank"). WHEREAS, the Bank has established the Stillwater National Bank and Trust Company Deferred Compensation Plan (the "Plan"), and the Participant is eligible to participate in said Plan: NOW THEREFORE, it is mutually agreed as follows: 1. The Participant, by the execution hereof, agrees to participate in the Plan upon the terms and conditions set forth therein, and, in accordance therewith, makes the following elections: a. The amount of compensation which the Participant hereby elects to defer is (i) _____ percent (____%) of the amount otherwise earned from the date of this Agreement forward, (ii) all amounts of compensation in excess of $ per (month/quarter/year[cross inapplicable periods]), (iii) _____ percent (____%) of any salary reduction contributions that the Participant would have made to the Bank's tax-qualified defined contribution or profit-sharing plan except for applicable tax law limitations on plan contributions, and/or (iv) ____ percent (____%) of any bonus paid following the date hereof during the remainder of the calendar year. This election will continue in force until revoked by the Participant in a writing sent to the Bank, or until the Participant ceases service with the Bank, or until the Plan is terminated by appropriate corporate action, whichever shall first occur. b. Until distributed to the Participant, the amounts deferred pursuant to paragraph 2.a. hereof shall appreciate or depreciate for each calendar quarter in a calendar year as though they were invested as follows: ____% in an uninsured, nondeposit fund account having an annual return for each calendar quarter equal to one percentage point (1.00%) less than the annualized average interest rate earned (non-taxable equivalent) by the Bank on average interest-earning assets for the previous calendar quarter, as calculated in good faith by the Bank. ____% in a fund invested in common stock of Southwest Bancorp, Inc. (the "Stock Fund"). c. The amounts deferred and any related accumulated income on such deferrals shall be distributed beginning during the first 15 days of January of: [Choose One] ( ) the calendar year immediately following the year in which the Participant ceases service with the Bank. ( ) the year in which the Participant attains 72 years of age. ( ) the later of the calendar year immediately following the year in which the Participant ceases service with the Bank, and ______________, ______(a specific date not later than the year in which the Participant will attain 72 years of age). d. The Participant, pursuant to the Plan, hereby elects to have the amount deferred and any related accumulated earnings distributed as follows: E-1 [Choose One] ( ) monthly over a ten-year period ( ) monthly over a five-year period (must be less than ten (10) years) ( ) in a lump sum e. All distributions made pursuant to the Plan and this Agreement will be made in cash. 2. The Participant hereby designates: _______________________ to be his or her beneficiary and to receive the balance of any unpaid deferred compensation and related earnings. 3. Except for the beneficiary designation made in paragraph 2 hereof (which may be revised at any time and from time to time), the elections made herein shall be irrevocable with respect to (i) the time and method of payment of the amounts deferred during the term of the Agreement, and (ii) the deemed future investment on such amounts. Any changes to the elections made herein by said Participant will be limited to the range of choices offered herein, and shall be prospective only. 4. The Bank agrees to make payment of the amount due the Participant in accordance with the terms of the Plan and the elections made by the Participant herein. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above-written. PARTICIPANT ------------------------------ Participant STILLWATER NATIONAL BANK AND TRUST COMPANY By ____________________________ Its ___________________________ E-2 EX-10.6 4 ex10-6.txt EXHIBIT 10.6 EXHIBIT 10.6 THE STILLWATER NATIONAL BANK AND TRUST COMPANY SUPPLEMENTAL PROFIT SHARING PLAN AND AGREEMENT -------------------- PLAN AND AGREEMENT, made as of the 19th day of December 2002, by and between Rick Green (the "Executive"), and Stillwater National Bank and Trust Company (the "Stillwater National"). WHEREAS, Stillwater National previously has established the Employee's Profit Sharing Plan and Trust as a qualified plan under the Internal Revenue Code of 1986, as amended. WHEREAS, the amounts of the annual profit sharing contributions made by Stillwater National to the Executive's account in the Primary Plan as a percentage of his compensation may be less than the percentages payable to other employees' accounts under Primary Plan by reason of provisions of the Code applicable to such qualified plans. WHEREAS, Stillwater National has established this Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan and Agreement (the "Plan"), in order that it may make tax-deferred contributions to a plan for the benefit of the Executive. NOW THEREFORE, it is mutually agreed as follows: 1. DEFINITIONS. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of Stillwater National, as such terms are defined in Section 424(e) and (f), respectively, of the Code. (b) "Beneficiary" means the person or persons selected by the Executive on a form provided by Stillwater National to receive the benefits provided under this Plan in the event of the Executive's death. (c) "Board" shall mean the Board of Directors of Stillwater National. (d) "Change in Control" shall mean any one of the following events occurring after the date hereof: (1) the acquisition of ownership, holding or power to vote more than 51% of any class if voting securities of Stillwater National or Southwest, (2) the acquisition of the power to control the election of a majority of Stillwater National's or Southwest's directors, (3) the exercise of a controlling influence over the management or policies of Stillwater National or Southwest by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934), or (4) the failure of Continuing Directors to constitute at least two-thirds of the Board of Directors of Southwest or Stillwater National (the "Southwest Board") during any period of two consecutive years. For purposes of this Plan, "Continuing Directors" shall include only those individuals who were members of Southwest Board at the Effective Date and those other individuals whose election or nomination for election as a member of Southwest Board was approved by a vote of at least two-thirds of the Continuing Directors then in office. For purposes of this subparagraph only, the term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a change in control has occurred shall be conclusive and binding. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" shall mean the Compensation Committee of the Board. (g) "Compensation" means salary, bonus, and other cash compensation, including amounts deferred by the Executive under any and all elective deferred compensation plans of Stillwater National and its Subsidiaries. (h) "Continuous Service" shall mean the absence of any interruption or termination of service as an Employee of Southwest or any present or E-1 future Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by Southwest or Stillwater National or in the case of transfers between payroll locations of Southwest or among Southwest, Stillwater National or any other Affiliate. (i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (j) "Non-Employee Director" means any member of the Board who, at the time discretion under the Plan is exercised, would be a "Non-Employee Director" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, if Stillwater National were an issuer for purposes of that rule. (k) "Parent" shall mean any present or future corporation that would be a "parent corporation" as defined in Subsections 424(e) and (g) of the Code. (l) "Permanent Disability means a physical or mental infirmity that impairs the Executive's ability to substantially perform his duties and that results in the Executive's becoming eligible for long-term disability benefits under a long-term disability plan maintained for Stillwater National employees (or, if Stillwater National has no such plan in effect, that impairs the Executive's ability to substantially perform his duties for a period of one-hundred and eighty consecutive days). (m) "Plan" means this Plan. (n) "Plan Account" means the account described in Section 2 of the Plan. (o) "Plan Year" means the calendar year. (p) "Primary Market Area" means Payne County, Oklahoma, the Tulsa, Oklahoma MSA, the Oklahoma City Oklahoma MSA, the Wichita Kansas MSA and the Dallas Texas MSA. (q) "Profit Sharing Plan" means the Stillwater National Bank and Trust Company Profit Sharing Plan and Trust, as amended, or any successor plan thereto. (r) "Southwest" shall mean Southwest Bancorp, Inc. (s) "Stillwater National" shall mean Stillwater National Bank and Trust Company. (t) "Subsidiary" shall mean any present or future corporation which would be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of the Code. (u) "Termination for Just Cause" means termination by Stillwater National or Southwest of Executive's employment because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties; willful violation of any law, rule or regulation (other than minor offenses) or any final cease-and-desist order), or committing any other act that causes significant damage to the reputation of the Bank or any of its Affiliates. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Just Cause by Southwest or Stillwater National unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Southwest or Stillwater National at a meeting of such Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board), finding that in the good faith opinion of such Board the Executive was guilty of conduct described above. (v) "Termination for Good Reason" means termination by the Executive of his employment with Stillwater National or Southwest because of a material breach by Stillwater National under a binding employment agreement with the Executive; a material reduction in the Executive's responsibilities or authority, or a requirement that the Executive report to any person or group other than the board of directors of Stillwater National and Southwest; assignment to the Executive of duties of a nonexecutive nature or duties for which he is not reasonably equipped by his skills and experience; any material reduction in salary or material reduction E-2 in benefits below the amounts to which he was entitled prior to a Change in Control; a requirement that the Executive relocate his principal business office or his principal place of residence outside the Principal Market Area, or the assignment to the Executive of duties that would reasonably require such a relocation; a requirement that the Executive spend more than ninety normal working days away from the Primary Market Area during any consecutive twelve-month period; or failure to provide office facilities, secretarial services, and other administrative services to Executive that are substantially equivalent to the facilities and services provided to the Executive immediately prior to the Change in Control (excluding brief periods during which office facilities may be temporarily unavailable due to fire, natural disaster, or other calamity). Notwithstanding the foregoing: a reduction or elimination of the Executive's benefits under one or more benefit plans maintained by of Stillwater National and Southwest as part of a good faith, overall reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of Stillwater National or any company that controls Stillwater National under a plan or plans in or under which the Executive is not entitled to participate, and receive benefits, on a fair and nondiscriminatory basis. This provision shall not affect the rights of the Executive to enforce this Plan. (w) "Transaction" means (i) the liquidation or dissolution of Southwest, (ii) a merger or consolidation in which Southwest is not the surviving entity; or (iii) the sale or other disposition of all or substantially all of the voting securities or assets of Stillwater National. (x) "Trust" means an irrevocable grantor trust established by Stillwater National, or a successor thereto, in connection with this Plan to provide the benefits described in the Plan, the assets of which are subject to the claims of Stillwater National's creditors in the event of bankruptcy or insolvency, and the terms of which conform to the terms of the model trust as descried in IRS Revenue Procedure 92-64 (and any successor thereto) and otherwise meet the requirements for a "rabbi trust" under ERISA and the Code and of the provisions of this Plan. (y) "Trustee" means the independent third-party corporation or individual selected by Stillwater National to serve as Trustee for the Trust. 2. PLAN ACCOUNT. Stillwater National shall establish and maintain the Plan Account for the benefit of the Executive or for the benefit of his designated beneficiary upon the death of the Executive, and shall credit the account with contributions and earnings and debit the account for distributions, as described in this Plan. 3. CONTRIBUTIONS. Stillwater National shall make contributions to the Plan Account as follows: (a) Supplemental Profit Sharing Contributions. Stillwater National shall credit the Plan Account with the amount equal to the difference between the aggregate amount of contributions which would have been allocated with respect to the Executive under the Profit Sharing Plan based on the Executive's Compensation without regard to the limitations imposed by the Code on the Profit Sharing Plan, or otherwise contained in the Plan, and the aggregate amount of contributions actually made with respect to the Executive, without regard to forfeitures. For purposes of determining the amount which would have been allocated to the Profit Sharing Plan, such amount shall be deemed to be proportionate to the ratio of the actual contribution made to such plan over the compensation taken into account under such plan. Such contributions shall be credited to the Plan Account at substantially the same time as contributions are made to the Profit Sharing Plan. Stillwater National is not required to make any Supplemental Profit Sharing Contribution for any period in which it does not make a contribution to the Profit Sharing Plan. No Supplemental Profit Sharing Contributions shall be made following a termination of the Executive's employment for Cause or voluntary termination without Good Reason. The Supplemental Profit E-3 Sharing Contribution for the calendar year in which the Executive's or his Beneficiary's rights under the Plan vest shall be prorated based upon the number of days in the calendar year prior to the vesting date over 365. (b) Discretionary Contributions. Stillwater National may make, but is not required by this Plan to make, additional, discretionary contributions to the Plan Account at such times and in such amounts as it may deem appropriate. (c) Earnings. Until the Plan Account is fully distributed to the Executive or his Beneficiary, the Plan Account shall be credited as of the last day of each calendar quarter with earnings as though the balance of the Plan Account at the beginning of such calendar quarter were invested in an uninsured, nondeposit fund account having an annual return for each calendar quarter equal to the annualized average interest rate earned (non-taxable equivalent) by Stillwater National on average interest-earning assets for such calendar quarter, and except as provided in Section 6 hereof, as calculated in good faith by Stillwater National. (For example, the earnings rate for the first calendar quarter of 2002 would have been 6.65%, if the Plan were then in effect.) (d) Unfunded Arrangement. The parties intend that this Plan be unfunded for purposes of ERISA and the Code. The Executive and his Beneficiary are general unsecured creditors of Stillwater National for the payment of benefits under this Plan. The benefits represent the mere promise by Stillwater National to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive or his Beneficiary. Any representation or assertion contrary to this section 3(d) is a material breach of this Plan by the representing or asserting party, which, if such party is the Executive or, following his death, a Beneficiary, shall immediately result in the cessation of any and all payments and the elimination of any liability hereunder for any payment not made prior to such assertion or representation, and, if such party is Stillwater National or an Affiliate of Stillwater National, shall subject Stillwater National to liability for actual damages for such breach. 4. DISTRIBUTIONS. (a) Vesting. The amounts deferred and any related accumulated income on such deferrals shall be fully vested upon the following occurs, provided the Executive has Continuously Served from the date of this Plan to such date: (1) The Executive's retirement on or after Age 62; (2) The Executive's 72nd birthday; (3) The Executive's Permanent Disability; (4) Termination of Executive's employment by Stillwater National Without Cause; (5) Termination of Executive's employment by the Executive With Good Reason; (6) Termination of the Plan; or (7) A Change in Control. (b) When Payments Start. Distribution shall begin during the first 15 days of January in the calendar year immediately following the year in which the earliest of the events listed in (1) through (6) of subsection (a) occurs. (c) Manner of Distributions. Distributions will occur in the manner selected by the Executive below, provided that the Executive may change the method of distribution as to future contributions and earnings thereon, only, and only from the choices offered below, by written notice to Stillwater National. The Executive, pursuant to the Plan, hereby elects to have the amount contributed and any related accumulated earnings distributed as follows: [Choose One] ( ) monthly over a five-year period ( ) monthly over a ten-year period E-4 ( ) monthly over a fifteen-year period ( ) in a lump sum (d) Cash Distributions. All distributions made pursuant to the Plan and this Agreement will be made in cash. (e) Distributions after Death. If the Executive dies before the entire amount credited to the Executive under the Plan has been paid to the Executive, the amount remaining shall be distributed to the Executive's Beneficiary in accordance with the method selected by the Executive. If the Executive has not designated a Beneficiary, or if no designated Beneficiary is living on the date of distribution, such amount shall be distributed to those persons or such trust entitled to receive distributions of the Executive's benefits under the Profit Sharing Plan. (f) Emergency Distributions. In the event the Executive incurs an unforeseeable emergency, the Executive may make a written request to the Stillwater National for a hardship withdrawal from his or her account. An unforeseeable emergency is a severe financial hardship to the Executive resulting from a sudden and unexpected illness or accident of the Executive or of a dependent (as defined in Section 152(a) of the Code), loss of the Executive's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive. Withdrawals of amounts because of an unforeseeable emergency are only permitted to the extent reasonably needed to satisfy the emergency need. This section shall be interpreted in a manner consistent with Sections 1.457-2(h)(4) and 1.457-2(h)(5) of the Treasury Regulations. 5. PLAN ADMINISTRATION. (a) Committee. The Plan shall be administered by the Committee. In the absence at any time of a duly appointed Committee, the Plan shall be administered by the Board. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and to prescribe, amend and rescind rules and regulations relating to the Plan, and to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. (b) Indemnification and Limitation of Liability. In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by Stillwater National in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in connection with the Plan to the maximum extent provided for under Stillwater National's Certificate of Incorporation or Bylaws with respect to the indemnification of Directors. Stillwater National nor any of its officers, directors, Affiliates, or agents shall be liable to the Executive, his Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan, unless attributable to fraud or willful misconduct on the part of such person. (c) Costs and Statements. Stillwater National shall pay the expenses of administration and the costs of employing employment counsel and accountants with respect to the Plan or its administration, including without limitation, the administrative and other costs of the Trust. Stillwater National shall furnish individual annual statements of accrued benefits to the Executive or current Beneficiary, in such form as determined by Stillwater National or as required by law. (d) Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, Stillwater National may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. Stillwater National may require proof of incompetency, minority, or guardianship as it may deem appropriate prior to the distribution of the benefit. Such distribution shall completely discharge Stillwater National from all liability with respect to such benefit. 6. TRUST. Prior to or simultaneously with any Transaction and within ten calendar days of any other Change in Control, unless and to the extent the Executive has E-5 previously provided a written release of any claims under this Plan, Stillwater National shall establish a valid trust under the law of the State of Oklahoma with an independent trustee that has or may be granted corporate trust powers under Oklahoma law, deposit in such trust an amount equal to 200% of the Plan Account balance immediately prior to the establishment of the Trust, and provide the Trustee of the Trust with a written direction to invest such amount in securities supported by the full faith and credit of the United States except for amounts held in one or more deposit accounts as needed on a short-term basis to pay amounts due to the Executive or his Beneficiary as provided below, to hold said amount and any investment return thereon in a segregated account, and to pay such amounts due to the Executive (or upon his death, his Beneficiary) under this Plan. Upon the final payment of all amounts due to the Executive or his Beneficiary under this Plan, the Trustee of the Trust shall pay to Stillwater National the entire balance, if any, remaining in the Trust. Payments from the Trust to the Executive shall be considered payments made by Stillwater National for purposes of this Agreement. Payment of such amounts to the Executive from the Trust, however, shall not relieve Stillwater National from any obligation to pay amounts in excess of those paid from the Trust, or from any obligation to take actions or refrain from taking actions otherwise required by this Plan. In no event may the Trust invest in securities or obligations issued by Stillwater National or any of its Affiliates or successors. Stillwater National shall have no right or power to direct the Trustee to return or divert any of the Trust assets before all payments of benefits have been made. Stillwater National shall pay all fees and expenses of the Trust, including, without limitation, Trustee fees, and all income taxes on earnings of the Trust from its assets outside of the Trust. In the event that Stillwater National shall not provide the earnings rate referred to under Section 3(c) hereof, the Trustee shall calculate such rate based upon reports of condition furnished by Stillwater National to its primary federal banking regulator or upon other publicly available reports. The Executive's and his Beneficiary's rights under this Plan shall be those of a general, unsecured creditor, he shall have no claim against the assets of the Trust, and the assets of the Trust shall be considered general assets of Stillwater National subject to the claims of creditors of Stillwater National in the event of its bankruptcy or insolvency. 7. NO EFFECT ON PROFIT SHARING PLAN. This Plan has no effect upon benefits under or the terms of the Profit Sharing Plan. 8. FORFEITURE OR SUSPENSION OF PLAN BENEFITS. (a) In General. The Executive shall completely forfeit any and all rights to any and all benefits under this Plan upon his termination for Cause or his voluntary termination without Good Reason. (b) Competition. Regardless of anything herein to the contrary, except in the case of a termination of employment by Stillwater National without Just Cause, a termination of employment by the Executive with Good Reason, or with the permission of Stillwater National, if the Executive shall, during the two years immediately following the Executive's termination of employment, serve as an officer or director or employee of any bank holding company, bank, savings association, savings and loan holding company, or mortgage company (any of which, a "Financial Institution") which Financial Institution offers products or services competing with those offered by the Bank from offices in any county in the Primary Market Area, or shall interfere with the relationship of Stillwater National and any of its employees, agents, or representatives, then the Committee shall direct that any unpaid balance of any payments to the Executive under this Agreement be suspended, and shall thereupon notify the Executive of such suspension, in writing. Thereupon, if the Committee shall determine that such behavior by the executive exists at any time after a period of one month following notification of such suspension, all rights of the Executive and his Beneficiary under this Plan, including rights to any and all further payments hereunder, shall thereupon terminate. (c) Certain Regulatory Events. If the Executive is removed and/or permanently prohibited from participating in the conduct of Stillwater National's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. ss.ss. 1818(e)(4) and (g)(1)), all obligations of Stillwater National under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected. If Stillwater National is in default (as defined in Section 3(x)(1) of FDIA), all obligations of Stillwater National under this Agreement shall terminate as of the date of default, but vested rights of the parties shall not be affected. If a notice served under Sections 8(e)(3) or (g)(1) of the E-6 FDIA (12 U.S.C. ss.ss. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Executive from participating in the conduct of Stillwater National's affairs, Stillwater National's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, Stillwater National may, in its discretion, (i) pay the Executive all or part of the contributions or payments withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 9. TERMINATION. Stillwater National may terminate this Plan only upon termination of the Profit Sharing Plan or with the Agreement of the Executive. No termination of the Plan shall directly or indirectly reduce the balance of the Plan Account as of the effective date of such termination. Upon termination of the Plan, distribution of the Plan Account in accordance with Section amounts credited to such account shall be made to the Executive or his or her Beneficiary in accordance with Section 4. No contributions will be credited to the Plan Account after termination of the Plan, but earnings will continue to be credited to the Plan Account until all amounts are distributed to the Executive or his Beneficiary. 10. GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Oklahoma, except to the extent that federal law shall be deemed to apply. 11. SUCCESSORS AND ASSIGNS. The Plan shall be binding upon Stillwater National's successors. 12. AMENDMENTS. No amendments or additions to this Plan shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. This document supersedes any previous version of the Plan. 13. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. HEADINGS. Headings contained herein are for convenience of reference only. 15. ENTIRE AGREEMENT. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, other than written agreements with respect to specific plans, programs or arrangements described in Sections 5 and 6. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above-written. RICK GREEN, Executive /s/ Rick Green ------------------------------- STILLWATER NATIONAL BANK AND TRUST COMPANY By /s/ Kerby E. Crowell --------------------------- /s/ Russell W. Teubner --------------------------- E-7 EX-13 5 exh13.txt EXHIBIT 13 EXHIBIT 13 Southwest Bancorp, Inc. ("Southwest") is the financial holding company for Stillwater National Bank and Trust Company ("Stillwater National"). A substantial portion of Southwest's current business and focus for the future are services for local businesses, their primary employees, and other managers and professionals living and working in its market areas. Information regarding Southwest can be accessed via the Internet at www.oksb.com. Southwest and Stillwater National offer commercial and consumer lending and deposit services from offices in Stillwater, Tulsa, Oklahoma City, and Chickasha, Oklahoma and Frisco, Texas; loan production offices in Wichita, Kansas and on the campuses of Oklahoma State University-Tulsa and the University of Oklahoma Health Sciences Center-Oklahoma City; and a marketing presence in the Student Union at Oklahoma State University-Stillwater. Southwest has applied to create SNB Bank of Wichita, which it expects to open on the site of its Kansas loan production office during 2003. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. At December 31, 2002, Southwest had total assets of $1.3 billion, deposits of $1.0 billion and shareholders' equity of $96.4 million. Southwest's philosophy is to provide a high level of customer service, a wide range of financial services, and products responsive to customer needs. This philosophy has led to the development of financial products that respond to customers' needs for speed, efficiency and information. These include SNB DirectBanker(R) and other Internet banking products, which complement Southwest's more traditional banking products. Information regarding products and services of Stillwater National, including SNB DirectBanker(R), can also be accessed via the Internet at www.banksnb.com. Stillwater National's web site and online banking technology are frequently updated in response to the changing needs of Stillwater National's large base of Internet banking customers. Southwest has established and pursued a strategy of independent operation for the benefit of all its shareholders. LETTER TO SHAREHOLDERS FROM THE C.E.O. February 25, 2003 In 2002, Southwest continued its focus on producing consistent current performance while making strategic moves into important new markets with significant growth potential. o Net Income: $13.4 million: up 14% o Diluted earnings per share: $2.23: up 12% o Book value per share: $16.69: up 12% o Dividends per share: $0.44: up 38% o Return on average equity of 15% o Efficiency ratio of 57% o Total loans of $1.10 billion: up 18% o Total assets of $1.35 billion: up 11% GOAL FOCUSED PERFORMANCE. At Southwest, we maintain an intense focus on specific performance goals designed to increase shareholder value. These goals include annual growth in diluted EPS and assets of at least 10% and geographic market share growth and expansion. In 2002, annual net income increased 14%, book value per share and diluted EPS increased 12%, assets grew 11%, and return on average equity was just under 15%. This performance is the result of loan growth (up 18% over year-end 2001), increased net interest income (up 10% from 2001), increased service charges and fees (up 22% from 2001), and improved efficiency (an efficiency ratio of 56.92%; an improvement of nearly three percentage points from the year 2001). PERFORMANCE CONSISTENCY. We also focus on building a record of consistent performance. Our 2002 results are consistent with our overall historic trends. Southwest became a public company in late 1993. Since year-end 1993, we have increased our net income and market value per share at a compound rate of 14% per year, book value per share at 12% per year; diluted earnings per share at 10% per year; assets at 13% per year, and loans at 15% per year. COMMITMENT TO OUR CUSTOMERS. In 2002, we continued our focus on our strengths in investments, lending, deposit, and cash management services, and increased our efforts in consulting services and web-based and other tech services. We are strongly committed to delivery of services that "make our customers money." These services include Business Mail Processing, Document Imaging, and Cash Management/Treasury services. All these services are designed for the health care industry and other document-intensive businesses for use in providing measurable office management and cash management benefits, while allowing our customers to improve the quality of service to their patients, clients, and customers. STRATEGIC MARKET ENTRY. During 2002, we made strategic moves into two important markets-the Dallas, Texas area and Wichita, Kansas. These offices are capitalizing on our strengths in serving medical, professional and small business customers. We expect continued growth from both locations. Our Dallas presence is through a banking office. We plan to expand our existing Kansas operations by establishing a new, Kansas based, federally chartered bank, SNB Bank of Wichita, later this year. COMMITMENT TO OUR COMMUNITIES. We also remain committed to the communities we serve. Southwest supports local, state and national service organizations and the arts financially, by donating many hours of voluntary assistance, and by providing leadership in each of our geographic markets. The Board of Directors joins me in thanking you for your investment and support. We look forward to the future with high energy, a vision for success, and dedication to achieve consistent high performance and growth. Sincerely, /s/ Rick Green ------------------------------------- Rick Green President and Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL DATA The following table presents Southwest's selected consolidated financial information for each of the five years in the period ended December 31, 2002. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of Southwest, including the accompanying Notes, presented elsewhere in this report.
For the Year Ended December 31, ---------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------------------------------- (dollars in thousands, except per share data) OPERATIONS DATA Interest income $ 76,495 $ 90,400 $ 97,274 $ 80,595 $ 80,252 Interest expense 30,606 48,867 57,155 42,495 42,274 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 45,889 41,533 40,119 38,100 37,978 Provision for loan losses 5,443 4,000 3,550 2,495 3,380 Gain on sales of securities and loans 3,498 3,346 1,753 2,395 2,918 Other income 9,148 7,395 6,736 6,049 4,025 Other expenses 33,319 31,165 29,615 30,426 26,982 - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes 19,773 17,109 15,443 13,623 14,559 Taxes on income 6,354 5,357 5,238 4,757 5,181 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 13,419 $ 11,752 $ 10,205 $ 8,866 $ 9,378 - ------------------------------------------------------------------------------------------------------------------------------------ Net income available to common shareholders $ 13,419 $ 11,752 $ 10,205 $ 8,866 $ 7,392 ==================================================================================================================================== DIVIDENDS DECLARED Preferred stock $ -- $ -- $ -- $ -- $ 1,190 Common stock 2,532 1,824 1,678 1,601 1,366 Ratio of total dividends declared to net income 18.87% 15.52% 16.44% 18.06% 27.26% PER SHARE DATA (1) Basic earnings per common share $ 2.34 $ 2.06 $ 1.78 $ 1.49 $ 1.30 Diluted earnings per common share 2.23 2.00 1.76 1.46 1.26 Common stock cash dividends 0.44 0.32 0.29 0.27 0.24 Book value per common share (2) 16.69 14.93 12.88 11.03 10.14 Weighted average common shares outstanding: Basic 5,745,083 5,693,129 5,733,624 5,960,817 5,692,704 Diluted 6,026,059 5,864,422 5,792,852 6,082,002 5,871,218 FINANCIAL CONDITION DATA (2) Investment securities $ 188,689 $ 227,346 $ 229,792 $ 211,682 $ 174,671 Total loans (3) 1,101,112 931,046 912,550 852,808 793,319 Interest-earning assets 1,292,232 1,160,478 1,142,945 1,064,496 969,002 Total assets 1,349,768 1,216,495 1,203,566 1,120,420 1,027,865 Interest-bearing deposits 885,812 777,600 825,370 761,481 722,962 Total deposits 1,021,757 904,796 945,102 871,235 842,717 Other borrowings 199,282 195,367 150,498 151,820 94,572 Long-term debt 25,013 25,013 25,013 25,013 25,013 Total shareholders' equity (4)(5) 96,372 85,125 73,239 64,254 57,801 Common shareholders' equity 96,372 85,125 73,239 64,254 57,801 Mortgage servicing portfolio 107,733 91,120 94,545 109,297 126,410 SELECTED RATIOS Return on average assets 1.05% 0.96% 0.87% 0.84% 0.95% Return on average total shareholders' equity 14.94 14.87 14.89 13.83 14.33 Return on average common equity 14.94 14.87 14.89 13.83 13.70 Net interest margin 3.75 3.54 3.57 3.82 4.04 Efficiency ratio (6) 56.92 59.62 60.93 65.37 60.07 Average assets per employee (7) $ 3,936 $ 3,916 $ 3,780 $ 3,476 $ 3,116
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31, --------------------------------------------------------- 2002 2001 2000 1999 1998 --------------------------------------------------------- (dollars in thousands, except per share data) ASSET QUALITY RATIOS Allowance for loan losses to total loans (2) 1.08% 1.23% 1.33% 1.31% 1.31% Nonperforming loans to total loans (2)(8) 1.17 0.99 1.32 0.63 0.17 Allowance for loan losses to nonperforming loans (2)(8) 92.11 124.56 100.71 207.26 786.17 Nonperforming assets to total loans and other real estate owned (2)(9) 1.24 1.06 1.45 0.83 0.62 Net loan charge-offs to average total loans 0.50 0.49 0.29 0.21 0.17 CAPITAL RATIOS Average shareholders' equity to average assets Total 7.05 6.45 5.82 6.11 6.64 Common 7.05 6.45 5.82 6.11 5.48 Tier I capital to risk-weighted assets (2) 10.38 11.15 10.36 9.76 8.88 Total capital to risk-weighted assets (2) 11.42 12.34 11.68 11.34 10.81 Leverage ratio (2) 8.99 8.84 8.08 8.06 7.69
(1) All share and per share information has been restated to reflect the three-for-two stock split effected in the form of a stock dividend paid August 29, 2001. (2) At period end. (3) Net of unearned discounts but before deduction of allowance for loan losses. (4) On September 1, 1998, Southwest redeemed all of its Series A Preferred Stock at its stated liquidation value of $17.25 million. (5) Reflects the public offering of 250,000 shares of common stock in May 1999, and repurchases of common shares in 1999, 2000, and 2001. Please see note 8 to the consolidated financial statements. (6) The efficiency ratio = other expenses/(net interest income + total other income) as shown on the consolidated statements of operations. This ratio has not been adjusted to remove any income or expense recorded under accounting principles generally accepted in the United States. (7) Ratio = year-to-date average assets divided by the number of FTE employees at year-end. (8) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and loans with restructured terms. (9) Nonperforming assets consist of nonperforming loans and foreclosed assets. FORWARD-LOOKING STATEMENTS This management's discussion and analysis of financial condition and results of operations, the letter from the President which precedes it, and other portions of this annual report include forward-looking statements such as: statements of Southwest's goals, intentions, and expectations; estimates of risks and of future costs and benefits; assessments of loan quality, probable loan losses, liquidity, and market or interest rate risk; 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 and other economic conditions; future laws and regulations; 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Southwest Bancorp, Inc.'s ("Southwest") net income and diluted earnings per share reached their highest levels in our history. o Net income for 2002 was $13.4 million, up from $11.8 million in 2001 and $10.2 million in 2000; o Return on average common equity for 2002 was 14.94%, compared to 14.87% in 2001 and 14.89% in 2000; and o Diluted earnings per common share increased to $2.23 in 2002, compared to $2.00 in 2001 and $1.76 in 2000. Balance sheet growth was favorable: o Total assets at year-end 2002 increased 11%, ending the year at $1.35 billion compared to $1.22 billion at year-end 2001 and $1.20 billion for 2000. o Total loans grew to $1.10 billion at December 31, 2002, compared to $931.0 million for 2001, and $912.6 million for 2000. o Common shareholders' equity at year-end increased 13% to $96.4 million for 2002 compared to $85.1 million for 2001 and $73.2 million for 2000. On August 29, 2001, Southwest effected a 3:2 stock split of its common stock in the form of a dividend of 2,040,465 shares. All share and per share amounts in this annual report have been retroactively restated to reflect this stock split. Southwest repurchased 61,870 shares of its outstanding common stock during 2002 at an average price of $20.12 per share under its share repurchase program. SUMMARY OF EARNINGS NET INCOME Net income for 2002 was $13.4 million, a $1.6 million increase over the $11.8 million earned in 2001. Basic earnings per common share increased 14% to $2.34 per share for 2002 from $2.06 per share for 2001. Diluted earnings per common share increased 12% to $2.23 per share for 2002 from $2.00 per share for 2001. The increase in earnings was primarily the result of a $4.4 million, or 10%, increase in net interest income and a $1.9 million, or 18%, increase in other income. This revenue growth more than offset a $2.2 million, or 7%, increase in other expenses, a $1.4 million, or 36%, increase in the provision for loan losses and a $997,000, or 19%, increase in taxes on income. Net income for 2001 was $11.8 million, a $1.6 million increase over the $10.2 million earned in 2000. Basic earnings per common share increased 16% to $2.06 per share for 2001 from $1.78 per share for 2000. Diluted earnings per common share increased 14% to $2.00 per share for 2001 from $1.76 per share for 2000. The 2001 increase in earnings was primarily the result of a $2.3 million, or 27%, increase in other income based on increased gains on sales of loans and service charges and fees and a $1.4 million, or 4%, increase in net interest income. In 2001, other expenses increased by $1.6 million, or 5%, the provision for loan losses increased by $450,000, or 13%, and taxes on income increased by $119,000, or 2%. These increases and decreases in the components of income are discussed further in other sections of this Management's Discussion. NET INTEREST INCOME Years ended December 31, 2002 and 2001 Net interest income for 2002 increased to $45.9 million from $41.5 million in 2001, primarily as a result of increases in Southwest's loan portfolio, the interest rate spread, and noninterest-bearing funds. The interest rate spread increased to 3.34% for 2002 from 2.92% for 2001 as a result of the 188 basis point reduction in rates paid on Southwest's interest-bearing liabilities, which exceeded the 146 basis point reduction in yields on Southwest's interest-earning assets. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 116.17% for 2002 from 114.92% for 2001. Interest income for 2002 was $76.5 million, down from $90.4 million in 2001 as a result of reductions in the yields earned on interest-earning assets. Yields on total interest-earning assets were 6.25% in 2002 and 7.71% in 2001. Loan interest and fee income declined $11.3 million, or 15%, while average loans outstanding increased $74.2 million, or 8%, to $1,012.5 million in 2002 from $938.3 million in 2001. Interest on investment securities declined $2.6 million, or 19% and average investment securities outstanding decreased $25.7 million, or 11%, to $208.0 million in 2002 from $233.7 million in 2001. The increase in interest-earning assets was funded by increased deposits and retention of earnings. Total interest expense for 2002 was $30.6 million, an $18.3 million, or 37%, decrease from $48.9 million in 2001. The decrease in interest expense was due to decreases in the rates paid on all categories of interest-bearing liabilities. Average interest-bearing deposits increased $52.5 million, or 6%, to $862.2 million for 2002 from $809.7 million for 2001. Average other borrowings decreased $20.4 million, or 11%, to $165.7 million for 2002 from $186.1 million for 2001. Rates paid on interest-bearing liabilities declined to 2.91% in 2002 from 4.79% in 2001. Years ended December 31, 2001 and 2000 Net interest income for 2001 increased to $41.5 million from $40.1 million in 2000, primarily as a result of increases in Southwest's loan portfolio, the interest rate spread, and noninterest-bearing funds. The interest rate spread increased to 2.92% for 2001 from 2.87% for 2000 as a result of the 99 basis point reduction in rates paid on Southwest's interest-bearing liabilities which exceeded the 94 basis point reduction in yields on Southwest's interest-earning assets. The ratio of average interest-earning assets to average interest-bearing liabilities increased to 114.92% for 2001 from 113.68% for 2000. Interest income for 2001 was $90.4 million, down from $97.3 million in 2000 as a result of reductions in the yields earned on interest-earning assets. Yields on total interest-earning assets were 7.71% in 2001 and 8.65% in 2000. Loan interest and fee income declined $6.6 million, or 8%, and average loans outstanding increased $38.0 million, or 4%, to $938.3 million in 2001 from $900.2 million in 2000. Interest on investment securities declined $146,000, or 1% and average investment securities outstanding increased $11.9 million, or 5%, to $233.7 million in 2001 from $221.8 million in 2000. The increase in interest-earning assets was funded by other borrowings and retention of earnings. Total interest expense for 2001 was $48.9 million, a $8.3 million, or 15%, decrease from $57.2 million in 2000. The decrease in interest expense was due to decreases in the rates paid on all categories of interest-bearing liabilities. Average interest-bearing deposits increased $3.3 million, or less than 1%, to $809.7 million for 2001 from $806.5 million for 2000. Average other borrowings increased $28.6 million, or 18%, to $186.1 million for 2001 from $157.5 million for 2000. Rates paid on interest-bearing liabilities declined to 4.79% in 2001 from 5.78% in 2000. The reductions in yields earned on interest-earning assets and rates paid on interest-bearing liabilities reflected the Federal Reserve's actions to decrease interest rates during 2001. The Federal Reserve lowered interest rates eleven times during 2001, reducing the benchmark federal funds rate by 475 basis points. THREE YEAR COMPARISON OF CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST, YIELDS, AND RATES The table on the following page provides certain 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. This table shows that the composition of Southwest's interest-earning assets changed in 2002 to include a higher level of loans and a lower level of investment securities, while the composition of interest-bearing liabilities changed as Southwest increased noninterest-bearing and money market deposits while decreasing its use of higher rate time deposits and other borrowings. 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.
For the Year Ended December 31, --------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------ ------------------------------- --------------------------- Interest (1) Interest (1) Interest (1) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------------------------------ ------------------------------- --------------------------- (dollars in thousands) ASSETS INTEREST-EARNING ASSETS: Total loans $1,012,487 $ 65,503 6.47% $ 938,278 $ 76,850 8.19% $ 900,241 $83,480 9.27% Investment securities 208,015 10,948 5.26 233,686 13,509 5.78 221,783 13,655 6.16 Other interest-earning assets 2,664 44 1.65 1,212 41 3.38 2,263 139 6.14 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,223,166 76,495 6.25 1,173,176 90,400 7.71 1,124,287 97,274 8.65 NONINTEREST-EARNING ASSETS: Other assets 52,004 52,586 53,252 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $1,275,170 $1,225,762 $1,177,539 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING LIABILITIES: Interest-bearing demand $ 52,096 372 0.71% $ 49,156 809 1.65% $ 47,902 1,263 2.64% Money market accounts 211,883 4,305 2.03 130,828 4,386 3.35 97,056 4,690 4.83 Savings accounts 5,702 25 0.44 5,361 79 1.47 4,731 94 1.99 Time deposits 592,478 18,749 3.16 624,359 33,497 5.37 656,765 39,205 5.97 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 862,159 23,451 2.72 809,704 38,771 4.79 806,454 45,252 5.61 Other borrowings (2) 165,745 4,829 2.91 186,109 7,770 4.17 157,517 9,577 6.08 Long-term debt 25,013 2,326 9.30 25,013 2,326 9.30 25,013 2,326 9.30 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,052,917 30,606 2.91 1,020,826 48,867 4.79 988,984 57,155 5.78 ---------------- --------------- ------------- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing demand 118,401 110,438 105,177 Other noninterest-bearing liabilities 14,007 15,452 14,861 Shareholders' equity 89,845 79,046 68,517 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $1,275,170 $1,225,762 $1,177,539 ==================================================================================================================================== Net interest income $ 45,889 $41,533 $40,119 ==================================================================================================================================== Interest rate spread 3.34% 2.92% 2.87% ==================================================================================================================================== Net interest margin (3) 3.75% 3.54% 3.57% ==================================================================================================================================== Ratio of average interest-earning assets to average interest-bearing liabilities 116.17% 114.92% 113.68% ====================================================================================================================================
(1) Yields, net interest spreads, and net interest margins are calculated using income recorded in accordance with accounting principals generally accepted in the United States ("GAAP"), and are not shown on the higher, non-GAAP tax-equivalent basis. (2) The decrease in other borrowings resulted mainly from reductions in Federal Home Loan Bank borrowings. (3) Net interest margin = net interest income / total interest-earning assets. PROVISION FOR LOAN LOSSES Southwest makes provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level Southwest deems appropriate. The allowance is based on careful, continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan and lease portfolio and unused commitments to provide financing. Southwest's systematic methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances and a general reserve. The formula allowance is calculated by applying loss factors to corresponding categories of outstanding loans and leases. Loss factors generally are based on Southwest's historical loss experience in the various portfolio categories over the prior six quarters or four quarters, but may be adjusted for categories where six and four quarter loss experience is historically unusual. The use of these loss factors is intended to reduce the differences between estimated losses inherent in the portfolio and observed losses. Formula allowances also are established for loans that do not have specific allowances according to the application of credit risk factors. These factors are set by management to reflect its assessment of the relative level of risk inherent in each grade. Specific allowances are established in cases where management has identified significant conditions or circumstances related to individual loans that management believes indicate the probability that losses may be incurred in an amount different from the amounts determined by application of the formula allowance. Specific allowances include amounts related to loans that are identified for evaluation of impairment, which is based on discounted cash flows using each loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. All of Southwest's nonaccrual loans are considered to be impaired loans. The general reserve is based upon management's evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. These factors may include general economic and business conditions affecting lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of internal credit examiners, and management's judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. Based upon this review, management established an allowance of $11.9 million, or 1.08% of total loans, at December 31, 2002 compared to an allowance of $11.5 million, or 1.23% of total loans, at December 31, 2001. At December 31, 2002, total nonperforming loans were $12.9 million, or 1.17% of total loans, compared to $9.2 million, or 0.99% of total loans, at December 31, 2001. The government-guaranteed portions of year-end nonperforming loans were $1.0 million for 2002 and $905,000 for 2001. The allowance for loan losses equaled 92.11% of nonperforming loans at December 31, 2002 compared to 124.56% at December 31, 2001. During 2002, 2001, and 2000, the provisions for loan losses were $5.4 million, $4.0 million, and $3.6 million, respectively, while net charge-offs were $5.0 million, $4.6 million, and $2.6 million. During 2002, there were no changes in estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance. Southwest determined the level of the allowance for loan losses at December 31, 2002 was appropriate, based on that methodology. Although the amount of the allowance for loan losses increased from year-end 2001, the percentage of the total allowance to loans decreased, in spite of an increase in nonperforming loans. The decreased percentage resulted from a decrease in the required specific allocations for problem loans and from improvements in the credit quality of performing loans, evidenced by a $26.9 million, or 48%, decrease in potential problem loans. In total, and as a percentage of total loans, the allowance relating to commercial mortgages and real estate construction loans increased from December 31, 2001, while the allowance relating to commercial loans decreased. The increases in the allowance relating to commercial mortgages and construction loans resulted from increases in the allowance related to problem and potential problem loans and in the allowance relating to performing loans. The decrease in the allowance relating to commercial loans resulted from significant decreases in allocations relating to potential problem loans and specific allocations on problem loans (including allowances on impaired loans), offset in part by an increase in the allowance on the remaining commercial loan portfolio. The general reserve comprised 11.30% of the total allowance at year-end 2002, up from 4.90% at year-end 2001. Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to Southwest, but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets, and may lead to a material increase in charge-offs and the provision for loan losses in future periods. The following table shows the amounts of nonperforming loans at the end of the periods indicated.
At December 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 --------------------------------------------------------------- (dollars in thousands) Total nonaccrual $11,455 $ 7,291 $ 3,138 $ 5,205 $ 872 Total past due 90 days or more 1,452 1,935 208 194 451 Total restructured -- -- 8,694 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 12,907 9,226 12,040 5,399 1,323 Other real estate owned 747 640 1,225 1,729 3,650 - ------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $13,654 $ 9,866 $13,265 $ 7,128 $ 4,973 ======================================================================================================================== Nonperforming loans to total loans 1.17% 0.99% 1.32% 0.63% 0.17% Allowance for loan losses to nonperforming loans 92.11% 124.56% 100.71% 207.26% 786.17%
The following table analyzes Southwest's allowance for loan losses for the periods indicated.
For the Year Ended December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------------------------- (dollars in thousands) Balance at beginning of period $11,492 $12,125 $11,190 $10,401 $ 8,282 LOANS CHARGED-OFF: Real estate mortgage 777 445 563 307 460 Real estate construction -- 99 1,083 10 -- Commercial 4,248 4,364 1,170 1,229 1,320 Installment and consumer 371 621 474 802 594 - ------------------------------------------------------------------------------------------------------------------------------------ Total charge-offs 5,396 5,529 3,290 2,348 2,374 - ------------------------------------------------------------------------------------------------------------------------------------ RECOVERIES: Real estate mortgage 93 54 155 30 105 Real estate construction -- 22 -- -- -- Commercial 107 574 360 382 582 Installment and consumer 149 246 160 230 426 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 349 896 675 642 1,113 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans charged-off 5,047 4,633 2,615 1,706 1,261 Provision for loan losses 5,443 4,000 3,550 2,495 3,380 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period $11,888 $11,492 $12,125 $11,190 $10,401 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of allowance for loan losses to total loans: Average 1.17% 1.22% 1.35% 1.38% 1.37% End of period 1.08 1.23 1.33 1.31 1.31 Ratio of net charge-offs to average total loans during the period 0.50 0.49 0.29 0.21 0.17
OTHER INCOME Southwest has developed sources of noninterest income through student lending, mortgage banking, and expansion of Southwest's ATM network, in addition to traditional deposit and loan service charges and fees. Total noninterest income, referred to as "total other income" in the Consolidated Statements of Operations, represented 22% of total net revenues (net interest income plus other income) in 2002. Total other income increased by $1.9 million for fiscal year 2002 compared to 2001 primarily due to a $1.5 million increase in service charges. Other income also benefited from a $270,000 increase in other noninterest income and a $191,000 increase in gains on sales of loans. These increases were partially offset by a reduction in gains on sales of available for sale investment securities of $39,000. The increase in service charges was primarily due to additional deposit accounts as reflected by the significant increases in noninterest-bearing demand, interest-bearing demand and money market account balances at December 31, 2002 as compared to December 31, 2001. The lower interest rate environment during 2002 also contributed to the increase in service charge income by reducing the earnings credit on commercial transaction accounts. Total other income increased by $2.3 million for fiscal year 2001 compared to 2000 primarily due to a $749,000 increase in gains on sales of residential mortgage loans. Other income also benefited from a $535,000 increase in service charges, a $485,000 increase in gains on sales of investment securities, and a $386,000 increase in gains on sales of Small Business Administration ("SBA") loans. The principal balance of residential mortgage loans sold was $117.4 million compared to $56.2 million during 2000. Sales of residential mortgage loans increased primarily as a result of reduced interest rates, which increased refinances and overall originations. The increase in service charges can be attributed to increases in transaction accounts and in fees earned by Southwest's ATM network. The lower interest rate environment during 2001 also contributed to the increase in service charge income by reducing the earnings credit on commercial transaction accounts. The gains on sales of investment securities during 2001 occurred when securities were called prior to their stated maturity date. OTHER EXPENSES Southwest's other expenses increased $2.2 million, or 7%, for fiscal year 2002 compared to 2001. This increase was primarily the result of a $1.4 million, or 9%, increase in personnel expense which can be attributed to additional compensation and higher benefit costs for Southwest's employee base. In addition, general and administrative expense increased $316,000, or 4%, and occupancy expense increased $513,000, or 8%. These increases in expense were partially offset by a $55,000, or 96%, reduction in other real estate expense. Southwest's other expenses increased $1.6 million, or 5%, for fiscal year 2001 compared to 2000. This increase was primarily the result of a $1.4 million, or 10%, increase in personnel expense which can be attributed to additional compensation and higher benefit costs for Southwest's employee base. In addition, general and administrative expense increased $772,000, or 10%, and occupancy expense increased $130,000, or 2%. These increases in expense were partially offset by a $751,000, or 93%, reduction in other real estate expense. TAXES ON INCOME Southwest's income tax expense for fiscal years 2002, 2001, and 2000 was $6.4 million, $5.4 million, and $5.2 million, respectively. Southwest's effective tax rates have been lower than statutory federal and state statutory rates primarily because of tax-exempt income on municipal obligations and loans and the organization in July 2001 of a real estate investment trust. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended ------------------------------------------------------------- 12-31-02 09-30-02 06-30-02 03-31-02 ------------------------------------------------------------- (dollars in thousands, except per share data) OPERATIONS DATA Interest income $ 19,023 $ 19,138 $ 19,371 $ 18,963 Interest expense 7,359 7,677 7,669 7,901 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 11,664 11,461 11,702 11,062 Provision for loan losses 1,348 1,570 1,275 1,250 Gain on sales of securities and loans 1,141 1,155 556 646 Other income 2,543 2,353 2,250 2,002 Other expenses 8,973 8,389 8,146 7,811 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 5,027 5,010 5,087 4,649 Taxes on income 1,538 1,561 1,684 1,571 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 3,489 $ 3,449 $ 3,403 $ 3,078 ======================================================================================================================= PER SHARE DATA Basic earnings per common share $ 0.61 $ 0.60 $ 0.59 $ 0.54 Diluted earnings per common share 0.58 0.57 0.56 0.52 Dividends declared per common share 0.11 0.11 0.11 0.11 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 5,770,147 5,774,107 5,732,589 5,702,426 Diluted 6,047,302 6,078,858 6,029,952 5,932,514
For the Quarter Ended ------------------------------------------------------------- 12-31-01 09-30-01 06-30-01 03-31-01 ------------------------------------------------------------- (dollars in thousands, except per share data) OPERATIONS DATA Interest income $ 19,878 $ 22,368 $ 23,518 $ 24,636 Interest expense 9,110 11,828 13,142 14,787 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 10,768 10,540 10,376 9,849 Provision for loan losses 1,150 900 1,125 825 Gain on sales of securities and loans 897 1,021 832 596 Other income 2,001 1,936 1,868 1,590 Other expenses 8,139 8,007 7,772 7,247 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 4,377 4,590 4,179 3,963 Taxes on income 1,379 1,357 1,287 1,334 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 2,998 $ 3,233 $ 2,892 $ 2,629 ======================================================================================================================= PER SHARE DATA (1) Basic earnings per common share $ 0.52 $ 0.57 $ 0.51 $ 0.46 Diluted earnings per common share 0.51 0.54 0.50 0.45 Dividends declared per common share 0.08 0.08 0.08 0.08 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1) Basic 5,680,190 5,704,012 5,698,049 5,690,258 Diluted 5,867,729 5,905,128 5,835,735 5,820,277
(1) All share and per share information has been restated to reflect the three-to-two stock split effected in the form of a stock dividend paid August 29, 2001. FINANCIAL CONDITION Southwest's total assets increased by $133.3 million, or 11%, from $1.22 billion at December 31, 2000 to $1.35 billion at December 31, 2002 after increasing by $12.9 million, or 1%, between December 31, 2000 and 2001. The growth in assets in 2002 was primarily attributable to the $170.1 million, or 18%, increase in total loans. Southwest's investment securities decreased by $38.6 million, or 17%, from $227.3 million at December 31, 2001 to $188.7 million at December 31, 2002 after decreasing by $2.4 million, or 1%, between December 31, 2000 and 2001. The decline in 2002 came primarily from mortgage-backed securities, which decreased $28.9 million, or 41%, from December 31, 2001 to December 31, 2002. Decreases also occurred during the same period in Southwest's investment in U.S. government and agency securities, which decreased $1.0 million, or 1%, tax-exempt municipal securities, which decreased $9.2 million, or 25%, and the investment in Federal Home Loan Bank stock, which decreased $861,000, or 10%. These reductions in investment securities were partially offset by a $1.3 million, or 28%, increase in other investment securities. Total loans were $1.10 billion at December 31, 2002, an increase of $170.1 million, or 18%, compared to December 31, 2001. All categories of loans increased, except one-to-four family residential mortgages and consumer loans. The allowance for loan losses increased by $396,000, or 3%, from December 31, 2001 to December 31, 2002. At December 31, 2002, the allowance for loan losses was $11.9 million, or 1.08% of total loans, compared to $11.5 million, or 1.23% of total loans, at December 31, 2001. (See "Provision for Loan Losses" above.) Southwest's investment securities decreased by $2.4 million, or 1%, from $229.8 million at December 31, 2000 to $227.3 million at December 31, 2001. The decline in 2001 came primarily from tax-exempt municipal securities, which decreased $4.2 million, or 10%, from December 31, 2000 to December 31, 2001. Southwest's investment in U.S. government and agency securities decreased $787,000 (less than 1%), during the same period. These decreases were partially offset by a $1.5 million, or 21%, increase in Federal Home Loan Bank stock. Total loans were $931.0 million at December 31, 2001, an increase of $18.5 million, or 2%, compared to December 31, 2000. In 2001, Southwest increased its commercial real estate mortgages and government-guaranteed student loans. The allowance for loan losses decreased by $633,000, or 5%, from December 31, 2000 to December 31, 2001. At December 31, 2001, the allowance for loan losses was $11.5 million, or 1.23% of total loans, compared to $12.1 million, or 1.33% of total loans, at December 31, 2000. CAPITAL RESOURCES At December 31, 2002, total shareholders' equity was $96.4 million compared to $85.1 million at December 31, 2001. Earnings, net of common dividends, contributed $10.9 million to shareholders' equity. Sales of common stock through the dividend reinvestment plan, the employee stock purchase plan and the employee stock option plan contributed an additional $1.8 million to shareholders' equity in 2002, including tax benefits realized by Southwest relating to option exercises. Under accounting principles generally accepted in the United States, these tax benefits increase shareholders' equity, but do not affect net income. Net unrealized holding gains (losses) on investment securities available for sale (net of tax) decreased to a gain of $2.2 million at December 31, 2002 compared to $2.4 million at December 31, 2001. During 2002, Southwest repurchased 61,870 shares at an average price of $20.12 per share, which reduced shareholders' equity by $1.2 million. Repurchases of an additional 271,000 shares may be made under the repurchase plan adopted in March 2002. Repurchases may be made from time to time based on market conditions, projected capital needs, and other factors. At December 31, 2001, total shareholders' equity was $85.1 million compared to $73.2 million at December 31, 2000. Earnings, net of common dividends, contributed $9.9 million to shareholders' equity. Sales of common stock through the dividend reinvestment plan, the employee stock purchase plan and the employee stock option plan contributed an additional $597,000 to shareholders' equity in 2001. Net unrealized holding gains (losses) on investment securities available for sale (net of tax) increased to a gain of $2.4 million at December 31, 2001 compared to $379,000 at December 31, 2000. During 2001, Southwest repurchased 40,000 shares at an average price of $16.19 per share, which reduced shareholders' equity by $647,000. 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, 2002, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 11.42%, a Tier 1 risk-based capital ratio of 10.38%, and a leverage ratio of 8.99%. As of December 31, 2002, Stillwater National also met the criteria for classification as a "well-capitalized" institution under the prompt corrective action rules promulgated under the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations does not constitute a recommendation or endorsement of Southwest or Stillwater National by Federal bank regulators. LIQUIDITY 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 residential mortgage loans and available for sale investments. Southwest's portfolio of government-guaranteed student loans and Small Business Administration ("SBA") loans are also readily salable. Additional sources of liquidity, including cash flow from the repayment of loans, are also considered in determining whether liquidity is satisfactory. Liquidity is also achieved through growth of deposits and liquid assets, and accessibility to the capital and money markets. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and operate the organization. Cash and cash equivalents increased $2.4 million during 2002. This increase was the result of cash provided from operating activities of $17.6 million and financing activities (primarily increased deposits) of $118.8 million offset by $134.0 million in cash used in investing activities. Cash and cash equivalents increased $1.6 million during 2001. This increase was the result of cash provided from operating activities of $15.3 million and financing activities (primarily other borrowings) of $2.7 million offset by $16.5 million in cash used in investing activities. ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Southwest's net income is largely dependent on its net interest income. Southwest seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and shareholders' equity. Southwest attempts to manage interest rate risk while enhancing net interest margin by adjusting its asset/liability position. At times, depending on the level of general interest rates, the relationship between long-term and other interest rates, market conditions and competitive factors, Southwest may determine to increase its interest rate risk position in order to increase its net interest margin. Southwest monitors interest rate risk and adjusts the composition of its rate-sensitive assets and liabilities in order to limit its exposure to changes in interest rates on net interest income over time. Southwest's asset/liability committee reviews its interest rate risk position and profitability, and recommends adjustments. The asset/liability committee also reviews the securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions. Notwithstanding Southwest's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. Interest rate sensitivity analysis measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods. The following table shows Southwest's interest rate sensitivity gaps for selected maturity periods at December 31, 2002:
0 to 3 4 to 12 Over 1 to Over Months Months 5 Years 5 Years Total ---------------------------------------------------- (dollars in thousands) RATE-SENSITIVE ASSETS: Total loans $720,899 $216,053 $119,851 $ 44,309 $1,101,112 Investment securities 31,323 65,078 86,428 5,860 188,689 Federal funds sold -- -- -- -- -- Due from banks 2,431 -- -- -- 2,431 - --------------------------------------------------------------------------------------------------- Total 754,653 281,131 206,279 50,169 1,292,232 RATE-SENSITIVE LIABILITIES: Money market deposit accounts 258,712 -- -- -- 258,712 Time deposits 158,889 277,232 135,117 -- 571,238 Savings accounts 5,700 -- -- -- 5,700 NOW accounts 50,162 -- -- -- 50,162 Other borrowings 149,282 30,000 20,000 -- 199,282 Long-term debt -- -- -- 25,013 25,013 - --------------------------------------------------------------------------------------------------- Total 622,745 307,232 151,117 25,013 1,110,107 - --------------------------------------------------------------------------------------------------- Interest sensitivity gap $131,908 $(26,101) $ 51,162 $ 25,156 $ 182,125 =================================================================================================== Cumulative interest sensitivity gap $131,908 $105,807 $156,969 $182,125 $ 182,125 =================================================================================================== Percentage of rate-sensitive assets to rate-sensitive liabilities 121.18% 91.50% 132.98% 200.57% 116.41% =================================================================================================== Percentage of cumulative gap to total assets 9.77% 7.84% 11.63% 13.49% 13.49% ===================================================================================================
The percentage of rate-sensitive assets to rate-sensitive liabilities presents a static position as of a single day and is not necessarily indicative of Southwest's 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 Southwest's mortgage-backed securities mature during the period in which they are estimated to prepay. No other prepayment or repricing assumptions have been applied to Southwest's interest-earning assets for this report. A principal objective of Southwest's asset/liability management effort is to balance the various factors that generate interest rate risk, thereby maintaining the interest rate sensitivity of Southwest within acceptable risk levels. To measure its interest rate sensitivity position, Southwest utilizes a simulation model that facilitates the forecasting of net interest income under a variety of interest rate and growth scenarios. At December 31, 2002, the model projected net income would decrease by 7.74% if interest rates immediately fell by 100 basis points. It projects an increase in net income of 1.59% if interest rates immediately rose by 100 basis points. The model projected net income would decrease by 4.59% if interest rates gradually fell by 100 basis points over a one-year time horizon. It projects an increase in net income of 2.28% if interest rates gradually rose by 100 basis points over a one-year time horizon. 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 will differ from simulated results due to timing, cash flows, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. EFFECTS OF INFLATION The consolidated financial statements and related consolidated financial data in this report have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry that require the measurement of financial position and operating results in terms of historical dollars without considering fluctuations in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. RECENTLY ADOPTED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 required that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. Southwest adopted SFAS No. 141 and SFAS No. 142 on January 1, 2002 as required. Southwest has completed the first of the required impairment tests of goodwill and intangible assets; the tests indicated no impairment existed of either goodwill or intangible assets. Finite-lived intangible assets continue to be amortized as allowed and consisted of mortgage and other loan servicing rights with a total carrying value of $897,000; no impairment was indicated. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of; however, it retained the fundamental provisions of the Statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used." In addition, SFAS No. 144 provided more guidance on estimating cash flows when performing a recoverability test, required that a long-lived asset to be disposed of other than by sale (e.g. abandoned) be classified as "held and used" until it is disposed of, and established more restrictive criteria to classify an asset as "held for sale." Southwest adopted SFAS No. 144 on January 1, 2002. Adoption of SFAS No. 144 did not have a material impact on Southwest's results of operations or financial position. On December 31, 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend Statement 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of Opinion 25. Statement 148's amendment of the transition and annual disclosure requirements of Statement 123 are effective for fiscal years ending after December 15, 2002. Statement 148's amendment of the disclosure requirements of Opinion 28 is effective for financial reports containing condensed consolidated financial statements for interim periods beginning after December 15, 2002. 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 accounting principles generally accepted in the United States. 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 certain measures, such as the efficiency ratio, are calculated using accounting principles generally accepted in the United States. REPORT OF MANAGEMENT January 22, 2003 To the Shareholders of Southwest Bancorp, Inc.: FINANCIAL STATEMENTS The management of Southwest Bancorp, Inc. ("Southwest") is responsible for the preparation, integrity, and fair presentation of its published financial statements as of December 31, 2002, and for the year then ended. The consolidated financial statements of Southwest Bancorp, Inc. have been prepared in accordance with generally accepted accounting principles and, as such, include some amounts that are based upon informed judgments and estimates of management. INTERNAL CONTROL OVER FINANCIAL REPORTING We, as management of Southwest, are responsible for establishing and maintaining effective internal control over financial reporting, presented in conformity with generally accepted accounting principles and the instructions to the Consolidated Financial Statements for Bank Holding Companies with Total Consolidated Assets of $150 million or More, or with More Than One Subsidiary Bank (Form FR Y-9C) (FR Y-9C instructions). Internal control is designed to provide reasonable assurance to Southwest's management and board of directors regarding the preparation of reliable published financial statements. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, and controls may be overridden or circumvented. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time. Management assessed Southwest's internal control over financial reporting, as it relates to its financial statements, presented in conformity with generally accepted accounting principles and FR Y-9C instructions as of December 31, 2002. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2002, its system of internal control over financial reporting as it relates to its financial statements presented in conformity with generally accepted accounting principles and FR Y-9C instructions met those criteria. COMPLIANCE WITH LAWS AND REGULATIONS Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders, designated by the Federal Deposit Insurance Corporation as safety and soundness laws and regulations. Management has assessed compliance by Southwest Bancorp, Inc. subsidiary Stillwater National Bank with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that this subsidiary insured depository institution complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2002. /s/ Rick Green /s/ Kerby Crowell Rick Green Kerby E. Crowell President and Chief Executive Officer Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SOUTHWEST BANCORP, INC.: We have audited the accompanying consolidated statements of financial condition of Southwest Bancorp, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of Southwest Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Bancorp, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Tulsa, Oklahoma January 22, 2003 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SOUTHWEST BANCORP, INC.
AT DECEMBER 31, 2002 AND 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) ASSETS Cash and cash equivalents $ 34,847 $ 32,406 Investment securities: Held to maturity, fair value $32,000 (2002) and $51,030 (2001) 31,154 49,893 Available for sale, amortized cost $145,141 (2002) and $163,924 (2001) 148,476 167,545 Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 9,059 9,908 Loans held for sale 10,638 12,740 Loans receivable, net of allowance for loan losses of $11,888 (2002) and $11,492 (2001) 1,078,586 906,814 Accrued interest receivable 9,283 10,157 Premises and equipment, net 20,202 20,418 Other assets 7,523 6,614 - -------------------------------------------------------------------------------------------------------------- Total assets $ 1,349,768 $ 1,216,495 - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 135,945 $ 127,196 Interest-bearing demand 50,162 49,051 Money market accounts 258,712 157,266 Savings accounts 5,700 5,372 Time deposits of $100,000 or more 309,205 260,071 Other time deposits 262,033 305,840 - -------------------------------------------------------------------------------------------------------------- Total deposits 1,021,757 904,796 Accrued interest payable 4,486 3,470 Other 2,858 2,724 liabilities Other borrowings 199,282 195,367 Long-term debt: Guaranteed preferred beneficial interests in the Company's subordinated debentures 25,013 25,013 - -------------------------------------------------------------------------------------------------------------- Total liabilities 1,253,396 1,131,370 SHAREHOLDERS' EQUITY: Common stock - $1 par value; 20,000,000 shares authorized; 6,121,521 shares issued and outstanding 6,122 6,122 Paid in capital 12,317 12,508 Retained earnings 80,724 69,838 Accumulated other comprehensive gain (loss) 2,201 2,389 Treasury stock, at cost; 348,142 (2002) and 420,764 (2001) shares (4,992) (5,732) - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 96,372 85,125 - -------------------------------------------------------------------------------------------------------------- Total liabilities & shareholders' equity $ 1,349,768 $ 1,216,495 ==============================================================================================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF OPERATIONS SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 - --------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) INTEREST INCOME: Interest and fees on loans $ 65,503 $ 76,850 $ 83,480 Investment securities: U.S. Government and agency obligations 5,913 6,329 6,767 Mortgage-backed securities 3,126 4,780 4,576 State and political subdivisions 1,355 1,638 1,499 Other securities 554 762 813 Federal funds sold 44 41 139 - --------------------------------------------------------------------------------------- Total interest income 76,495 90,400 97,274 INTEREST EXPENSE: Interest-bearing demand 372 809 1,263 Money market accounts 4,305 4,386 4,690 Savings accounts 25 79 94 Time deposits of $100,000 or more 9,320 15,468 18,797 Other time deposits 9,429 18,029 20,408 Other borrowings 4,829 7,770 9,577 Long-term debt 2,326 2,326 2,326 - --------------------------------------------------------------------------------------- Total interest expense 30,606 48,867 57,155 - --------------------------------------------------------------------------------------- Net interest income 45,889 41,533 40,119 Provision for loan losses 5,443 4,000 3,550 OTHER INCOME: Service charges and fees 8,216 6,733 6,198 Other noninterest income 932 662 538 Gain on sales of loans 3,170 2,979 1,871 Gain (loss) on sales of investment securities 328 367 (118) - --------------------------------------------------------------------------------------- Total other income 12,646 10,741 8,489 OTHER EXPENSES: Salaries and employee benefits 17,168 15,794 14,401 Occupancy 7,119 6,606 6,476 FDIC and other insurance 286 280 274 Other real estate 2 57 808 General and administrative 8,744 8,428 7,656 - --------------------------------------------------------------------------------------- Total other expenses 33,319 31,165 29,615 - --------------------------------------------------------------------------------------- Income before taxes 19,773 17,109 15,443 Taxes on income 6,354 5,357 5,238 - --------------------------------------------------------------------------------------- Net income $ 13,419 $ 11,752 $ 10,205 ======================================================================================= Basic earnings per common share $ 2.34 $ 2.06 $ 1.78 (1) Diluted earnings per common share 2.23 2.00 1.76 (1) Cash dividends declared per share 0.44 0.32 0.29 (1)
The accompanying notes are an integral part of this statement. (1) All share and per share information has been restated to reflect the three-for-two stock split effected in the form of a stock dividend paid August 29, 2001. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------- (Dollars in thousands) Net income $ 13,419 $ 11,752 $ 10,205 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized holding gain (loss) on available for sale securities 43 3,357 3,357 Reclassification adjustment for (gains) losses arising during the period (328) (367) 118 - ------------------------------------------------------------------------------------------- Other comprehensive income (loss), before tax (285) 2,990 3,475 Tax (expense) benefit related to items of other comprehensive income (loss) 97 (980) (1,388) - ------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax (188) 2,010 2,087 - ------------------------------------------------------------------------------------------- Comprehensive income $ 13,231 $ 13,762 $ 12,292 ===========================================================================================
The accompanying notes are an integral part of this statement. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SOUTHWEST BANCORP, INC.
Accumulated Total Other Share- Common Stock Paid in Retained Comprehensive Treasury holders' Shares Amount Capital Earnings Income (Loss) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) (1) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2000 6,121,521 $ 6,122 $12,814 $51,385 $(1,708) $(4,359) $64,254 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends: Common, $0.29 per share -- -- -- (1,678) -- -- (1,678) Common stock issued: Employee Stock Option Plan -- -- (35) -- -- 89 54 Employee Stock Purchase Plan -- -- (16) -- -- 62 46 Dividend Reinvestment Plan -- -- (16) -- -- 64 48 Other comprehensive income (loss), net of tax -- -- -- -- 2,087 -- 2,087 Treasury shares purchased -- -- -- -- -- (1,777) (1,777) Net income -- -- -- 10,205 -- -- 10,205 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 6,121,521 6,122 12,747 59,912 379 (5,921) 73,239 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends: Common, $0.32 per share, and other dividends -- -- -- (1,826) -- -- (1,826) Common stock issued: Employee Stock Option Plan -- -- (234) -- -- 739 505 Employee Stock Purchase Plan -- -- -- -- -- 39 39 Dividend Reinvestment Plan -- -- (5) -- -- 58 53 Other comprehensive income (loss), net of tax -- -- -- -- 2,010 -- 2,010 Treasury shares purchased -- -- -- -- -- (647) (647) Net income -- -- -- 11,752 -- -- 11,752 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 6,121,521 6,122 12,508 69,838 2,389 (5,732) 85,125 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends: Common, $0.44 per share, and other dividends -- -- -- (2,533) -- -- (2,533) Common stock issued: Employee Stock Option Plan -- -- (515) -- -- 1,913 1,398 Employee Stock Purchase Plan -- -- 24 -- -- 37 61 Dividend Reinvestment Plan -- -- 15 -- -- 35 50 Tax benefit related to exercise of stock options -- -- 285 -- -- -- 285 Other comprehensive income (loss), net of tax -- -- -- -- (188) -- (188) Treasury shares purchased -- -- -- -- -- (1,245) (1,245) Net income -- -- -- 13,419 -- -- 13,419 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 6,121,521 $ 6,122 $12,317 $80,724 $ 2,201 $(4,992) $96,372 ===============================================================================================================================
The accompanying notes are an integral part of this statement. (1) All share and per share information has been restated to reflect the three-for-two stock split effected in the form of a stock dividend paid August 29, 2001. CONSOLIDATED STATEMENTS OF CASH FLOWS SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) OPERATING ACTIVITIES: Net income $ 13,419 $ 11,752 $ 10,205 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Provision for loan losses 5,443 4,000 3,550 Depreciation and amortization expense 2,510 2,434 2,493 Amortization of premiums and accretion of discounts on securities, net (59) 15 (13) Amortization of intangibles 202 178 182 Tax benefit from exercise of stock options 285 -- -- (Gain) Loss on sales/calls of securities (328) (367) 118 (Gain) Loss on sales of loans (3,170) (2,979) (1,871) (Gain) Loss on sales of premises/equipment -- 137 48 (Gain) Loss on other real estate owned, net (92) (16) 424 Proceeds from sales of residential mortgage loans 133,207 118,899 56,986 Residential mortgage loans originated for resale (134,705) (118,717) (59,370) Changes in assets and liabilities: Accrued interest receivable 874 1,885 (2,629) Other assets (905) 1,685 (1,550) Income taxes payable (195) (170) 365 Accrued interest payable 1,016 (3,635) 1,101 Other liabilities 150 246 121 - ------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from operating activities 17,652 15,347 10,160 - ------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sales of available for sale securities 18,769 1,993 3,998 Proceeds from principal repayments, calls and maturities: Held to maturity securities 19,533 14,475 23,290 Available for sale securities 71,707 69,475 15,129 Proceeds from redemptions of Federal Home Loan Bank stock 2,378 718 146 Purchases of Federal Home Loan Bank stock and Federal Reserve Bank stock (1,529) (2,187) (96) Purchases of held to maturity securities (2,093) -- (15,930) Purchases of available for sale securities (70,008) (78,688) (41,274) Loans originated and principal repayments, net (289,085) (105,352) (115,631) Proceeds from sales of guaranteed student loans 117,703 84,658 54,440 Purchases of premises and equipment (2,361) (2,640) (2,247) Proceeds from sales of premises and equipment 67 67 90 Proceeds from sales of other real estate owned 922 963 3,169 - ------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from investing activities (133,997) (16,518) (74,916) - ------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 116,961 (40,306) 73,867 Net increase (decrease) in other borrowings 3,915 44,869 (1,322) Net proceeds from issuance of common stock 1,509 597 148 Purchases of treasury stock (1,245) (647) (1,777) Common stock dividends paid (2,354) (1,787) (1,649) - ------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from financing activities 118,786 2,726 69,267 - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,441 1,555 4,511 CASH AND CASH EQUIVALENTS, Beginning of period 32,406 30,851 26,340 - ------------------------------------------------------------------------------------------------------------- End of period $ 34,847 $ 32,406 $ 30,851 =============================================================================================================
The accompanying notes are an integral part of this statement. SOUTHWEST BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc. ("Southwest") was incorporated in 1981 as a bank holding company headquartered in Stillwater, Oklahoma engaged primarily in commercial and consumer banking services in the state of Oklahoma as well as Wichita, Kansas and the Dallas, Texas area. The accompanying consolidated financial statements include the accounts of Stillwater National Bank and Trust Company ("Stillwater National"), a national bank established in 1894, SBI Capital Trust, a Delaware business trust established in 1997, Business Consulting Group, Inc. ("BCG"), a consulting company established in 2002, and consolidated subsidiaries of Stillwater National, include SNB Real Estate Holdings, Inc. and SNB REIT, Inc. Stillwater National, SBI Capital Trust and BCG are wholly owned, direct subsidiaries of Southwest. All significant intercompany balances and transactions have been eliminated. MANAGEMENT ESTIMATES - In preparing Southwest's 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 impact the determination of material estimates such as the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, income taxes, and the fair value of financial instruments. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions, and federal funds sold. Federal funds sold are sold for one-to-four day periods. INVESTMENT SECURITIES - Investments in debt and equity securities are identified as held to maturity and available for sale based on management considerations of asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors. Southwest has the ability and intent to hold to maturity its investment securities classified as held to maturity. Southwest had no investments held for trading purposes for any period presented. Under certain circumstances (including the deterioration of the issuer's creditworthiness, a change in tax law, or statutory or regulatory requirements), Southwest may change the investment security classification. The classifications Southwest utilizes determine the related accounting treatment for each category of investments. Available for sale securities are accounted for at fair value with unrealized gains or losses, net of taxes, excluded from operations and reported as accumulated other comprehensive income or loss. Held to maturity securities are accounted for at amortized cost. All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to operations over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method. Income earned on Southwest's investments in state and political subdivisions generally is not subject to ordinary Federal income tax. Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are not readily marketable, therefore these investments are carried at cost, which approximates fair value. LOANS - Interest on loans is accrued and credited to operations based upon the principal amount outstanding. In general, accrued interest income on impaired loans is written off after the loan is 90 days past due; subsequent interest income is recorded when cash receipts are received from the borrower. Southwest originates real estate mortgage loans and government-guaranteed student loans for 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 approximating par value of the loans. Government-guaranteed student loans are generally sold within ninety days of closing. Real estate mortgage loans held for sale and government-guaranteed student loans are carried at the lower of cost or market. Gains or losses recognized upon the sale of loans are determined on a specific identification basis. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is 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. A loan is considered to be impaired when, based on current information and events, it is probable that Southwest will be unable to collect all amounts due according to the contractual terms of the loan agreement. The allowance for loan losses related to loans that are evaluated for impairment is based either on the discounted cash flows using the 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, student and consumer, are collectively evaluated for impairment. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. All of Southwest's nonaccrual loans are considered to be impaired loans. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful life of each asset, which ranges from three to forty years. Southwest reviews the carrying value of long-lived assets used in operations when changes in events or circumstances indicate that the assets might have become impaired. This review initially includes a comparison of carrying value to the undiscounted cash flows estimated to be generated by those assets. If this review indicates that an asset is impaired, Southwest records a charge to operations to reduce the 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. OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at the lesser of the fair value less the estimated costs to sell the asset or the recorded amount of the related loan. Write-downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, and costs related to holding the property are expensed. Foreclosed property is subject to periodic revaluation based upon estimates of fair value. In determining the valuation of other real estate owned, management obtains independent appraisals for significant properties. Valuation adjustments are provided, as necessary, by charges to operations. Profits and losses from sales of foreclosed property by Southwest are recognized as incurred. INTANGIBLES - Intangibles consist of goodwill and mortgage servicing rights and are included in other assets in the consolidated statements of financial condition. SFAS No. 142, adopted on January 1, 2002, requires that goodwill no longer be amortized, but must be reviewed for impairment at least annually. Southwest completed the first of the required impairment tests of goodwill; the tests indicated no impairment existed. The remaining capitalized amount of goodwill is not material. The cessation of amortization of goodwill did not have a material impact on the Statement of Operations. Loan servicing rights are capitalized based on estimated fair market value at the point of origination. The servicing rights are amortized on an individual loan by loan basis over the period of estimated net servicing income. Impairment of loan servicing rights is assessed based on the fair value of those rights. The capitalized amounts and amortization of the loan servicing rights is not material. Southwest reviews the carrying value of intangible assets annually for impairment. Assets are considered impaired when the balances are not recoverable from estimated future cash flows. At December 31, 2002 and 2001, Southwest had recorded cumulative amortization of $2.4 million and $2.2 million, respectively. DEPOSITS - The total amount of time deposits with a minimum denomination of $100,000 was approximately $309.2 million and $260.1 million at December 31, 2002 and 2001, respectively. The total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2002 and 2001 was $529,000 and $575,000, respectively. Time deposit maturities are as follows: $436.1 million in 2003, $88.3 million in 2004, $15.3 million in 2005, $1.4 million in 2006 and $30.1 million thereafter. LONG-TERM DEBT - The long-term debt consists of the Guaranteed Preferred Beneficial Interests in Southwest's Subordinated Debentures purchased from SBI Capital Trust. LOAN SERVICING INCOME - Southwest earns fees for servicing real estate mortgages owned by others. These fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when received. TAXES ON INCOME - Southwest and its subsidiaries file consolidated income tax returns. Deferred income taxes arise from temporary differences between financial and tax bases of certain assets and liabilities. A valuation allowance will be established if it is more likely than not that some portion of the deferred tax asset will not be realized. EARNINGS PER COMMON SHARE - Basic earnings per common share is computed based upon net income divided by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed based upon net income divided by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. For the years ended December 31, 2002, 2001, and 2000, Southwest had 14,000, 150,000, and 405,000 antidilutive options to purchase common shares, respectively. The following is a reconciliation of the common shares used in the calculations of basic and diluted earnings per common share:
2002 2001 2000 --------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic earnings per share 5,745,083 5,693,129 5,733,624 EFFECT OF DILUTIVE SECURITIES: Stock options 280,976 171,293 59,228 - ---------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Diluted earnings per share 6,026,059 5,864,422 5,792,852 ========================================================================================
STOCK OPTION PLAN - The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option Plan (the "Stock Plans") provide selected key employees with the opportunity to acquire common stock. The exercise price of all options granted under the Stock Plans is the fair market value on the grant date. Depending upon terms of the stock option agreements, stock options generally become exercisable on either a quarterly or annual basis and expire either 30 days after becoming exercisable or from five to ten years after the date of grant. Southwest applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the Stock Plans; accordingly, no compensation expense has been recorded in the accompanying consolidated statements of operations. Had compensation cost for the Stock Plans been determined based upon the fair value of the options at their grant date as prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma data would have been as follows: For the Years Ended December 31 ------------------------------- 2002 2001 2000 ------------------------------- Proforma net income $12,967 $11,313 $9,707 Basic earnings per common share $ 2.26 $ 1.99 $ 1.69 Diluted earnings per common share $ 2.15 $ 1.93 $ 1.68 Weighted average fair value at grant date $ 4.82 $ 4.83 $ 5.04 Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its proforma effect is not necessarily indicative of its impact on future years. The compensation cost is calculated using the Black-Scholes option pricing model with the following weighted average assumptions: For the Years Ended December 31, -------------------------------- 2002 2001 2000 -------------------------------- Expected dividend yield 1.73% 1.71% 1.77% Expected volatility 25.40% 25.67% 26.87% Risk-free interest rate 5.70% 5.82% 6.20% Expected option term (in years) 8.87 9.17 9.69 The Stock Plan's activity follows: Weighted Number of Average Options Exercise Price --------------------------- - ---------------------------------------------------------------------------- Outstanding at January 1, 2000 681,750 $13.12 - ---------------------------------------------------------------------------- Granted 168,001 10.65 Exercised (6,000) 8.92 Canceled/expired (79,350) 14.93 - ---------------------------------------------------------------------------- Outstanding at December 31, 2000 764,401 12.42 - ---------------------------------------------------------------------------- Granted 25,000 14.90 Exercised (49,051) 10.30 Canceled/expired (78,949) 14.76 - ---------------------------------------------------------------------------- Outstanding at December 31, 2001 661,401 12.39 - ---------------------------------------------------------------------------- Granted 121,540 20.68 Exercised (129,617) 10.79 Canceled/expired -- -- - ---------------------------------------------------------------------------- Outstanding at December 31, 2002 653,324 $14.25 ============================================================================ Total exercisable at December 31, 2000 322,426 $11.03 Total exercisable at December 31, 2001 324,050 $11.29 Total exercisable at December 31, 2002 305,081 $13.16 At December 31, 2002, Southwest had reserved 1,193,283 shares under the Stock Plans, and had 653,324 shares under option. The following summarizes the information concerning options outstanding and exercisable at December 31, 2002.
Number of Range of Weighted Average Weighted Exercisable Options Exercise Remaining Average Number Weighted Average Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------- 256,736 $ 8.50 - $12.96 3.9 $ 9.56 156,161 $ 9.29 263,275 $14.21 - $17.83 5.9 $15.69 104,125 $15.86 99,313 $18.15 - $20.23 4.2 $18.72 33,460 $18.67 20,000 $24.65 - $24.99 4.4 $24.82 6,668 $24.82 14,000 $26.31 - $26.61 4.9 $26.42 4,667 $26.42
COMPREHENSIVE INCOME - The Company's comprehensive income (net income plus all other changes in shareholders' equity from non-equity sources) consists of its net income and unrealized holding gains (losses) in its available for sale securities. TRUST - Southwest offers trust services to customers through its relationship with the Heritage Trust Company, a trust services company. Property (other than cash on deposit) held by Southwest in a fiduciary or agency capacity for its customers is not included in the consolidated statements of financial condition as it is not an asset or liability of Southwest. LIQUIDITY - Stillwater National is required by the Federal Reserve Bank to maintain average reserve balances. Cash and due from banks in the consolidated statements of financial condition include restricted amounts of $535,000 and $116,000 at December 31, 2002 and 2001, respectively. RECLASSIFICATIONS - Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. SEGMENTS - The Company operates under one reportable segment under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." 2. INVESTMENT SECURITIES A summary of the amortized cost and fair values of investment securities follows:
At December 31, 2002 -------------------------------------------------- Amortized Gross Unrealized Fair Cost Gains Losses Value -------------------------------------------------- (dollars in thousands) Held to Maturity: U.S. Government and agency obligations $ 8,068 $ 267 $ -- $ 8,335 Obligations of state and political subdivisions 23,086 579 -- 23,665 - ------------------------------------------------------------------------------------------------------- Total $ 31,154 $ 846 $ -- $ 32,000 ======================================================================================================= Available for Sale: U.S. Government and agency obligations $ 94,046 $ 2,295 $ -- $ 96,341 Obligations of state and political subdivisions 4,340 253 -- 4,593 Mortgage-backed securities 40,916 852 17 41,751 Equity securities 5,839 45 93 5,791 - ------------------------------------------------------------------------------------------------------- Total $145,141 $ 3,445 $ 110 $148,476 ======================================================================================================= At December 31, 2001 -------------------------------------------------- Amortized Gross Unrealized Fair Cost Gains Losses Value -------------------------------------------------- (dollars in thousands) Held to Maturity: U.S. Government and agency obligations $ 17,723 $ 539 $ 1 $ 18,261 Obligations of state and political subdivisions 32,170 599 -- 32,769 - ------------------------------------------------------------------------------------------------------- Total $ 49,893 $ 1,138 $ 1 $ 51,030 ======================================================================================================= Available for Sale: U.S. Government and agency obligations $ 85,499 $ 2,210 $ 9 $ 87,700 Obligations of state and political subdivisions 4,560 112 -- 4,672 Mortgage-backed securities 69,303 1,385 31 70,657 Equity securities 4,562 66 112 4,516 - ------------------------------------------------------------------------------------------------------- Total $163,924 $ 3,773 $ 152 $167,545 =======================================================================================================
As required by law, investment securities are pledged to secure public and trust deposits, as well as the Sweep Repurchase Agreement Product and borrowings from the FHLB. Securities with an amortized cost of $134.9 million and $193.4 million were pledged to meet such requirements of $80.9 million and $117.1 million at December 31, 2002 and 2001, respectively. Any amount overpledged can be released at any time. A comparison of the amortized cost and approximate fair value of Southwest's debt securities by maturity date at December 31, 2002 follows on the next page.
Available for Sale Held to Maturity -------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------------------- (dollars in thousands) One year or less $ 65,131 $ 66,331 $ 15,220 $ 15,389 Two years through five years 70,920 73,092 15,934 16,611 Five years through ten years 3,237 3,293 -- -- More than ten years 5,853 5,760 -- -- - ------------------------------------------------------------------------------------ Total $145,141 $148,476 $ 31,154 $ 32,000 ====================================================================================
Gross realized gains (losses) on sales of investment securities were $328,000, $367,000, and $(118,000) during 2002, 2001, and 2000, respectively. The gross proceeds from such sales of investment securities totaled approximately $18.8 million, $2.0 million, and $4.0 million during 2002, 2001, and 2000, respectively. A portion of the gain on sales of investment securities during 2002 and 2001 occurred when securities classified as "held to maturity" and "available for sale", originally purchased at a discount, were called prior to their stated maturity dates. 3. LOANS Major classifications of loans are as follows: At December 31, ----------------------------- 2002 2001 ----------------------------- (dollars in thousands) Real estate mortgage: Commercial $ 374,999 $ 301,578 One-to-four family residential 102,423 106,206 Real estate construction 130,001 91,897 Commercial 348,879 312,577 Installment and consumer: Government-guaranteed student loans 119,064 91,841 Other 25,746 26,947 - --------------------------------------------------------------------------- 1,101,112 931,046 Allowance for loan losses (11,888) (11,492) - --------------------------------------------------------------------------- Total loans, net $ 1,089,224 $ 919,554 =========================================================================== Southwest extends commercial and consumer credit primarily to customers in the states of Oklahoma, Texas and Kansas which subjects the loan portfolio to the general economic conditions within this area. At December 31, 2002 and 2001, substantially all of Southwest's loans are collateralized with real estate, inventory, accounts receivable and/or other assets or guaranteed by agencies of the United States Government. Loans to individuals and businesses in the healthcare industry totaled $206.8 million, or 19% of total loans. Southwest does not have any other concentrations of loans to individuals or businesses involved in a single industry of more than 5% of total loans. In the event of total nonperformance by the borrowers, Southwest's accounting loss would be limited to the recorded investment in the loans reduced by proceeds received from disposition of the related collateral. Southwest had loans which were held for sale of $10.6 million and $12.7 million at December 31, 2002 and 2001, respectively. These loans are carried at the lower of cost or market. Government-guaranteed student loans are generally sold to a single servicer. A substantial portion of the one-to-four family residential loans and loan servicing rights are sold to five servicers. The principal balance of loans for which accrual of interest has been discontinued totaled approximately $11.5 million and $7.3 million at December 31, 2002 and 2001, respectively. If interest on those loans had been accrued, the interest income as reported in the accompanying consolidated statements of operations would have increased by approximately $749,000, $543,000, and $155,000, for 2002, 2001, and 2000, respectively. The unpaid principal balance of real estate mortgage loans serviced for others totaled $107.7 million and $91.1 million at December 31, 2002 and 2001, respectively. Southwest maintained escrow accounts totaling $321,000 and $370,000 for real estate mortgage loans serviced for others at December 31, 2002 and 2001, respectively. The following table sets forth the remaining maturities for certain loan categories at December 31, 2002. Student loans that do not have stated maturities are treated as due in one year or less.
One year One to Over or less five years five years Total --------- ---------- ---------- ---------- (dollars in thousands) Real estate mortgage: Commercial $ 35,359 $ 120,286 $ 219,354 $ 374,999 One-to-four family residential 16,154 34,154 52,115 102,423 Real estate construction 54,354 35,993 39,654 130,001 Commercial 172,022 126,033 50,824 348,879 Installment and consumer: Government-guaranteed student loans 119,064 -- -- 119,064 Other 9,605 14,863 1,278 25,746 - -------------------------------------------------------------------------------------------------------- Total $ 406,558 $ 331,329 $ 363,225 $1,101,112 ========================================================================================================
The following table sets forth at December 31, 2002 the dollar amount of all loans due more than one year after December 31, 2002. Fixed Variable Total -------- -------- -------- (dollars in thousands) Real estate mortgage: Commercial $ 31,133 $308,507 $339,640 One-to-four family residential 33,964 52,305 86,269 Real estate construction 16,174 59,473 75,647 Commercial 22,041 154,816 176,857 Installment and consumer: Government-guaranteed student loans -- -- -- Other 10,748 5,393 16,141 - -------------------------------------------------------------------------------- Total $114,060 $580,494 $694,554 ================================================================================ The allowance for loan losses is summarized as follows: For the Years Ended December 31, -------------------------------------- 2002 2001 2000 -------------------------------------- (dollars in thousands) Beginning balance $ 11,492 $ 12,125 $ 11,190 Provision for loan losses 5,443 4,000 3,550 Loans charged off (5,396) (5,529) (3,290) Recoveries 349 896 675 - --------------------------------------------------------------------- Total $ 11,888 $ 11,492 $ 12,125 ===================================================================== As of December 31, 2002 and 2001, impaired loans totaled $11.5 million and $7.3 million and had a related allowance for loan loss of $930,000 and $2.4 million, respectively. The average balance of impaired loans totaled $7.5 million and $6.3 million for the years ended December 31, 2002 and 2001, respectively. Interest income recognized on impaired loans totaled $241,000, $392,000, and $142,000, respectively, for the years ended December 31, 2002, 2001, and 2000. Directors and officers of Southwest and Stillwater National were customers of, and had transactions with, Southwest in the ordinary course of business, and similar transactions are expected in the future. All loans included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of loss or present other unfavorable features. Certain directors, and companies in which they have ownership interests, had indebtedness to Southwest totaling $2.6 million, $1.5 million and $1.4 million at December 31, 2002, 2001 and 2000, respectively. During 2002, $6.8 million of new loans and advances on existing loans were made to these persons and repayments totaled $5.7 million. 4. PREMISES AND EQUIPMENT These consist of the following: At December 31, ---------------------- 2002 2001 ---------------------- (dollars in thousands) Land $ 4,558 $ 4,558 Buildings and improvements 11,218 10,972 Furniture, fixtures, and equipment 21,153 19,599 Construction/Remodeling in progress 444 48 - ---------------------------------------------------------------------- 37,373 35,177 Accumulated depreciation and amortization (17,171) (14,759) - ---------------------------------------------------------------------- Premises and equipment, net $ 20,202 $ 20,418 ====================================================================== 5. OTHER BORROWED FUNDS During 2002, the only categories of other borrowings whose averages exceeded 30% of ending shareholders' equity were repurchase agreements and funds borrowed from the FHLB.
At December 31, -------------------------------------- 2002 2001 2000 -------------------------------------- (dollars in thousands) AMOUNTS OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option $ 2,500 $ 1,493 $ 1,944 Federal funds purchased and securities sold under repurchase agreements 67,895 51,579 55,758 Borrowed from the Federal Home Loan Bank 128,887 142,295 92,574 Other -- -- 222 WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option 0.99% 1.40% 5.72% Federal funds purchased and securities sold under repurchase agreements 1.25 1.61 5.72 Borrowed from the Federal Home Loan Bank 3.28 3.27 6.43 Other -- -- 9.50 MAXIMUM AMOUNTS OF BORROWINGS OUTSTANDING AT ANY MONTH-END: Treasury, tax and loan note option $ 2,500 $ 2,500 $ 2,500 Federal funds purchased and securities sold under repurchase agreements 77,994 58,274 59,766 Borrowed from the Federal Home Loan Bank 141,500 168,590 127,850 Other 250 500 222 APPROXIMATE AVERAGE SHORT-TERM BORROWINGS OUTSTANDING FOR THE YEAR: Treasury, tax and loan note option $ 1,415 $ 1,596 $ 1,658 Federal funds purchased and securities sold under repurchase agreements 48,608 53,128 51,718 Borrowed from the Federal Home Loan Bank 115,684 131,220 104,032 Other 38 165 109 APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR: Treasury, tax and loan note option 1.46% 3.55% 6.33% Federal funds purchased and securities sold under repurchase agreements 1.22 3.39 5.59 Borrowed from the Federal Home Loan Bank 3.64 4.50 6.32 Other 4.38 6.76 9.00
Southwest has entered into an agreement with the FHLB to obtain advances from the FHLB from time to time. The terms of the agreement are set forth in the Advance, Pledge and Security Agreement (the "Agreement"). The FHLB requires that Southwest pledge collateral on such advances. Under the terms of the Agreement, the discounted value of the collateral, as defined by the FHLB, should at all times be at least equal to the amount borrowed by Southwest. Such advances outstanding are subject to a blanket collateral arrangement, which requires the pledging of eligible collateral to secure such advances. Such collateral principally includes certain loans and securities. At December 31, 2002 and 2001, loans pledged under the Agreement were $385.5 million and $312.1 million and investment securities (at carrying value) were $25.9 million and $42.8 million, respectively. Southwest has available various forms of other borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchases, securities sold under agreements to repurchase, and borrowings from the FRB, the Student Loan Marketing Association ("SLMA"), the F&M Bank of Tulsa ("F&M") and the FHLB. Southwest has available a $5.0 million line of credit from F&M, none of which was outstanding at December 31, 2002. Southwest also carries interest-bearing demand notes issued by the U.S. Treasury in connection with the Treasury Tax and Loan note program; the outstanding balance of those notes was $2.5 million at December 31, 2002. Southwest has approved federal funds purchase lines totaling $70.0 million with three other banks; the outstanding balance on these lines totaled $20.0 million at December 31, 2002. In addition, Southwest has available a $35.0 million line of credit from the SLMA and a $257.1 million line of credit from the FHLB. Borrowings under the SLMA line would be secured by student loans. Borrowings under the FHLB line are secured by all unpledged securities and other loans. The SLMA line expires April 20, 2007; no amount was outstanding on this line at December 31, 2002. The FHLB line of credit had an outstanding balance of $128.9 million at December 31, 2002 and maturities as follows: $22.4 million in 2003, $0 in 2004, $20.0 million in 2005, $20.0 million in 2006, $20.0 million in 2007 and $46.5 million after 2007. Southwest also has available unsecured brokered certificate of deposit lines of credit in connection with its retail certificate of deposit program from Merrill Lynch & Co., Morgan Stanley Dean Witter, Salomon Smith Barney, Prudential Securities, Inc., PaineWebber, Inc., RBC Dain Rauscher, Inc., and CountryWide Securities that total $675.0 million. In conjunction with these lines of credit, $176.1 million in retail certificates of deposit were included in total deposits at December 31, 2002. Southwest sells securities under agreements to repurchase with Southwest retaining custody of the collateral. Collateral consists of direct obligations of U.S. Government Agency issues, which are designated as pledged with Southwest's safekeeping agent. The type of collateral required, and the retention of the collateral and the security sold minimize Southwest's risk of exposure to loss. These transactions are for one-to-four day periods. At December 31, 2002, two repurchase agreements to one entity totaling $12.0 million exceeded 10% of equity capital. 6. LONG-TERM DEBT On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest, issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the "Trust Preferred") in an underwritten public offering for an aggregate price of $25,012,500. Proceeds of the Trust Preferred were invested in the 9.30% Subordinated Debentures (the "Subordinated Debentures") of Southwest. After deducting underwriter's compensation and other expenses of the offering, the net proceeds were available to Southwest to increase capital and for general corporate purposes, including use in investment and lending activities, and the redemption, in whole, of Southwest's 9.20% Redeemable Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"). Interest payments on the Subordinated Debentures are deductible for federal income tax purposes. The Trust Preferred and the Subordinated Debentures each mature on July 31, 2027. If certain conditions are met, the maturity dates of the Trust Preferred and the Subordinated Debentures may be shortened to a date not earlier than July 31, 2002, or extended to a date not later than July 31, 2036. The Trust Preferred and the Subordinated Debentures also may be redeemed prior to maturity if certain events occur. The Trust Preferred is subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures at maturity or their earlier redemption. Southwest also has the right, if certain conditions are met, to defer payment of interest on the Subordinated Debentures, which would result in a deferral of dividend payments on the Trust Preferred, at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period. Southwest and SBI Capital Trust believe that, taken together, the obligations of Southwest under the Trust Preferred Guarantee Agreement, the Amended and Restated Trust Agreement, the Subordinated Debentures, the Indenture and the Agreement as to Expenses and Liabilities, entered into in connection with the offering of the Trust Preferred and the Subordinated Debentures, in the aggregate constitute a full and unconditional guarantee by Southwest of the obligations of SBI Capital Trust under the Trust Preferred. SBI Capital Trust is a Delaware business trust created for the purpose of issuing the Trust Preferred and purchasing the Subordinated Debentures, which are its sole assets. Southwest owns all of the 30,960 outstanding common securities, liquidation value $25 per share, (the "Common Securities") of SBI Capital Trust. The Trust Preferred 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, 2002, all of the Trust Preferred was included in Tier I capital. For accounting purposes, the Trust Preferred is presented on the Consolidated Statements of Financial Condition as a separate category of long-term debt entitled "Guaranteed Preferred Beneficial Interests in Southwest's Subordinated Debentures." 7. INCOME TAXES The components of taxes on income follow: For the Years Ended December 31, ---------------------------------- 2002 2001 2000 ---------------------------------- (dollars in thousands) CURRENT TAX EXPENSE: Federal $ 6,642 $ 4,707 $ 3,776 State 6 205 542 DEFERRED TAX EXPENSE (BENEFIT): Federal (307) 399 786 State 13 46 134 - ----------------------------------------------------------------------- Taxes on income $ 6,354 $ 5,357 $ 5,238 ======================================================================= The taxes on income reflected in the accompanying consolidated statements of operations differs from the expected U.S. Federal income tax rates for the following reasons: For the Years Ended December 31, ----------------------------------- 2002 2001 2000 ----------------------------------- (dollars in thousands) Computed tax expense at statutory rates $ 6,921 $ 5,817 $ 5,253 INCREASE (DECREASE) IN INCOME TAXES RESULTING FROM: Benefit of income not subject to U.S. Federal income tax (675) (653) (565) State income taxes, net of Federal income tax benefit 12 165 446 Other 96 28 104 - ------------------------------------------------------------------------------- Taxes on income $ 6,354 $ 5,357 $ 5,238 =============================================================================== Deferred tax expense (benefit) relating to temporary differences includes the following components: For the Years Ended December 31, -------------------------------- 2002 2001 2000 -------------------------------- (dollars in thousands) Provision for loan losses $(138) $ 344 $(318) Accumulated depreciation (37) 16 401 Intangibles 36 21 21 Write-downs on other real estate owned 10 (22) 649 Deferred compensation accrual 28 42 39 Other (193) 44 128 - ------------------------------------------------------------------------- Total $(294) $ 445 $ 920 ========================================================================= Net deferred tax assets of $2.6 million and $2.2 million at December 31, 2002 and 2001, respectively, are reflected in the accompanying consolidated statements of financial condition in other assets. There were no valuation allowances at December 31, 2002 or 2001. Temporary differences that give rise to the deferred tax assets (liabilities) include the following: At December 31, ---------------------- 2002 2001 ---------------------- (dollars in thousands) Provision for loan losses $ 4,439 $ 4,301 Accumulated depreciation (1,622) (1,659) Intangibles 86 122 Write-downs on other real estate owned 130 140 Deferred compensation accrual 151 179 Other 522 329 - ----------------------------------------------------------------------- 3,706 3,412 Deferred taxes (payable) receivable on investment securities available for sale (1,133) (1,230) - ----------------------------------------------------------------------- Net deferred tax asset $ 2,573 $ 2,182 ======================================================================= 8. SHAREHOLDERS' EQUITY On August 29, 2001, Southwest effected a 3:2 stock split of its common stock in the form of a dividend of 2,040,465 shares. Share and per share amounts in this report have been retroactively restated to reflect this stock split. In April 2001, Southwest's Board of Directors (the "Board") authorized the repurchase of up to 5%, or 292,500 shares, of its outstanding common stock, par value $1.00 per share, in connection with shares expected to be issued under Southwest's dividend reinvestment, stock option, and employee benefit plans and for other corporate purposes. In April 2002, that program had expired and the Board authorized the repurchase of another 5%, or approximately 286,000 shares. The additional repurchases will also be made in connection with shares expected to be issued under Southwest's dividend reinvestment, stock option, and employee benefit plans and for other corporate purposes. The share repurchases are expected to be made primarily on the open market from time to time until March 31, 2003, or earlier termination of the repurchase program by the Board. Repurchases under the program will be made at the discretion of management based upon market, business, legal, accounting and other factors. On April 22, 1999, Southwest adopted a Rights Plan designed to protect its shareholders against acquisitions that the Board believes are unfair or otherwise not in the best interests of Southwest and its shareholders. Under the Rights Plan, each holder of record of Southwest's common stock, as of the close of business on April 22, 1999, received one right per common share. The rights generally become exercisable if an acquiring party accumulates, or announces an offer to acquire, 10% or more of Southwest's voting stock. The rights will expire on April 22, 2009. Each right will entitle the holder (other than the acquiring party) to buy, at the right's then current exercise price, Southwest's common stock or equivalent securities having a value of twice the right's exercise price. The exercise price of each right was initially set at $73.34. In addition, upon the occurrence of certain events, holders of the rights would be entitled to purchase, at the then current exercise price, common stock or equivalent securities of an acquiring entity worth twice the exercise price. Under the Rights Plan, Southwest also may exchange each right, other than rights owned by an acquiring party, for a share of its common stock or equivalent securities. Southwest has reserved for issuance 300,000 shares of common stock pursuant to the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The Dividend Reinvestment Plan allows shareholders of record a convenient and economical method of increasing their equity ownership of Southwest. The Employee Stock Purchase Plan allows Company employees to acquire additional common shares through payroll deductions. Since July 1999, shares issued out of these plans have come from treasury shares. At December 31, 2002, 40,243 new shares had been issued and 22,810 treasury shares had been reissued by these plans. 9. CAPITAL REQUIREMENTS Southwest and Stillwater National are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Southwest's and Stillwater National's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Southwest and Stillwater National must meet specific capital guidelines that involve quantitative measures of Southwest's and Stillwater National's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Southwest's and Stillwater National'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 Southwest and Stillwater National to maintain minimum amounts and of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that Southwest and Stillwater National met all capital adequacy requirements to which they are subject. As of December 31, 2002 and 2001, the most recent notification from the Office of the Comptroller of the Currency ("OCC") categorized Stillwater National as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, Stillwater National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed Stillwater National's category. Southwest's and Stillwater National's actual capital amounts and ratios are presented below.
To Be Well Capitalized Under Prompt Corrective For Capital Actual Action Provisions Adequacy Purposes ----------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------ (dollars in thousands) AS OF DECEMBER 31, 2002: Total Capital (to risk-weighted assets) Southwest $130,843 11.42% N/A N/A $ 91,652 8.00% Stillwater National 127,073 11.11 $ 114,341 10.00% 91,473 8.00 Tier I Capital (to risk-weighted assets) Southwest 118,955 10.38 N/A N/A 45,826 4.00 Stillwater National 115,271 10.07 68,605 6.00 45,737 4.00 Tier I Leverage (to average assets) Southwest 118,955 8.99 N/A N/A 52,933 4.00 Stillwater National 115,271 8.72 66,015 5.00 52,812 4.00 AS OF DECEMBER 31, 2001: Total Capital (to risk-weighted assets) Southwest $119,013 12.34% N/A N/A $ 77,129 8.00% Stillwater National 115,866 12.05 $ 96,184 10.00% 76,947 8.00 Tier I Capital (to risk-weighted assets) Southwest 107,521 11.15 N/A N/A 38,565 4.00 Stillwater National 104,374 10.85 57,711 6.00 38,474 4.00 Tier I Leverage (to average assets) Southwest 107,521 8.84 N/A N/A 48,651 4.00 Stillwater National 104,374 8.60 60,665 5.00 48,532 4.00
The approval of the Comptroller of the Currency is required if the total of all dividends declared by Stillwater National in any calendar year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, Stillwater National may not pay a dividend if, after paying the dividend, Stillwater National would be under capitalized. Stillwater National's maximum amount of dividends available for payment totaled approximately $13.0 million at December 31, 2002. Dividends declared by Stillwater National for the years ended December 31, 2002, 2001, and 2000 did not exceed the threshold requiring regulatory approval. 10. EMPLOYEE BENEFITS Southwest sponsors a noncontributory, defined contribution profit sharing plan intended to provide retirement benefits for employees of Southwest. The plan covers all employees who have completed one year of service and have attained the age of 21. The plan is subject to the Employee Retirement Income Security Act of 1974, as amended. Company contributions are made at the discretion of the Board of Directors; however, the annual contribution may not exceed 15% of the total annual compensation of all participants. Southwest made contributions of $1.1 million, $1.0 million, and $990,000 in 2002, 2001, and 2000, respectively. 11. OPERATING LEASES Southwest leases certain equipment and facilities for its operations. Future minimum annual rental payments required under operating leases, net of sublease agreements, that have initial or remaining lease terms in excess of one year as of December 31, 2002 follow: 2003 $1,143,769 2004 1,024,156 2005 955,137 2006 895,531 Thereafter 2,966,242 The total rental expense was $1.1 million, $1.0 million, and $1.0 million in 2002, 2001, and 2000, respectively. 12. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by Southwest using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Southwest could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES - The fair value of U.S. Government and agency obligations, other securities and mortgage-backed securities is estimated based on quoted market prices or dealer quotes. The fair value for other investments such as obligations of state and political subdivisions is estimated based on quoted market prices. LOANS - Fair values are estimated for certain homogeneous categories of loans adjusted for differences in loan characteristics. Southwest's loans have been aggregated by categories consisting of commercial, real estate, student, and other consumer. The fair value of loans is estimated by discounting the cash flows using credit and interest rate risks inherent in the loan category and interest rates currently offered for loans with similar terms and credit risks. ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable estimate of fair value for accrued interest receivable. DEPOSITS - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the statement of financial condition date. The fair value of fixed maturity certificates of deposits is estimated using the rates currently offered for deposits of similar remaining maturities. OTHER BORROWINGS - The fair 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. Included in other borrowings are federal funds purchased, securities sold under agreements to repurchase, and treasury tax and loan demand notes. LONG-TERM DEBT - The fair value of long-term debt, which consists of the Subordinated Debentures, is estimated based on quoted market prices or dealer quotes. OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value of other liabilities, which primarily include trade accounts payable, and accrued interest payable approximates their carrying value. COMMITMENTS - Commitments to extend credit, standby letters of credit and financial guarantees written or other items have short maturities and therefore have no significant fair values. The carrying values and estimated fair values of Southwest's financial instruments follow:
At December 31, 2002 At December 31, 2001 -------------------------- -------------------------- Carrying Fair Carrying Fair Values Values Values Values ---------------------------------------------------------- (dollars in thousands) Cash and cash equivalents $ 34,847 $ 34,847 $ 32,406 $ 32,406 Investment securities: Held to maturity 31,154 32,000 49,893 51,030 Available for sale 148,476 148,476 167,545 167,545 FRB and FHLB stock 9,059 9,059 9,908 9,908 Total loans 1,089,224 1,092,325 919,554 925,997 Accrued interest receivable 9,283 9,283 10,157 10,157 Deposits 1,021,757 1,028,689 904,796 909,631 Accrued interest payable 4,486 4,486 3,470 3,470 Other liabilities 2,858 2,858 2,724 2,724 Short-term borrowings 199,282 199,282 195,367 195,367 Long-term debt 25,013 25,173 25,013 25,663 Commitments -- -- -- --
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, Southwest makes use of a number of different financial instruments to help meet the financial needs of its customers. In accordance with generally accepted accounting principles, these transactions are not presented in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit, standby and commercial letters of credit and available credit card lines of credit. The following table provides a summary of Southwest's off-balance sheet financial instruments:
At December 31, ---------------------- 2002 2001 ---------------------- (dollars in thousands) Commitments to extend commercial and real estate mortgage credit $413,098 $256,655 Standby and commercial letters of credit 5,670 2,551 Credit card lines of credit -- 492,388 - -------------------------------------------------------------------------------------------- Total $418,768 $751,594 ============================================================================================
A loan commitment is a binding contract to lend up to a maximum amount for a specified period of time provided there is no violation of any financial, economic or other terms of the contract. A standby letter of credit obligates Southwest to honor a financial commitment by issuing a guarantee to a third party should Southwest's customer fail to perform. Many loan commitments and most standby letters of credit expire unfunded, and, therefore, total commitments do not represent future funding obligations of Southwest. Loan commitments and letters of credit are made under normal credit terms, including interest rates and collateral prevailing at the time, and usually require the payment of a fee by the customer. Commercial letters of credit are commitments generally issued to finance the movement of goods between buyers and sellers. Southwest's exposure to credit loss, assuming commitments are funded, in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. Southwest does not anticipate any material losses as a result of the commitments. During the third quarter of 2002, Southwest sold its portfolio of credit card lines of credit to the institution that owned a 100% participation in the outstanding loan balances. 14. COMMITMENTS AND CONTINGENCIES In the normal course of business, Southwest is at all times subject to various pending and threatened legal actions. The relief or damages sought in some of these actions may be substantial. After reviewing pending and threatened actions with counsel, management considers that the outcome of such actions will not have a material adverse effect on Southwest's financial position; however, Southwest is not able to predict whether the outcome of such actions may or may not have a material adverse effect on results of operations in a particular future period as the timing and amount of any resolution of such actions and relationship to the future results of operations are not known. At periodic intervals, the Federal Reserve Bank and the Office of the Comptroller of the Currency routinely examine Southwest's and Stillwater National's financial statements as part of their legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that Southwest's and Stillwater National's financial statements be adjusted in accordance with their findings. Southwest has adopted a Severance Compensation Plan (the "Plan") for the benefit of certain officers and key members of management. The Plan's purpose is to protect and retain certain qualified employees in the event of a change in control (as defined) and to reward those qualified employees for loyal service to Southwest by providing severance compensation to them upon their involuntary termination of employment after a change in control of Southwest. At December 31, 2002, Southwest has not recorded any amounts in the consolidated financial statements relating to the Plan. If a change of control were to occur, the maximum amount payable to certain officers and key members of management would approximate $1.2 million. 15. SUPPLEMENTAL CASH FLOWS INFORMATION For the years ended December 31, ------------------------------- 2002 2001 2000 ------------------------------- (dollars in thousands) Cash paid for interest $29,590 $52,502 $56,054 Cash paid for taxes on income 6,600 4,650 3,722 Loans transferred to other real estate owned 937 362 3,089 16. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED On December 31, 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While the Statement does not require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of Opinion 25. Statement 148's amendment of the transition and annual disclosure requirements of Statement 123 are effective for fiscal years ending after December 15, 2002. Statement 148's amendment of the disclosure requirements of Opinion 28 is effective for financial reports containing condensed consolidated financial statements for interim periods beginning after December 15, 2002. 17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION Following are the condensed financial statements of Southwest Bancorp, Inc. ("Parent Company only") for the periods indicated:
At December 31, ---------------------- 2002 2001 ---------------------- (dollars in thousands) STATEMENTS OF FINANCIAL CONDITION ASSETS: Cash and due from banks $ 1,290 $ 983 Investment in subsidiary bank 117,984 106,991 Investment securities, available for sale 906 912 Loans, net of allowance for loan losses of $0 for both periods 93 0 Other assets 2,196 2,120 - ------------------------------------------------------------------------------------------ Total $122,469 $111,006 ========================================================================================== LIABILITIES: Subordinated debentures $ 25,013 $ 25,013 Other liabilities 1,084 868 SHAREHOLDERS' EQUITY: Common stock and related accounts 96,372 85,125 - ------------------------------------------------------------------------------------------ Total $122,469 $111,006 ========================================================================================== For the Years Ended December 31, -------------------------------------- 2002 2001 2000 -------------------------------------- (dollars in thousands) STATEMENTS OF OPERATIONS INCOME: Cash dividends from subsidiary bank $ 4,400 $ 3,800 $ 6,450 Other income 375 -- -- Investment income 43 51 55 Interest and fees on loans (7) -- -- Security gains/(losses) 1 6 (107) - --------------------------------------------------------------------------------------------- Total income 4,812 3,857 6,398 EXPENSE: Interest on subordinated debentures 2,326 2,326 2,326 Provision for loan losses 146 -- -- Other expense 957 456 350 - --------------------------------------------------------------------------------------------- Total expense 3,429 2,782 2,676 - --------------------------------------------------------------------------------------------- Total income before taxes and equity in undistributed income of subsidiary bank 1,383 1,075 3,722 Taxes on income (1,137) (1,030) (1,031) - --------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiary bank 2,520 2,105 4,753 Equity in undistributed income of subsidiary bank 10,899 9,647 5,452 - --------------------------------------------------------------------------------------------- Net income $ 13,419 $ 11,752 $ 10,205 =============================================================================================
For the Years Ended December 31, -------------------------------------- 2002 2001 2000 -------------------------------------- (dollars in thousands) STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES: Net income $ 13,419 $ 11,752 $ 10,205 Equity in undistributed income of subsidiary bank (10,899) (9,647) (5,452) Other, net (40) 72 (23) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,480 2,177 4,730 - ------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Available for sale securities: Purchases (400) (1,774) (623) Sales -- 399 25 Maturities 409 893 500 Other (93) -- -- - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (84) (482) (98) - ------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings -- (223) 223 Purchases of treasury stock, net 264 (50) (1,629) Capital contribution to Bank -- (399) -- Cash dividends paid on common stock (2,353) (1,787) (1,649) - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (2,089) (2,459) (3,055) - ------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 307 (764) 1,577 Cash and cash equivalents, Beginning of year 983 1,747 170 - ------------------------------------------------------------------------------------------------ End of year $ 1,290 $ 983 $ 1,747 ================================================================================================
BOARD OF DIRECTORS OF SOUTHWEST OFFICERS OF SOUTHWEST BANCORP, CORPORATE INFORMATION BANCORP, INC. AND STILLWATER INC. NATIONAL BANK & TRUST COMPANY INDEPENDENT AUDITORS Rick Green Ernst & Young LLP Robert B. Rodgers President and Chief Executive 3900 One Williams Center Chairman of the Board Officer Tulsa, OK 74172 President, Bob Rodgers Motor Kerby E. Crowell, CPA Company Executive Vice President and SPECIAL COUNSEL Rick Green Chief Financial Officer Kennedy, Baris & Lundy, L.L.P. President and Chief Executive Kay W. Smith 4701 Sangamore Road Officer, Vice Chairman of the Senior Vice President and Suite P-15 Board Comptroller Bethesda, MD 20816 James E. Berry II President, Shading Concepts, GENERAL COUNSEL Drapery Manufacturing/Sales Hert, Baker & Koemel Tom D. Berry SENIOR MANAGEMENT OF STILLWATER 222 E. 7th Avenue Investments NATIONAL BANK & TRUST COMPANY Stillwater, OK 74074 Joe Berry Cannon Professor of Management, Rick Green TRANSFER AGENTS AND REGISTRARS Oral Roberts University President and Chief Executive School of Business Officer Common Stock: J. Berry Harrison Kerby E. Crowell, CPA Computershare Investor Services, Rancher Executive Vice President and LLC Erd M. Johnson Chief Financial Officer 2 North LaSalle St. Petroleum Engineer & Jerry Lanier Chicago, IL 60602 Operating Partner, Johnson Executive Vice President and Oil Partnership Chief Lending Officer Trust Preferred Securities: Betty B. Kerns Kimberly G. Sinclair State Street Bank and Trust Owner, Betty Kerns & Executive Vice President and Company Associates, Government Chief Administrative Officer Two International Place Relations Consulting Chuck Westerheide Boston, MA 02110 David P. Lambert Executive Vice President President, Lambert and Treasurer ANNUAL MEETING Construction Company Steve Gobel The 2003 Annual Meeting of Linford R. Pitts Executive Vice President Shareholders will be held on President, Stillwater Transfer & John Frazee April 24, 2003 at 11:00 a.m. in the Storage Co. President, Kansas LPO Auditorium (Room 215) at the Russell W. Teubner Rex E. Horning Stillwater Public Library, 1107 S. Founder and Director, Esker S.A., President, Stillwater Division Duck, Stillwater, Oklahoma. Software Len McLaughlin Stanley R. White President, Texas Division ANNUAL REPORT ON FORM 10-K: President and Managing Director, Joseph P. Root Copies of Southwest's Annual Tulsa and Eastern Region, President, Central Oklahoma Report on Form 10-K for the fiscal Stillwater National Bank Division year ended December 31, 2002, as & Trust Co. Richard Webb filed with the Securities and President, Business Consulting Exchange Commission, may be Group, Inc. obtained by shareholders as of the Stanley R. White record date for the Annual Meeting President and Managing Director, at no charge by writing to Kerby E. Tulsa and Eastern Region Crowell, Chief Financial Officer, Melanie Pitchford Southwest Bancorp, Inc., P.O. Box Vice President, 1988, Stillwater, Oklahoma 74076 Human Resources and are available via the Internet at www.oksb.com.
SOUTHWEST BANCORP, INC. Corporate Headquarters P.O. Box 1988 608 S. Main Street Stillwater, Oklahoma 74076 405-372-2230 STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS CORPORATE HEADQUARTERS DRIVE-IN & MORTGAGE LENDING WATERFORD BRANCH P.O. Box 1988 P.O. Box 1988 6301 Waterford Blvd. 608 S. Main Street 308 S. Main Street Suite 101 Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 Oklahoma City, 405-372-2230 405-372-2230 Oklahoma 73118 405-427-4000 CHICKASHA BRANCH TULSA UTICA BRANCH TULSA 61ST BRANCH 500 W. Grand Avenue P.O. Box 521500 P.O. Box 521500 Chickasha, Oklahoma 73018 1500 S. Utica Avenue 2431 E. 61st, Suite 170 405-427-4800 Tulsa, Oklahoma 74152 Tulsa, Oklahoma 74152 918-523-3600 918-523-3600 TEXAS BRANCH OPERATIONS CENTER KANSAS LOAN OFFICE 5300 Town and Country Blvd. P.O. Box 1988 8415 E. 21st Street North Suite 100 1624 Cimarron Plaza Suite 150 Frisco, Texas 75034 Stillwater, Oklahoma 74076 Wichita, Kansas 67206 972-624-2900 405-372-2230 316-315-1600 OSU-TULSA LOAN OFFICE OUHSC LOAN OFFICE OSU-STILLWATER MARKETING OFFICE North Hall 1106 N. Stonewall P.O. Box 1988 700 N. Greenwood Avenue Oklahoma City, Student Union, Room 150 Tulsa, Oklahoma 74106 Oklahoma 73190 Stillwater, Oklahoma 74076 918-594-8581 405-271-3113 405-744-5961 OSU CAMPUS BRANCH BANK WEBSITE ADDRESSES P.O. Box 1988 Stillwater National Bank & Trust Company: www.banksnb.com 1102 W. Hall of Fame Avenue Southwest Bancorp, Inc.: www.oksb.com Stillwater, Oklahoma 74074 405-372-2230 STOCK INFORMATION NASDAQ National Market Symbols: Common Stock - OKSB Trust Preferred Securities - OKSBO Number of common shareholders of record at February 25, 2003: 2,200
The following table sets forth the common stock dividends paid for each quarter during 2002 and 2001 and the range of high and low closing trade prices for the common stock for those periods.
2002 2001 ---------------------------------------------------------------------------- Dividend Dividend High Low Declared High Low Declared --------------------------------- ---------------------------------- For the Quarter Ending: March 31 $20.50 $17.61 $0.11 $15.33 $11.00 $0.08 June 30 27.23 20.15 0.11 16.37 14.25 0.08 September 30 27.02 23.80 0.11 19.13 14.83 0.08 December 31 26.97 21.04 0.11 17.99 14.38 0.08
EX-21 6 ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the Registrant. Name Jurisdiction of Incorporation ----------------------------------------------------------------- SBI Capital Trust Delaware Business Consulting Group, Inc. Oklahoma Stillwater National Bank & Trust Company United States Cash Source, Inc.* Oklahoma CRK Properties, Inc.* Oklahoma BNS, Inc.** Oklahoma SNB Real Estate Holdings, Inc. * Delaware SNB REIT, Inc. *** Delaware Stillwater National Building Corporation* Oklahoma Stillwater Properties, Inc.* Oklahoma SWB, Inc. * Oklahoma * Direct subsidiaries of Stillwater National Bank & Trust Company. ** Direct subsidiary of CRK Properties, Inc. *** Direct subsidiary of SNB Real Estate Holdings, Inc. EX-23 7 ex23.txt EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-81276 (1994 Stock Option Plan), 333-92143 (1999 Stock Option Plan), and 33-97850 (Employee Stock Purchase Plan), each on Form S-8, and Registration Statement No. 33-94378 (Dividend Reinvestment Plan) on Form S-3, of our report dated January 22, 2003, incorporated by reference in this Annual Report on Form 10-K of Southwest Bancorp, Inc. for the year ended December 31, 2002. /s/ Ernst & Young LLP - --------------------- MARCH 27, 2003 EX-24 8 ex24.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY We, the undersigned directors of the Registrant, hereby severally constitute and appoint Rick Green our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said person may deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the annual report on Form 10-K for the year ended December 31, 2002, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the annual report and any amendments thereto; and we hereby approve, ratify, and confirm all that said person shall do or cause to be done by virtue thereof. /s/ Jim Berry February 27, 2003 - ------------------------------ Jim Berry, Director /s/ Thomas D. Berry February 27, 2003 - ------------------------------ Thomas D. Berry, Director /s/ Joe Berry Cannon February 27, 2003 - ------------------------------ Joe Berry Cannon, Director /s/ J. Berry Harrison February 27, 2003 - ------------------------------ J. Berry Harrison, Director /s/ Erd M. Johnson February 27, 2003 - ------------------------------ Erd M. Johnson, Director /s/ Betty B. Kerns February 27, 2003 - ------------------------------ Betty B. Kerns, Director /s/ David P. Lambert February 27, 2003 - ------------------------------ David P. Lambert, Director /s/ Linford R. Pitts February 27, 2003 - ------------------------------ Linford R. Pitts, Director /s/ Robert B. Rodgers February 27, 2003 - ------------------------------ Robert B. Rodgers, Director /s/ Russell W. Teubner February 27, 2003 - ------------------------------ Russell W. Teubner, Director /s/ Stanley R. White February 27, 2003 - ------------------------------ Stanley R. White, Director EX-99 9 ex99.txt EXHIBIT 99 EXHIBIT 99 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 I hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the accompanying Form 10-K of Southwest Bancorp, Inc. ("Southwest") for the year ended December 31, 2002, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Southwest. By: /s/ Rick Green March 27, 2003 ------------------------------------- ----------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 I hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the accompanying Form 10-K of Southwest Bancorp, Inc. ("Southwest") for the year ended December 31, 2002, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Southwest. By: /s/ Kerby Crowell March 27, 2003 ----------------------------------------- ----------------- Kerby Crowell Date Executive Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----