-----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, AGhPJIu8rFWbPUwP1VTV3JX26TVeVofhWjV+UkpDpSWFR//sQlJgpU84UBq0eV0s 5rneBeOPM4uZ88vfqB0YeA== 0001005150-04-000746.txt : 20040315 0001005150-04-000746.hdr.sgml : 20040315 20040315105112 ACCESSION NUMBER: 0001005150-04-000746 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST BANCORP INC CENTRAL INDEX KEY: 0000914374 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] 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: 04668085 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, 2003 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. [X] 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 approximately10,895,232 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2003, the last day of the registrant's most recently completed second fiscal quarter, was approximately $149.4 million based on the closing sales price of $13.71 per share of the registrant's Common Stock on that date. Solely for purposes of this calculation, it is assumed that directors, officers and 10% stockholders of the registrant are affiliates. As of the close of business on March 5, 2004, 12,031,651 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, 2003 (the "Annual Report"). Part III: Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004 (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: 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, off-balance sheet arrangements, contractual obligations, 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, regulations and accounting principles; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Southwest's past growth and performance do not necessarily indicate its future results. 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 subsidiaries, Stillwater National Bank & Trust Company ("Stillwater National") and SNB Bank of Wichita ("SNB Wichita") and management consulting services through Business Consulting Group, Inc. and Healthcare Strategic Support, 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. Stillwater National is a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the "OCC"). SNB Wichita, headquartered in Wichita, Kansas, is a federal savings bank chartered in November 2003 and subject to supervision and regulation by the Office of Thrift Supervision ("OTS"). The deposit accounts of Southwest's banking subsidiaries are insured by the by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by law. Products and Services Southwest offers a wide variety of commercial and consumer lending and deposit services. Southwest has developed internet banking services, called SNB DirectBanker(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. 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 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. 1 Organization Southwest's business operations are conducted through four operating segments that include Oklahoma banking, Other states banking re, Secondary market segment consisting of student lending and residential mortgage lending services, and an "Other" segment that includes support, control, , and funding. The organizational structure is designed to facilitate high customer service, prompt response, efficiency, and appropriate, uniform credit standards and other controls. Regional Divisions. The regional operating segments include Oklahoma Banking, which includes the Stillwater division, the Central Oklahoma division, based in Oklahoma City, and the Tulsa division; and Other States Banking, which includes 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. Secondary Market Segment. Southwest manages its mortgage and student lending operations through its home office. Southwest markets its student lending program directly to financial aid directors at colleges and universities throughout the United States. 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. 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), , and products marketed and managed directly by central staff, such as 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. For additional information regarding Southwest's operating segments, please see "Note 16. Operating Segments" to the Consolidated Financial Statements on page 45-46 of the Annual Report. Banking Offices Banking Offices. Southwest has nine full-service banking offices, three located in Stillwater, two located in Tulsa, Oklahoma, and one each in Oklahoma City and Chickasha, Oklahoma, Frisco, Texas, and Wichita, Kansas; loan production offices on the campuses of the University of Oklahoma 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 financial institution 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 interstate offices in Frisco, Texas and Wichita, Kansas in 2002. SNB Wichita opened on the site of the Wichita loan production office in 2003. Regulation, Supervision, and Governmental Policy Following is a brief summary of certain statutes and regulations that significantly affect Southwest and its banking subsidiaries. A number of other statutes and regulations affect Southwest, Stillwater National, and SNB Wichita but are not summarized below. Although Stillwater National and SNB Wichita have different primary federal banking regulators, many of the rules that govern them are substantially the same. Where practical, the rules for both banks are discussed together below. For ease of reference the term "banks" is used below to include national banks and state chartered banks ("commercial banks") and federal savings banks and saving associations, unless other wise indicated. 2 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 commercial 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 commercial bank or bank holding company; or (3) merging or consolidating with another bank holding company. Under the Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of Southwest or its banking subsidiaries. For purposes of the Holding Company Act, "control" is defined as ownership of more than 25% of any class of voting securities, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies. The federal Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make application under the Holding Company Act), to file a written notice with the Federal Reserve before the person or persons acquire control of Southwest or its banking subsidiaries. The Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling commercial banks, providing services for its subsidiaries, non-bank activities that are closely related to banking (including ownership and control of a savings bank or savings association), 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 banking subsidiary of that holding company. The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "Regulatory Capital Requirements." 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. National Bank Regulation. As a national bank, Stillwater National is subject to the primary supervision of the OCC under the National Bank Act. The prior approval of the OCC is required for a national bank to establish or relocate an additional branch office or to engage in any merger, consolidation, or significant purchase or sale of assets. 3 Before 1999, laws of the State of Oklahoma severely limited the number and location of de novo branches that a national 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 deposit insurance funds administered by the FDIC. 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 national bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. No national bank may pay dividends from its paid-in capital. All dividends must be paid out of current or retained net profits, 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 national 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. Federal Savings Bank Regulation. As a federal savings bank, SNB Wichita is subject to the primary supervision of the OTS. The prior approval of the OTS is required for SNB Wichita to establish or relocate a branch office or to engage in any merger, consolidation, or significant purchase or sale of assets. The OTS examines the operations and condition of SNB Wichita, including, but not limited to, its capital adequacy, reserves, loans, investments, and management practices. These examinations are for the protection of SNB Wichita's depositors and the deposit insurance funds administered by the FDIC. In addition, SNB Wichita is required to furnish quarterly and annual reports to the OTS. The OTS enforcement authority includes the power to remove officers and directors and the authority to issue cease-and-desist orders to prevent a federal savings bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business. In general, OTS regulations permit federal savings banks to branch in any state or states of the United States and its territories. A federal savings bank that does not meet the Qualified Thrift Lender ("QTL") test must either convert to a national bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; and (iii) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and a federal savings bank. To qualify as a QTL, a federal savings bank must either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" in Qualified Thrift Investments. Portfolio assets are defined as total assets less intangibles, the value of property used by a federal savings bank in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing and educational, small business and credit card loans; and (ii) subject to an aggregate 20% of portfolio assets limit, shares of stock in the FHLMC and the FNMA, loans for personal, family, household purposes, 50% of the dollar amount of residential mortgage loans originated and sold within 90 days of origination, and 200% of a federal savings bank's investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas. In order to maintain QTL status, the federal savings bank must maintain a weekly 4 average percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a monthly average basis in nine out of 12 months. A federal savings bank that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. At December 31, 2003, approximately 83.23% of SNB Wichita's assets were invested in Qualified Thrift Investments, which were in excess of the percentage required to qualify it under the QTL test. Under regulations of the OTS, federal savings banks must submit notice to the OTS prior to making a capital distribution (which includes dividends, stock repurchases and amounts paid to stockholders in another institution in a cash merger) if (a) they would not be well capitalized after the distribution, (b) the distribution would result in the retirement of any of the federal savings bank's common or preferred stock or debt counted as its regulatory capital, or (c) the federal savings bank is a subsidiary of a holding company. A federal savings bank must make application to the OTS to pay a capital distribution if (x) the federal savings bank would not be adequately capitalized following the distribution, (y) the federal savings bank's total distributions for the calendar year exceed the federal savings bank's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. Under the OTS' prompt corrective action regulations, SNB Wichita is also prohibited from making any capital distributions if after making the distribution, SNB Wichita would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. Limits on Loans to One Borrower. National banks and federal savings banks generally are subject to the same loan to one borrower limits. With certain limited exceptions, loans and extensions of credit outstanding to any borrower (including certain related entities of the borrower) at any one time may not exceed 15% of the unimpaired capital and surplus of the institution. A national bank or federal savings bank may lend an additional amount, equal to 10% of unimpaired capital and surplus, if such loan is fully secured by readily marketable collateral. Federal savings banks are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the federal savings bank is in compliance with its regulatory capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and; (iv) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. The lending limits generally do not apply to purchase money mortgage notes taken from the purchaser of real property acquired by federal savings banks in satisfaction of debts previously contracted if no new funds are advanced to the borrower and the federal savings bank is not placed in a more detrimental position as a result of the sale. Certain types of loans are exempted from the lending limits, including loans secured by in-bank deposits. Transactions with Affiliates. Banks are subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, Southwest and other affiliates, and on investments in their stock or other securities. These restrictions prevent Southwest and its nonbanking subsidiaries from borrowing from Stillwater National or SNB Wichita unless the loans are secured by specified collateral, and require those transactions to have terms comparable to terms of arms-length transactions with third persons. In addition, secured loans and other transactions and investments by Stillwater National or SNB Wichita are generally limited in amount as to Southwest and as to any other affiliate to 10% of Stillwater National's or SNB Wichita's capital and surplus and as to Southwest and all other affiliates together to an aggregate of 20% of the Stillwater National's or SNB Wichita's capital and surplus. Certain exemptions to these limitations apply to extensions of credit by, and other transactions between, Stillwater National or SNB Wichita and their subsidiaries. These regulations and restrictions may limit Southwest's ability to obtain funds from Stillwater National and SNB Wichita for its cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses. Real Estate Lending Guidelines. Under federal banking regulations, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan 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 banking regulators. The Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the limits specified in the Guidelines. The Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits. 5 Federal Deposit Insurance. The FDIC has established a risk-based deposit insurance premium assessment system for banks. Under the system, the assessment rate for an insured depository bank depends on the assessment risk classification assigned to the bank by the FDIC, based upon the bank's capital level and supervisory evaluations. Banks are assigned to one of three capital groups -- well-capitalized, adequately capitalized, or undercapitalized -- based on the data reported to regulators. Well-capitalized banks are banks 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 banks are banks that do not meet the standards for well-capitalized banks 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. Banks that do not qualify as either well-capitalized or adequately capitalized are deemed to be undercapitalized. Within each capital group, banks are assigned to one of three subgroups on the basis of supervisory evaluations by the bank's primary supervisory authority and such other information as the FDIC determines to be relevant to the bank's financial condition and the risk it poses to the deposit insurance fund. Subgroup A consists of financially sound banks with only a few minor weaknesses. Subgroup B consists of banks with demonstrated weaknesses that, if not corrected, could result in significant deterioration of the bank and increased risk of loss to the deposit insurance fund. Subgroup C consists of banks 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 2004. SNB Wichita has not yet been assessed. Regulatory Capital Requirements. Federal regulators have established guidelines for maintenance of appropriate levels of capital by bank holding companies and banks. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets. Federal banking regulations require bank holding companies and banks to maintain a minimum leverage ratio of "Tier 1 capital" (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the strongest bank holding companies and banks, with composite examination ratings of 1 under the rating system used by the federal banking regulators, would be permitted to operate at or near this minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 1% to 2% above the minimum ratio, depending on the assessment of an individual organization's capital adequacy by its primary regulator. A bank holding company or bank 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. Under OTS capital regulations, federal savings banks also must maintain "tangible" capital equal to 1.5% of adjusted total assets. Tangible capital for OTS purposes is Tier 1 capital reduced by the amount of all the federal savings bank's intangible assets except for limited amounts of mortgage servicing rights. The federal risk-based capital rules of the require bank holding companies and banks, to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations according to risk. The risk-based capital rules have two basic components: a core capital (Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core capital consists primarily of common stockholders' equity, certain perpetual preferred stock (noncumulative perpetual preferred stock with respect to national banks), and minority interests in the equity accounts of consolidated subsidiaries; less all intangible assets, except for certain mortgage servicing rights and purchased credit card relationships. Supplementary capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify as Tier 1 capital; long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory convertible securities; subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax net unrealized gains on available for sale equity securities. The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all bank holding companies and banks 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. 6 The federal banking regulatory agencies have established a joint policy regarding the evaluation of banks' capital adequacy for interest rate risk. Under the policy, the assessment of a national bank's capital adequacy includes an assessment of 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. A federal savings bank's interest rate risk is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. A federal savings bank with more than normal interest rate risk is required to deduct an interest rate risk component equal to one-half of the excess of its measured interest rate risk over the normal level from its total capital for purposes of determining its compliance with the OTS risk-based capital guidelines. The federal banking regulators may require federal savings 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. Neither Stillwater National nor SNB Wichita had any trading assets or liabilities during 2003, 2002 or 2001, and were not required to maintain such supplemental capital. The federal banking regulators have established regulations that classify banks by capital levels and provide for various "prompt corrective actions" to resolve the problems of any bank that fails to satisfy the capital standards. Under these regulations, a well-capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized bank is one that does not qualify as well-capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank that does not meet these standards is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized, depending on its capital levels. A f 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, 2003, Stillwater National and SNB Wichita were well-capitalized as defined in applicable banking regulations. For information regarding Southwest's, Stillwater National's, and SNB Wichita's compliance with their respective regulatory capital requirements, see "Management's Discussion and Analysis -- Capital Resources" on page 15 of the Annual Report, and, in the Notes to Consolidated Financial Statements in the Annual Report "Note 6-Subordinated Debentures" on page 38 and "Note 9- Capital Requirements" on pages 41-43. 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. Southwest's mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors. Other Laws and Regulations. Some of the aspects of the lending and deposit business of Stillwater National and SNB Wichita 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 and SNB Wichita are subject to numerous federal and state laws and regulations that include specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices, the disclosure of credit terms, and discrimination in credit transactions. 7 Competition Southwest encounters competition in seeking deposits and in obtaining loan, cash management, investment and other customers. The level of competition for deposits is high. Southwest's principal competitors for deposits are other financial institutions, including other national banks, federal savings banks, and credit unions. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from U.S. Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors, such as securities firms. Competition from credit unions has intensified 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 national banks and federal savings banks, 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 national banks and federal savings banks. Southwest also competes in its lending activities with other financial institutions such as securities firms, insurance companies, credit unions, small loan companies, finance companies, mortgage companies and other sources of funds. Many of Southwest'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 Southwest in providing certain services. A number of the financial institutions with which Southwest competes in lending, deposit, investment, cash management and other activities are larger than Southwest or have a significantly larger market share. The new offices in metropolitan Dallas and Wichita compete for loans, deposits and other services against local and nationally based financial institutions, many of which have much larger market shares and widespread office networks. In recent periods, competition has increased in Southwest'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 banks, federal savings banks, 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 commercial bank located in a state other than that holding company's home state. The Federal Reserve may not approve the acquisition of a commercial bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Holding Company Act also prohibits the Federal Reserve from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target commercial bank's home state or in any state in which the target commercial bank maintains a branch. The Holding Company Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a commercial bank or bank holding company to the extent such limitation does not discriminate against out-of-state commercial banks or bank holding companies. The State of Oklahoma allows out-of-state financial institutions to establish branches in Oklahoma, subject to certain limitations. Federal savings banks generally may establish branches in any state, and bank holding companies may acquire federal savings banks in any state, without regard to state law 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. Financial institutions 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, 2003, Southwest employed 345 persons on a full-time equivalent basis, including executive officers, loan and other banking officers, branch personnel, and others. No employees of Southwest or any of its consolidated subsidiaries are represented by a union or covered under a collective bargaining agreement. Management of Southwest considers their employee relations to be excellent. 8 Executive Officers The following table sets forth information regarding the executive officers of Southwest, Stillwater National and SNB Wichita who are not directors.
Name Age Position - ---- --- --------- Kerby E. Crowell......................... 54 Executive Vice President, Chief Financial Officer and Secretary of Southwest and Stillwater National; Director and Secretary of SNB Wichita John M. Frazee........................... 47 President, SNB Wichita Steve Gobel.............................. 51 Executive Vice President, Stillwater National Rex E. Horning........................... 52 President, Stillwater Division of Stillwater National Jerry L. Lanier.......................... 53 Executive Vice President and Chief Lending Officer of Stillwater National Len McLaughlin........................... 51 President, Texas Division of Stillwater National J. Randall Mills......................... 49 President, Healthcare Strategic Support, Inc. Joseph P. Root........................... 39 President, Central Oklahoma Division of Stillwater National Kimberly G. Sinclair..................... 48 Executive Vice President and Chief Administrative Officer of Stillwater National Charles H. Westerheide................... 55 Executive Vice President and Treasurer of Stillwater National
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 Stillwater National since 1986, became Secretary of Southwest and Stillwater National in 2000, and was named Director and Secretary of SNB Wichita in 2003. Mr. Crowell joined Stillwater National in 1969. He is a Past President and Board member of the Oklahoma City Chapter of the Financial Executives Institute, and a Board member of the Independent Community Bankers of America's ("ICBA") credit card subsidiary 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, a past member of the Payments and Technology Committee of the ICBA and past Vice Chairman of the ICBA's Bank Services Committee. Mr. Crowell is also a graduate of the Leadership Stillwater Class XI. John M. Frazee serves as President of SNB Wichita, and previously served as President of Stillwater National's Kansas Loan Production Office. 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 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 9 the YMCA of Greater Tulsa 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 Stillwater National 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 of Stillwater National in 2001. Mr. Lanier previously served as Executive Vice President-Credit Administration beginning in December 1999, supervising this area Company-wide, and from January 1998 to December 1999, served as Senior Vice President in Credit Administration. From 1992 until joining Stillwater National in 1998, Mr. Lanier was a consultant specializing in loan review. During this same period he also served as court-appointed receiver for a number of Oklahoma-based insurance companies. From 1982-1992, Mr. Lanier served as President of American National Bank and Trust Co. of Shawnee, Oklahoma including service as Chief Executive Officer from 1987-92. 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 Texas Division of Stillwater National, 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. J. Randall Mills was appointed President of Healthcare Strategic Services, Inc. ("HSSI") in 2003. Mr. Mills holds a Bachelor of Science degree in Accounting from Southwest Missouri State University; a Master of Health Administration from the University of Colorado; and a PhD in Sociology from Oklahoma State University. Prior to his employment with HSSI, he was a Healthcare Consultant for Madole & Wagner, PLLC where he was responsible for marketing, administration, and client services for individual physicians, medical groups, and hospital clients on medical group practice, managed care, marketing, networking, strategic planning, and development issues. He is a member of the American College of Healthcare Executives, Medical Group Management Association, Healthcare Financial Management Association, American Society of Certified Public Accountants, and Oklahoma Society of Certified Public Accountants. Joseph P. Root was appointed President of the Central Oklahoma Division of Stillwater National in 1997. Previously, Mr. Root was Senior Vice President in the Central Oklahoma division. Prior to joining Stillwater National 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 Stillwater National since 1991. Prior to 1991, she had been Senior Vice President and Chief Operations Officer of Stillwater National since 1985. Ms. Sinclair joined Stillwater National in 1975. She is a member of the Stillwater Junior Service Sustainers, and 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. 10 Charles H. Westerheide was appointed Executive Vice President and Treasurer of Stillwater National in 2000. Prior to that he served as Senior Vice President and Treasury Manager. He joined Stillwater National in 1997, coming from Bank of America (previously NationsBank and BankIV), Wichita, Kansas, 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. 11 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, 2003 December 31, 2002 Compared to Compared to December 31, 2002 December 31, 2001 -------------------------------------------------------------------------- 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) $ 15,722 $ (5,110) $ 10,612 $ 5,759 $(17,106) $(11,347) Investment securities (775) (2,219) (2,994) (1,366) (1,195) (2,561) Other interest-earning assets (20) (14) (34) 33 (30) 3 -- -------- -------- -------- -------- -------- -------- Total interest income 14,927 (7,343) 7,584 4,426 (18,331) (13,905) Interest paid on: NOW accounts 27 (44) (17) 50 (487) (437) Money market accounts 2,094 (1,162) 932 2,062 (2,143) (81) Savings accounts 3 (11) (8) 5 (59) (54) Time deposits 693 (4,406) (3,713) (1,481) (13,267) (14,748) Short-term borrowings 908 (850) 58 (784) (2,157) (2,941) Subordinated Debentures 1,273 (592) 681 -- -- -- -------------------------------- ---------------------------------- Total interest expense 4,998 (7,065) (2,067) (148) (18,113) (18,261) -------------------------------- ---------------------------------- Net interest income $ 9,929 $ (278) $ 9,651 $ 4,574 $ (218) $ 4,356 ================================ ==================================
(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. 12 Investment Portfolio Composition At December 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (Dollars in thousands) U.S. Government and agency obligations $153,344 $104,409 $105,423 Obligations of states and political subdivisions 14,997 27,679 36,842 Mortgage-backed securities 19,681 41,751 70,657 Other securities 16,244 14,850 14,424 -------- -------- -------- Total investment securities $204,266 $188,689 $227,346 ======== ======== ======== Available for sale (fair value) $177,074 $148,476 $167,545 Held to maturity (amortized cost) 15,916 31,154 49,893 Federal Reserve Bank and Federal Home Loan Bank Stock 11,276 9,059 9,908 -------- -------- -------- Total investment securities $204,266 $188,689 $227,346 ======== ======== ======== 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. 13 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, 2003. 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, 2003.
One Year or Less Two through Five Years Five through Ten Years More than Ten Years ----------------- ---------------------- ---------------------- ------------------- Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- ---------- ------- --------- ------- --------- -------- (Dollars in thousands) Held to Maturity: U.S. government and agency obligations $ 3,999 6.13% $ 1,048 2.51% $ -- --% $ -- --% Obligations of states and political subdivisions 9,400 4.34 1,469 4.98 -- -- -- -- ------- -------- ---- ------- Total 13,399 4.88 2,517 3.95 -- -- -- -- ------- -------- ---- ------- Available for Sale: U.S. government and agency obligations 14,708 4.67 133,294 3.60 -- -- -- -- Obligations of states and political subdivisions -- -- 3,930 4.42 -- -- -- -- Mortgage-backed securities 6,382 3.60 13,199 2.47 -- -- -- -- Other securities -- - 13,947 3.12 -- -- 2,286 6.31 ------- -------- ---- ------- Total 21,090 4.34 164,370 3.48 -- -- 2,286 6.31 ------- -------- ---- ------- Total investment securities $34,489 $166,887 $ -- $ 2,286 ======= ======== ==== =======
Total Investment Securities ----------------------------- Amortized Market Average Cost Value Yield -------- ------- -------- Held to Maturity: U.S. government and agency -- -- -- obligations $ 5,047 $ 5,104 5.38% Obligations of states and political subdivisions 10,869 11,040 4.43 -------- ------- Total 15,916 16,144 4.73 -------- ------- Available for Sale: U.S. government and agency obligations 148,002 148,297 3.70 Obligations of states and political subdivisions 3,930 4,128 4.42 Mortgage-backed securities 19,581 19,681 2.84 Other securities 16,233 16,244 3.57 -------- ------- Total 187,746 188,350 3.62 -------- ------- Total investment securities $203,662 $204,494 ======== ======== 14 Loan Portfolio The following table presents the composition of Southwest's loan portfolio, net of unearned interest: LOAN PORTFOLIO
At December 31, 2003 2002 2001 2000 1999 ------------------ ------------------ ------------------- ------------------- ------------------- Amount % Amount % Amount % Amount % Amount % ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ (Dollars in thousands) Real estate mortgage - Commercial $402,596 30.76% $ 374,999 34.06% $ 301,578 32.39% $ 276,525 30.30% $ 263,216 30.86% One to four family residential 83,250 6.36 102,423 9.30 106,206 11.41 107,360 11.76 102,973 12.07 Real estate construction 230,292 17.60 130,001 11.81 91,897 9.87 103,951 11.39 85,511 10.03 Commercial 355,965 27.20 348,879 31.68 312,577 33.58 311,953 34.19 296,415 34.77 Installment and consumer - Government-guaranteed student loans 211,546 16.16 119,064 10.81 91,841 9.86 77,846 8.53 69,873 8.19 Other 25,187 1.92 25,746 2.34 26,947 2.89 34,915 3.83 34,820 4.08 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ----- 1,308,836 100.00% 1,101,112 100.00% 931,046 100.00% 912,550 100.00% 852,808 100.00% ====== ====== ====== ====== ====== Less: Allowance for loan loss (15,848) (11,888) (11,492) (12,125) (11,190) ---------- ---------- ---------- ---------- ---------- Total $1,292,988 $1,089,224 $ 919,554 $ 900,425 $ 841,618 ========== ========== ========== ========== ==========
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 $37.8 million at December 31, 2003, compared to $28.9 million at December 31, 2002, and $55.8 million at December 31, 2001. 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. 15 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 a general 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 10 and 11 under the caption "Provision for Loan Losses," and in Note 1 on page 30 and Note 3 on page 34 . 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, the general allowance decreased to 8.2% from 11.3% at December 31, 2002, and was 7.7% at December 31, 2001. ALLOCATION OF THE LOAN LOSS ALLOWANCE
At December 31, 2003 2002 2001 --------------------- --------------------- --------------------- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans --------------------- --------------------- --------------------- (Dollars in thousands) Real estate mortgage - Commercial $ 4,980 30.76% $ 4,076 34.06% $ 2,277 32.39% One to four family residential 291 6.36 509 9.30 557 11.41 Real estate construction 1,538 17.60 1,405 11.81 750 9.87 Commercial 7,318 27.20 4,271 31.68 6,680 33.58 Installment and consumer - Government-guaranteed student loans 105 16.16 59 10.81 46 9.86 Other 319 1.92 225 2.34 298 2.89 General 1,297 1,343 884 ------- ------ ------- ------ ------- ------ Total $15,848 100.00% $11,888 100.00% $11,492 100.00% ======= ====== ======= ====== ======= ====== At December 31, 2000 1999 --------------------- --------------------- Percent of Percent of Loans in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans --------------------- --------------------- (Dollars in thousands) Real estate mortgage - Commercial $ 916 30.30% $ 1,128 30.86% One to four family residential 546 11.76 602 12.07 Real estate construction 3,003 11.39 1,893 10.03 Commercial 4,286 34.19 4,028 34.77 Installment and consumer - Government-guaranteed student loans -- 8.53 56 8.19 Other 347 3.83 491 4.08 General 3,027 2,992 ------- ------ ------- ------ Total $12,125 100.00% $11,190 100.00% ======= ====== ======= ======
16 Management believes that the allowance for loan losses is adequate. However, its determination 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, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by Southwest, periodically review the loan portfolio and allowance for loan losses. Such review may result in recognition of additional provisions based on their judgments of information available at the time of each 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, 2003: Maturity Period Amount ------------------------------------- ------ (Dollars in thousands) Three months or less (1) $113,857 Over three through six months (1) 64,959 Over six through 12 months (1) 139,285 Over 12 months 40,029 -------- Total $358,130 ======== (1) The amount of certificates of deposit that mature within 12 months is $318.1 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 pages 2 and 3 of the Annual Report, the information set forth on pages 4 through 21 of the Annual Report, Note 1-"Summary of Significant Accounting and Reporting Policies" on pages 29 through 33 of the Annual Report, Note 3-"Loans" on pages 34 through 36 of the Annual Report, and Note 5-"Other Borrowed Funds" on pages 37 and 38 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 Stillwater National's website at www.banksnb.com, the metropolitan Dallas division's website at www.snbdallas.com, and SNB Wichita's website at www.snbwichita.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. 17 ITEM 2. PROPERTIES Page 50 of the Annual Report (listing executive and other offices) is hereby incorporated by reference. The Corporate Headquarters, Drive-in Facility, Chickasha Branch, and Tulsa Utica Branch are owned. Other facilities are held under lease or similar arrangement. ITEM 3. LEGAL PROCEEDINGS Note 14--"Commitments and Contingencies" on page 45 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 2003, 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, 2003, 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 (c) - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 1,034,483 $8.43 214,218 - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Total 1,034,483 $8.43 214,218 - ----------------------------------------------------------------------------------------------------------------------
As of March 5, 2004, there were approximately 1,800 holders of record of Southwest's Common Stock. The section titled "Stock Information" on page 50 of the Annual Report is hereby incorporated by reference. For information regarding regulatory restrictions on Southwest's payment of dividends, see Note 9 -- "Capital Requirements" on pages41 through 43 of the Annual Report, which is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The table titled "Selected Consolidated Financial Data" on pages 4 and 5 of the Annual Report is hereby incorporated by reference. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 6 through 21 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 17 through 18 of the Annual Report is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 23 through 48 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. ITEM 9A. CONTROLS AND PROCEDURES Southwest's management, under the supervision and with the participation of it Chief Executive Officer and the Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of Southwest's disclosure controls and procedures, as defined in Rule 13a-15 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 in Southwest's internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended December 31, 2003, that have materially effected, or are reasonably likely to materially affect, the Southwest's internal control over financial reporting. 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, "Section 16(a) Beneficial Ownership Reporting Compliance" on page 15 of the Proxy Statement, and "Code of Ethics" on page 24 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. 19 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding fees and services of Southwest's principal accountant is included under the caption, "Audit and Non-Audit Fees" on page 22 of the Proxy Statement and is hereby incorporated by reference. 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, 2003, 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, 2003 and 2002 Consolidated Statements of Financial Condition at December 31, 2003 and 2002 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002, and 2001 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003, 2002, and 2001 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2003, 2002, and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001 Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002, and 2001 (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 (incorporated by reference from Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002.) 20 * 10.6 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan and Agreement dated December 19, 2002 (incorporated by reference from Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002.) 13 Annual Report to Shareholders for the Year Ended December 31, 2003 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 24 Power of Attorney 31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications 32(a), (b) 18 U.S.C. Section 1350 Certifications * 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 a report on Form 8-K, dated October 16, 2003, announcing, under items 5, 9 and 12 of that form, earnings for the third quarter of 2003. (c) Exhibits. See (a)(3) above for all exhibits filed herewith and the Exhibit Index. 21 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 12, 2004 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 12, 2004 - ---------------------------------- Rick Green Director and Chief Executive Officer (Principal Executive Officer) /s/ Kerby E. Crowell March 12, 2004 - ---------------------------------- 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, 2003. This report has been signed below by such attorney-in-fact as of March 12, 2004. By: /s/ Rick Green ----------------------- Rick Green Attorney-in-Fact for Majority of the Directors of Southwest 22 EX-13 3 ex13.txt EXHIBIT 13 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2003 Southwest Bancorp, Inc. ("Southwest") is the financial holding company for Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of Wichita ("SNB Wichita"), Business Consulting Group, Inc. ("BCG"), and Healthcare Strategic Support, Inc. ("HSSI"). Southwest is an independent company, not controlled by other organizations or individuals. Southwest pursues an established strategy of independent operation for the benefit of all of its shareholders. 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. Southwest seeks to be the premier financial services company for its selected markets. Information regarding Southwest can be retrieved via the Internet, at www.oksb.com. Southwest, Stillwater National, and SNB Wichita offer commercial and consumer lending, deposit, and investment services, and specialized cash management, consulting and other financial services from offices in Stillwater, Tulsa, Oklahoma City, and Chickasha, Oklahoma, Wichita, Kansas, and metropolitan Dallas, Texas; loan production offices on the campuses of Oklahoma State University-Tulsa and the University of Oklahoma Health Sciences Center-Oklahoma City; a marketing presence in the Student Union at Oklahoma State University-Stillwater; and on the Internet. Information regarding products and services of Stillwater National and SNB Wichita, including SNB DirectBanker(R), Southwest's online banking product, can be retrieved via the Internet, at www.banksnb.com and www.snbwichita.com. The Stillwater National and SNB Wichita websites and online banking technology are frequently updated in response to the changing needs of the large base of Internet banking customers. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. At December 31, 2003, Southwest had total assets of $1.6 billion, deposits of $1.2 billion and shareholders' equity of $109.9 million. LETTER TO SHAREHOLDERS FROM THE C.E.O. February 27, 2003 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 2003, Southwest continued to focus on producing consistent current performance and building a basis for long-term growth. o Net Income: $14.9 million, up 11% o Diluted earnings per share: $1.22, up 10% o Book value per share: $9.20, up 10% o Dividends per share: $0.25, up 14% o Return on average equity of 14.59%, down slightly from 2002 o Efficiency ratio of 54.95%, an improvement of approximately 2 basis points o Total loans of $1.31 billion, up $207.7 million, or 19% o Allowance for loan losses of 1.21% of total loans, up from 1.08% at year-end 2002 PERFORMANCE CONSISTENCY. We also focus on building a record of consistent performance. Our 2003 results are consistent with our overall historic trends, and built upon our 2002 performance, which included loan growth of 19% and efficiency improvements. Southwest became a public company in late 1993. Since year-end 1993, we have increased our net income and market value per share at compound rates of 13.50% and 15.97% per year, respectively; book value per share at 11.60% per year; diluted earnings per share at 26.26% per year; assets at 13.80% per year, and loans at 15.15% per year. MARKET AREA EXPANSION AND CORE GROWTH. During 2003, we continued a focus on two important markets--Dallas, Texas and Wichita, Kansas, where we established offices in 2002. These offices, SNB-DALLAS and SNB BANK OF WICHITA, are capitalizing on our strengths in serving medical, professional, and small business customers. We believe the early effectiveness of these offices demonstrates our ability to successfully expand and compete in carefully selected markets outside of Oklahoma, however, the majority of our operations and income continue to be Oklahoma based. STRATEGIC INITIATIVES. In 2003, we continued the development of other important strategic initiatives, including our DOWNSTREAM LOAN PARTICIPATIONS PROGRAM, our new HEALTHCARE LENDING GROUP, and HEALTHCARE STRATEGIC SUPPORT, INC., our new healthcare consulting firm. The loan participation program strategy was initiated in 2002, and has developed into a mechanism to serve our customers with large loan needs, manage concentration risk, provide liquidity, enhance net interest margin, and generate fee income. The healthcare industry is one of the top growth industries in our economy. Southwest has developed a specialty in serving the needs of the healthcare industry over a period of many years. The "Healthcare Lending Group" is a new strategy developed to concentrate resources on providing lending and other financial services for healthcare projects and providers in our primary market areas and other mid-west states. The experienced consultants of Healthcare Strategic Support, Inc. provide services to healthcare providers and facilities across our market areas. COMMITMENT TO OUR CUSTOMERS. 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 2 SERVICES. All these services are designed for the healthcare 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. They contribute to Southwest's ability to gain new noninterest-bearing deposits and to differentiate Southwest from its competitors. 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 performance and growth to increase the value of your investment in Southwest. Sincerely, /s/ Rick Green ------------------------------------- Rick Green President and Chief Executive Officer 3 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, 2003. 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, ------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------- (dollars in thousands, except per share data) OPERATIONS DATA Interest income $ 84,079 $ 76,495 $ 90,400 $ 97,274 $ 80,595 Interest expense 28,611 30,678 48,939 57,227 42,567 - ------------------------------------------------------------------------------------------------------------------ Net interest income 55,468 45,817 41,461 40,047 38,028 Provision for loan losses 8,522 5,443 4,000 3,550 2,495 Gain on sales of loans and securities 4,139 3,498 3,346 1,753 2,395 Other income 10,361 9,220 7,467 6,808 6,121 Other expenses 38,448 33,319 31,165 29,615 30,426 - ------------------------------------------------------------------------------------------------------------------ Income before taxes 22,998 19,773 17,109 15,443 13,623 Taxes on income 8,106 6,354 5,357 5,238 4,757 - ------------------------------------------------------------------------------------------------------------------ Net income available to common shareholders $ 14,892 $ 13,419 $ 11,752 $ 10,205 $ 8,866 - ------------------------------------------------------------------------------------------------------------------ DIVIDENDS DECLARED Common stock $ 2,959 $ 2,533 $ 1,826 $ 1,678 $ 1,601 Ratio of total dividends declared to net income 19.87% 18.87% 15.52% 16.44% 18.06% PER SHARE DATA (1) Basic earnings per common share $ 1.26 $ 1.17 $ 1.03 $ 0.89 $ 0.74 Diluted earnings per common share 1.22 1.11 1.00 0.88 0.73 Common stock cash dividends 0.25 0.22 0.16 0.15 0.13 Book value per common share (2) 9.20 8.35 7.47 6.44 5.52 Weighted average common shares outstanding: Basic 11,798,810 11,490,166 11,386,258 11,467,248 11,921,634 Diluted 12,159,620 12,052,118 11,728,844 11,585,704 12,164,004 FINANCIAL CONDITION DATA (2) Investment securities $204,266 $188,689 $227,346 $229,792 $211,682 Total loans (3) 1,308,836 1,101,112 931,046 912,550 852,808 Interest-earning assets 1,514,314 1,292,232 1,160,478 1,142,945 1,064,496 Total assets 1,580,725 1,350,554 1,217,281 1,204,352 1,121,206 Interest-bearing deposits 1,036,793 885,812 777,600 825,370 761,481 Total deposits 1,204,125 1,021,757 904,796 945,102 871,235 Other borrowings 183,850 199,282 195,367 150,498 151,820 Subordinated debentures 72,180 25,787 25,787 25,787 25,787 Total shareholders' equity (4) 109,935 96,372 85,125 73,239 64,254 Mortgage servicing portfolio 124,366 107,733 91,120 94,545 109,297 SELECTED RATIOS Return on average assets 0.99% 1.05% 0.96% 0.87% 0.84% Return on average equity 14.59 14.94 14.87 14.89 13.83 Net interest margin 3.80 3.75 3.53 3.57 3.82 Efficiency ratio (5) 54.95 56.92 59.62 60.93 65.37 Average assets per employee (6) $ 4,382 $ 3,938 $ 3,919 $ 3,783 $ 3,478
4 SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31, ------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------- (dollars in thousands, except per share data) ASSET QUALITY RATIOS Allowance for loan losses to total loans (2) 1.21% 1.08% 1.23% 1.33% 1.31% Nonperforming loans to total loans (2)(7) 1.22 1.17 0.99 1.32 0.63 Allowance for loan losses to nonperforming loans 99.59 92.11 124.56 100.71 207.26 (2)(7) Nonperforming assets to total loans and other real estate owned (2)(8) 1.34 1.24 1.06 1.45 0.83 Net loan charge-offs to average total loans 0.36 0.50 0.49 0.29 0.21 CAPITAL RATIOS Average total shareholders' equity to average assets 6.75 7.04 6.44 5.81 6.10 Tier I capital to risk-weighted assets (2) 11.13 10.38 11.15 10.36 9.76 Total capital to risk-weighted assets (2) 14.90 11.42 12.34 11.68 11.34 Leverage ratio (2) 9.32 8.99 8.84 8.08 8.06
(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 and the two-for-one stock split effected in the form of a stock dividend paid August 29, 2003. (2) At period end. (3) Net of unearned discounts but before deduction of allowance for loan losses. (4) Reflects the public offering of 250,000 shares of common stock in May 1999, and repurchases of common shares in 1999, 2000, 2001 and 2002. Please see note 8 to the consolidated financial statements. (5) 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. (6) Ratio = year-to-date average assets divided by the number of FTE employees at year-end. (7) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and loans with restructured terms. (8) Nonperforming assets consist of nonperforming loans and foreclosed assets. FORWARD-LOOKING STATEMENTS The Letter from the President and Chief Executive Officer, Management's Discussion and Analysis of Financial Condition and Results of Operations, 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, off-balance sheet arrangements, contractual obligations, 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, regulations and accounting principles; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, Southwest's past growth and performance do not necessarily indicate its future results. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Southwest Bancorp, Inc.'s ("Southwest") net income, diluted earnings per share, loans, deposits, and assets reached their highest levels in our history. The earnings growth was driven by a substantial (19%) increase in total loans, which led to an improved margin, and to an increase in other income (up 14%) due mainly to greater service charges and fees and gains on sales of loans, offset in part by a 57% higher provision for loan losses and greater operating expenses (up 15%) and income taxes (up 28%). o Net income for 2003 was $14.9 million, up from $13.4 million in 2002 and $11.8 million in 2001. o Diluted earnings per common share increased to $1.22 in 2003, compared to $1.11 in 2002 and $1.00 in 2001. o Total assets at year-end 2003 increased 17%, ending the year at $1.58 billion compared to $1.35 billion at year-end 2002 and $1.22 billion for 2001. o Total loans grew to $1.31 billion at December 31, 2003, compared to $1.10 billion for 2002, and $931.0 million for 2001. o Total shareholders' equity at year-end increased 14% to $109.9 million for 2003 compared to $96.4 million for 2002 and $85.1 million for 2001. 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. On August 29, 2003, Southwest effected a 2:1 stock split of its common stock in the form of a dividend of 6,121,521 shares. All share and per share amounts in this annual report have been retroactively restated to reflect these stock splits. Although Southwest had a share repurchase program in effect during 2003, no shares were repurchased. RESULTS OF OPERATIONS For the year ended December 31, 2003, Southwest reported net income of $14.9 million, a $1.5 million, or 11%, increase over the $13.4 million earned in 2002. Basic earnings per common share increased by 8% to $1.26 per share for 2003 from $1.17 per share for 2002. Diluted earnings per common share increased by 10% to $1.22 per share for 2003 from $1.11 per share for 2002. Significant growth in loans, which was funded by growth in deposits, other borrowings and two new issuances of subordinated debentures, was the primary factor contributing to Southwest's performance in 2003. The low and relatively flat interest rate environment was also a factor as higher rate deposits matured and were renewed or replaced by lower rate deposits, which reduced interest expense for 2003 as compared to 2002. However, new loans and refinancings were added at the lower rates prevailing in the market, reducing interest income so that the net effect of rate changes on net interest margin was slightly negative. For the year ended December 31, 2002, Southwest reported net income of $13.4 million, a $1.7 million, or 14%, increase over the $11.8 million earned in 2001. Basic earnings per common share increased by 14% to $1.17 per share for 2002 from $1.03 per share for 2001. Diluted earnings per common share increased by 11% to $1.11 per share for 2002 from $1.00 per share for 2001. These factors are discussed in more detail in the sections that follow. 6
COMPARISON SUMMARY 2003 Change 2002 Change NET INTEREST MARGIN 2003 From 2002 2002 From 2001 2001 - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) OPERATIONS DATA Interest income $ 84,079 $ 7,584 $ 76,495 $ (13,905) $ 90,400 Interest expense 28,611 (2,067) 30,678 (18,261) 48,939 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 55,468 9,651 45,817 4,356 41,461 Provision for loan losses 8,522 3,079 5,443 1,443 4,000 Gain on sales of loans and securities 4,139 641 3,498 152 3,346 Other income 10,361 1,141 9,220 1,753 7,467 Other expenses 38,448 5,129 33,319 2,154 31,165 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes 22,998 3,225 19,773 2,664 17,109 Taxes on income 8,106 1,752 6,354 997 5,357 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 14,892 $ 1,473 $ 13,419 $ 1,667 $ 11,752 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Basic earnings per common share $ 1.26 $ 0.09 $ 1.17 $ 0.14 $ 1.03 Diluted earnings per common share 1.22 0.11 1.11 0.11 1.00 FINANCIAL CONDITION DATA - AVERAGES Investment securities $191,276 $ (16,739) $208,015 $ (25,671) $233,686 Total loans 1,269,216 256,729 1,012,487 74,209 938,278 Interest-earning assets 1,461,584 238,418 1,223,166 49,990 1,173,176 Total assets 1,511,739 235,795 1,275,944 49,408 1,226,536 Interest-bearing deposits 1,021,315 159,156 862,159 52,455 809,704 Total deposits 1,160,376 179,816 980,560 60,418 920,142 Other borrowings 200,473 34,728 165,745 (20,364) 186,109 Subordinated debentures 42,042 16,255 25,787 - 25,787 Total shareholders' equity 102,046 12,201 89,845 10,799 79,046 SELECTED RATIOS Return on average assets 0.99% -0.06% 1.05% 0.09% 0.96% Return on average total shareholders' equity 14.59 (0.35) 14.94 0.07 14.87 Net interest margin 3.80 0.05 3.75 0.22 3.53 ASSET QUALITY RATIOS Allowance for loan losses to total loans 1.21% 0.13% 1.08% -0.15% 1.23% Nonperforming loans to total loans 1.22 0.05 1.17 0.18 0.99 Allowance for loan losses to nonperforming loans 99.59 7.48 92.11 (32.45) 124.56 Nonperforming assets to total loans and other real 1.34 0.10 1.24 0.18 1.06 estate Net loan charge-offs to average total loans 0.36 (0.14) 0.50 0.01 0.49
NET INTEREST INCOME Net interest income is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is Southwest's largest source of revenue, representing 79% of total revenue in 2003. Net interest margin is net interest income as a percentage of average earning assets for the period. This measure is followed closely by the analyst community. Net interest income and net interest margin increase or decrease as a result of changes in the levels of interest rates, the volume and the mix of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets funded by noninterest-bearing funding sources. Net interest income for 2003 was $55.5 million, an increase of $9.7 million, or 21%, from the $45.8 million earned in 2002. The net interest margin was 3.80% for the year ended December 31, 2003, an increase of five basis points from 2002. The 2003 increase in net interest income and net interest margin from 2002 is the result of the significant increase in interest-earning assets, the reduction in interest expense due to the lower and relatively flat interest rate environment experienced during 2003, and a slightly higher use of noninterest-bearing funds. Net interest income for 2002 increased by $4.4 million, or 11%, from the $41.5 million for 2001, while 2002 net 7 interest margin improved by 22 basis points from the 2001 level of 3.53%. These increases resulted from the 2002 loan growth and an improved interest rate spread. Interest rate spread, which represents the difference between the rate earned on interest-earning assets and the rates paid out on interest-bearing liabilities, was 3.49% for 2003 compared to 3.34% for 2002 and 2.92% for 2001. Southwest has also seen significant growth in money market deposit accounts which are a low rate funding source compared to time deposits and other borrowings. The average balance of money market deposit accounts increased to $336.3 million in 2003 from $211.9 million in 2002 and $130.8 million in 2001. 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 a shift in the composition of Southwest's interest-earning assets over the periods toward 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. 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. 8
For the Year Ended December 31, ------------------------------------------------------------------------------------- 2003 2002 2001 ----------------------------- -------------------------- ---------------------------- 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 $1,269,216 $76,115 6.00% $1,012,487 $65,503 6.47% $ 938,278 $76,850 8.19% Investment securities 191,276 7,954 4.16 208,015 10,948 5.26 233,686 13,509 5.78 Other interest-earning assets 1,092 10 0.92 2,664 44 1.65 1,212 41 3.38 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,461,584 84,079 5.75 1,223,166 76,495 6.25 1,173,176 90,400 7.71 NONINTEREST-EARNING ASSETS: Other assets 50,155 52,778 53,360 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $1,511,739 $1,275,944 $1,226,536 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING LIABILITIES: Interest-bearing demand $ 56,011 $ 355 0.63% $ 52,096 $ 372 0.71% $ 49,156 $ 809 1.65% Money market accounts 336,274 5,237 1.56 211,883 4,305 2.03 130,828 4,386 3.35 Savings accounts 6,608 17 0.26 5,702 25 0.44 5,361 79 1.47 Time deposits 622,422 15,036 2.42 592,478 18,749 3.16 624,359 33,497 5.37 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 1,021,315 20,645 2.02 862,159 23,451 2.72 809,704 38,771 4.79 Other borrowings (2) 200,473 4,887 2.44 165,745 4,829 2.91 186,109 7,770 4.17 Subordinated debentures 42,042 3,079 7.32 25,787 2,398 9.30 25,787 2,398 9.30 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,263,830 28,611 2.26 1,053,691 30,678 2.91 1,021,600 48,939 4.79 ----------------- ---------------- ------------------ NONINTEREST-BEARING LIABILITIES: Noninterest-bearing demand 139,061 118,401 110,438 Other noninterest-bearing liabilities 6,802 14,007 15,452 Shareholders' equity 102,046 89,845 79,046 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and $1,511,739 $1,275,944 $1,226,536 shareholders' equity - -------------------------------------------------------------------------------------------------------------------------------- Net interest income $55,468 $45,817 $41,461 - -------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 3.49% 3.34% 2.92% - -------------------------------------------------------------------------------------------------------------------------------- Net interest margin (3) 3.80% 3.75% 3.53% - -------------------------------------------------------------------------------------------------------------------------------- Ratio of average interest-earning assets to average interest-bearing 115.65% 116.08% 114.84% liabilities - --------------------------------------------------------------------------------------------------------------------------------
(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 fluctuation in other borrowings resulted mainly from changes in Federal Home Loan Bank borrowings. (3) Net interest margin = net interest income / total interest-earning assets. 9 PROVISION FOR LOAN LOSSES Southwest makes provisions for loan losses in amounts necessary to maintain the allowance for loan losses at the level Southwest determines is appropriate based on a systematic methodology. 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 allowance. 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 eighteen months or twelve months, but may be adjusted for categories where eighteen and twelve month 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 by loan grade 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 allowance 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 $15.8 million, or 1.21% of total loans, at December 31, 2003 compared to an allowance of $11.9 million, or 1.08% of total loans, at December 31, 2002. This represents an annual increase in the allowance of $4.0 million, or 33%, from year-end 2002. At December 31, 2003, total nonperforming loans were $15.9 million, or 1.22% of total loans, compared to $12.9 million, or 1.17% of total loans, at December 31, 2002. The government-guaranteed portions of year-end nonperforming loans were $2.7 million for 2003 and $1.0 million for 2002. The allowance for loan losses equaled 99.59% of nonperforming loans at December 31, 2003 compared to 92.11% at December 31, 2002. During 2003, 2002, and 2001, the provisions for loan losses were $8.5 million, $5.4 million, and $4.0 million, respectively, while net charge-offs were $4.6 million, $5.0 million, and $4.6 million, respectively. From time to time, Southwest has incurred losses on commercial loans due to fraud by borrowers. In a number of these instances, the loans have not been recognized as problem or potential problem loans until a short time before the probable loss has been discovered. During the fourth quarter of 2003, Southwest established a fraud by borrowers allocation applicable to commercial loans based upon an analysis of the historical amount and frequency of such losses, and adjusted the twelve and eighteen month loss experience ratios to remove the effect of fraud losses. There were no other changes in estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance during the year 2003. Southwest determined the level of the allowance for loan losses at December 31, 2003, was appropriate, based on that methodology. Both the dollar amount and the percentage of the allowance to loans increased during 2003. The increase was primarily the result of increases in nonperforming loans, increased allocations on impaired loans, and increases in loan categories with relatively higher historical loss experience. The allowance allocations for commercial business, commercial mortgage, and commercial construction loans showed the largest increases, due primarily to the fraud allocation relating to commercial loans and volume increases in other categories. The allocation for residential mortgage loans declined as a result of lower volume. At December 31, 2003, the general allowance of $1.3 million was approximately the same as at year-end 2002, but accounted for 8% of the total allowance, down from 11% from the prior year. 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 10 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 assets at the end of the periods indicated.
At December 31, -------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------- (dollars in thousands) Total nonaccrual $14,530 $11,455 $7,291 $3,138 $5,205 Total past due 90 days or more 1,384 1,452 1,935 208 194 Total restructured -- -- -- 8,694 - - ---------------------------------------------------------------------------------------------------------------- Total nonperforming loans 15,914 12,907 9,226 12,040 5,399 Other real estate owned 1,699 747 640 1,225 1,729 - ---------------------------------------------------------------------------------------------------------------- Total nonperforming assets $17,613 $13,654 $9,866 $13,265 $7,128 - ---------------------------------------------------------------------------------------------------------------- Nonperforming loans to total loans 1.22% 1.17% 0.99% 1.32% 0.63% Allowance for loan losses to nonperforming loans 99.59% 92.11% 124.56% 100.71% 207.26% Government-guaranteed portion of nonperforming loans $ 2,694 $ 1,017 $ 905 $ 200 $ 585
The following table analyzes Southwest's allowance for loan losses for the periods indicated.
For the Year Ended December 31, -------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------- (dollars in thousands) Balance at beginning of period $11,888 $11,492 $12,125 $11,190 $10,401 LOANS CHARGED-OFF: Real estate mortgage 717 777 445 563 307 Real estate construction 3 -- 99 1,083 10 Commercial 3,915 4,248 4,364 1,170 1,229 Installment and consumer 442 371 621 474 802 - --------------------------------------------------------------------------------------------------------- Total charge-offs 5,077 5,396 5,529 3,290 2,348 - --------------------------------------------------------------------------------------------------------- RECOVERIES: Real estate mortgage 173 93 54 155 30 Real estate construction -- -- 22 -- -- Commercial 230 107 574 360 382 Installment and consumer 112 149 246 160 230 - --------------------------------------------------------------------------------------------------------- Total recoveries 515 349 896 675 642 - --------------------------------------------------------------------------------------------------------- Net loans charged-off 4,562 5,047 4,633 2,615 1,706 Provision for loan losses 8,522 5,443 4,000 3,550 2,495 - --------------------------------------------------------------------------------------------------------- Balance at end of period $15,848 $11,888 $11,492 $12,125 $11,190 - --------------------------------------------------------------------------------------------------------- Ratio of allowance for loan losses to total loans: Average 1.25% 1.17% 1.22% 1.35% 1.38% End of period 1.21 1.08 1.23 1.33 1.31 Ratio of net charge-offs to average total loans during the period 0.36 0.50 0.49 0.29 0.21
11 OTHER INCOME Other income was $14.5 million for 2003, up 14% when compared with 2002. Other income increased by 18% in 2002. Growth in other income for the periods presented in the table below occurred primarily in two areas: service charges and fees on deposit accounts and gain on sales of loans.
COMPARISON SUMMARY 2003 Change 2002 Change OTHER INCOME 2003 From 2002 2002 From 2001 2001 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) Service charges and fees on deposit accounts $ 9,293 $ 1,077 $ 8,216 $ 1,483 $ 6,733 Other noninterest income 1,068 64 1,004 270 734 Gain on sales of loans 4,111 941 3,170 191 2,979 Gain on sales of investment securities 28 (300) 328 (39) 367 - -------------------------------------------------------------------------------------------------------------- Total other income $14,500 $ 1,782 $12,718 $ 1,905 $10,813 - --------------------------------------------------------------------------------------------------------------
Service charges and fees on deposit accounts increased $1.1 million, or 13%, compared to the prior year due to increased volumes in consumer deposit accounts and higher revenues on commercial deposit accounts. The higher revenues resulted primarily from a lower earnings credit rate. The earnings credit rate is the value given to deposits maintained by commercial customers. In a lower rate environment, deposit balances are not as valuable because of a lower earnings credit rate. This results in customers paying for most of their services through fees rather than through the use of deposit balances. In 2002, service charges and fees on deposit accounts increased $1.5 million, or 22%, from 2001, also due to increased consumer deposit volume and a lower earnings credit rate compared to the prior year. Service charges and fees also benefited from increases in revenue from Southwest's multi-state ATM network. Non-customer ATM fees and interchange fees received based on the transactions of these ATM machines increased $322,000 in 2003 and $498,000 in 2002. At December 31, 2003, Southwest operated 262 ATM machines in 24 states. Other noninterest income increased $64,000 in 2003. This was due primarily to additional consulting fee income generated by Southwest's subsidiary, HSSI, which was established during the first quarter of 2003. Consulting fee income increased from $371,000 in 2002 to $456,000 in 2003. During the second quarter of 2003, SNB Insurance Agency, Inc., a subsidiary of Stillwater National, was established to provide the ability to market annuity products. Sales of these annuity products generated $106,000 in other income that did not exist in prior years. These increases in other noninterest income were partially offset by a $53,000 reduction in credit card income. Gain on sale of loans increased $941,000, or 30%, in 2003. Proceeds from sales of government-guaranteed student loans increased to $278.1 million in 2003 from $117.7 million in 2002 and $84.7 million in 2001. This dramatic increase in student loan volumes can be attributed to the escalation of loans produced through agreements with the Student Loan Marketing Association ("SLMA"). These loans have typically been sold at the time the student withdraws from school, however, an increasing number of student loans are now being sold at the time the loan becomes fully disbursed, which could be within 90 to 180 days of origination. Proceeds from sales of residential mortgage loans increased from $118.9 million in 2001 to $133.2 million in 2002 and to $177.4 million in 2003. Sales of residential mortgages increased in 2002 and 2003 as a result of reduced interest rates, which increased refinancings and overall originations. Southwest typically sells residential mortgages within thirty days of origination. OTHER EXPENSE Other expense was $38.4 million for 2003, which was an increase of $5.1 million, or 15%, from 2002. Other expense increased $2.2 million, or 7%, from 2001.
COMPARISON SUMMARY 2003 Change 2002 Change OTHER EXPENSE 2003 From 2002 2002 From 2001 2001 - ------------------------------------------------------------------------------------------------- (dollars in thousands) Salaries and employee benefits $19,792 $ 2,624 $17,168 $ 1,374 $15,794 Occupancy 8,107 988 7,119 513 6,606 FDIC and other insurance 340 54 286 6 280 Other real estate 215 213 2 (55) 57 General and administrative 9,994 1,250 8,744 316 8,428 - ------------------------------------------------------------------------------------------------- Total other expense $38,448 $ 5,129 $33,319 $ 2,154 $31,165 - -------------------------------------------------------------------------------------------------
12 Salaries and employee benefits increased $2.6 million, or 15%, in 2003 and $1.4 million, or 9%, in 2002 primarily as a result of employees hired to staff the offices opened in the Dallas, Texas metropolitan area and Wichita, Kansas, and the hiring of employees for HSSI, as well as normal increases in salaries and benefits of existing staff. Occupancy expense increased $988,000, or 14%, in 2003 and $513,000, or 8%, in 2002 due to the expenses related to opening the new offices in Texas and Kansas, and the furniture and equipment costs related to those offices. Data processing costs related to government-guaranteed student loans increased $456,000 in 2003 and $183,000 in 2002, which also contributed to the increase in occupancy expense. General and administrative expense increased $1.3 million, or 14%, in 2003 and $316,000, or 4%, in 2002. Amortization costs related to originated mortgage service rights increased $251,000 in 2003 and $24,000 in 2002; this increase is related to the increase in residential mortgage loan originations discussed earlier. Postage and freight expense increased $228,000 in 2003 and $115,000 in 2002 due to additional courier costs required to transport documents between offices and items to be processed to their respective processing centers. Loan costs incurred in the origination of loans that are not paid by the customer increased $142,000 in 2003 after declining $42,000 in 2002. Fees paid to SLMA for the origination of government-guaranteed student loans increased $268,000 in 2003 and $23,000 in 2002.
CONTRIBUTION OF OPERATING SEGMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 - -------------------------------------------------------------------------------------------------- (Dollars in thousands) Oklahoma banking $10,691 $10,608 $ 8,034 Other states banking 1,816 (157) -- Secondary market 5,560 2,984 2,344 Other operations (3,175) (16) 1,374 - -------------------------------------------------------------------------------------------------- Consolidated net income $14,892 $13,419 $11,752
OPERATING SEGMENTS Southwest has three reportable operating segments: Oklahoma banking operations; other states banking operations; and loans originated for sale in the secondary market ("secondary market"). These business units were identified through the products and services that are offered within each unit and the geographic area they serve. The segment disclosures above and in Note 16 to the Consolidated Financial Statements show that, although the Oklahoma banking and secondary market segments provide the significant majority of consolidated interest income and net income, the new, other states banking segment, consisting of the Texas and Kansas operations, began to contribute a significant percentage of consolidated interest income and net income in 2003, and by year-end 2003 accounted for approximately $231.0 million, or 15%, of total assets. The segment disclosures are based upon a number of assumptions and allocations of expense. Southwest allocates resources and evaluates performance of its segments after allocation of funds, indirect expenses, taxes and capital costs. The funds management unit is included in the other operations segment. The cost of funds borrowed from the funds management unit by the operating segments is transfer priced at Southwest's incremental borrowing rates. The value of funds provided by the operating segments to the funds management unit is based on blended borrowing rates which include core deposits and borrowings from the Federal Home Loan Bank and other wholesale sources. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer priced based on the expected duration of the accounts. The expected duration ranges from two to three years. Please also see "Note 16. Operating Segments" to the Consolidated Financial Statements on page 45 of this report. TAXES ON INCOME Southwest's income tax expense for fiscal years 2003, 2002, and 2001 was $8.1 million, $6.4 million, and $5.4 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 as well as tax credits generated by certain lending and investment activities. 13 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended ------------------------------------------------------ 12-31-03 09-30-03 06-30-03 03-31-03 ------------------------------------------------------ (dollars in thousands, except per share data) OPERATIONS DATA Interest income $21,791 $21,176 $21,313 $19,799 Interest expense 7,107 6,974 7,308 7,222 - ------------------------------------------------------------------------------------------------------- Net interest income 14,684 14,202 14,005 12,577 Provision for loan losses 2,074 2,726 2,000 1,722 Gain on sales of securities and loans 954 1,159 1,087 939 Other income 2,675 2,632 2,511 2,543 Other expenses 10,360 9,901 9,293 8,894 - ------------------------------------------------------------------------------------------------------- Income before taxes 5,879 5,366 6,310 5,443 Taxes on income 1,956 1,943 2,277 1,930 - ------------------------------------------------------------------------------------------------------- Net income $ 3,923 $ 3,423 $ 4,033 $ 3,513 - ------------------------------------------------------------------------------------------------------- PER SHARE DATA (1) Basic earnings per common share $0.33 $0.30 $0.33 $0.30 Diluted earnings per common share 0.32 0.28 0.33 0.29 Dividends declared per common share 0.06 0.06 0.06 0.06 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 11,905,084 11,839,891 11,792,068 11,654,998 Diluted 12,329,963 12,398,000 12,199,100 12,124,972
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 7,377 7,695 7,687 7,919 - ------------------------------------------------------------------------------------------------------- Net interest income 11,646 11,443 11,684 11,044 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 2,561 2,371 2,268 2,020 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 (1) Basic earnings per common share $0.30 $0.30 $0.30 $0.27 Diluted earnings per common share 0.29 0.28 0.28 0.26 Dividends declared per common share 0.06 0.06 0.06 0.06 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 11,540,294 11,548,214 11,465,178 11,404,852 Diluted 12,094,604 12,157,716 12,059,904 11,865,028
(1) All share and per share information has been restated to reflect the two-for-one stock split effected in the form of a stock dividend paid August 29, 2003. 14 FINANCIAL CONDITION Southwest's total assets increased by $230.2 million, or 17%, from $1.35 billion at December 31, 2002 to $1.58 billion at December 31, 2003 after increasing by $133.3 million, or 11%, between December 31, 2001 and 2002. The growth in assets in 2003 was primarily attributable to the $207.7 million, or 19%, increase in total loans. Southwest's investment securities increased by $15.6 million, or 8%, to $204.3 million at December 31, 2003, from $188.7 million at December 31, 2002 after decreasing by $38.6 million, or 17%, in 2002. The increase in 2003 came primarily from U.S. government and federal agency securities, which increased $48.9 million, or 47%, in 2003. Southwest's investments in Federal Reserve Bank and Federal Home Loan Bank stock also increased during 2003. Decreases occurred during the same period in Southwest's investment in mortgage-backed securities, which decreased $22.1 million, or 53%, tax-exempt municipal securities, which decreased $12.7 million, or 46%, and other investment securities, which decreased $825,000, or 14%. Total loans were $1.31 billion at December 31, 2003, an increase of $207.7 million, or 19%, compared to December 31, 2002. All categories of loans increased, except one-to-four family residential mortgages and consumer loans. The allowance for loan losses increased by $4.0 million, or 33%, from December 31, 2002 to December 31, 2003. At December 31, 2003, the allowance for loan losses was $15.8 million, or 1.21% of total loans, compared to $11.9 million, or 1.08% of total loans, at December 31, 2002. (See "Provision for Loan Losses" on page 10.) Southwest's total assets increased by $133.3 million, or 11%, to $1.35 billion at December 31, 2002 from $1.22 billion at December 31, 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%, to $188.7 million at December 31, 2002 from $227.3 million at December 31, 2001. The decline in 2002 came primarily from mortgage-backed securities, which decreased $28.9 million, or 41%. 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%, during 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" on page 10.) CAPITAL RESOURCES At December 31, 2003, total shareholders' equity was $109.9 million compared to $96.4 million at December 31, 2002. Earnings, net of common dividends, contributed $11.9 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 $3.5 million to shareholders' equity in 2003, 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 $360,000 at December 31, 2003 compared to $2.2 million at December 31, 2002. Although Southwest had share repurchase plans in place during 2003, no shares were repurchased during the year. Repurchases of an additional 592,000 shares may be made under the repurchase plan adopted in March 2003. Repurchases may be made from time to time based on market conditions, projected capital needs, and other factors. 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 and applied by Southwest, 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 123,740 shares at an average price of $10.06 per share, which reduced shareholders' equity by $1.2 million. 15 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, 2003, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 14.90%, a Tier 1 risk-based capital ratio of 11.13%, and a leverage ratio of 9.32%. As of December 31, 2003, Stillwater National and SNB Wichita 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 in order to meet current and future cash flow needs as they become due. 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. Deposits remain the primary source of funding for Southwest. Interest-bearing demand accounts in particular have shown positive growth trend over the three year period, which has been a key factor in Southwest's ability to maintain a low cost of funds. For 2003, average interest-bearing demand deposits were 33.8% of total average deposits, up from 26.9% in 2002 and 19.6% in 2001. Loans continue to be the largest component of the earning assets mix and have shown a positive trend over the three year period.
Percentage of Total Average Assets ------------------------------------------------ Sources and uses of funds 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------- Sources of Funds: Deposits: Noninterest-bearing demand 9.20% 9.28% 9.00% Interest-bearing demand and money market accounts 25.95 20.69 14.67 Time and savings deposits 41.61 46.88 51.36 Other borrowings 13.26 12.99 15.17 Subordinated debentures 2.78 2.02 2.10 Other liabilities 0.45 1.10 1.26 Equity capital 6.75 7.04 6.44 - -------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% - -------------------------------------------------------------------------------------------------------------- Uses of Funds: Loans 83.96% 79.35% 76.50% Investment securities 12.65 16.30 19.05 Other interest-earning assets 0.07 0.21 0.10 Noninterest-earning assets 3.32 4.14 4.35 - -------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% - --------------------------------------------------------------------------------------------------------------
16 Sources and uses of cash are presented in the Consolidated Statements of Cash Flows. Total cash decreased by $866,000, or less than 3%, to $34.0 million in 2003 from $34.8 million at year-end 2002, as a result of the net effects of a $76.1 million increase in cash used in operating activities (primarily from the increase in originations of government-guaranteed student loans, net of sales proceeds); a $21.2 million increase in cash used in investing activities (primarily from the increase in purchases of available for sale securities net of the reduction in loan originations); and a $94.0 million increase in cash provided by financing activities (primarily from a $65.4 million increase in deposits and the $46.4 million net proceeds from issuance of subordinated debentures). Total cash increased by $2.4 million, or less than 8%, during 2002 from $32.4 million at year-end 2001, as a result of the net effects of a $12.0 million increase in cash used in operating activities, a $103.2 million increase in cash used in investing activities (primarily from the increase in loan originations); and a $116.1 million increase in cash provided by financing activities (primarily from a $157.3 million increase in deposits net of a $41.0 million decrease in other borrowings.) 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 and liquidity. Interest rate sensitivity analysis measures the cumulative differences between the amounts of assets and liabilities maturing or repricing within various time periods. The following table shows Southwest's interest rate sensitivity gaps for selected maturity periods at December 31, 2003: 17
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 $1,021,138 $ 161,348 $ 94,001 $ 32,349 $1,308,836 Investment securities 26,364 24,659 152,987 256 204,266 Due from banks 1,212 -- -- -- 1,212 - --------------------------------------------------------------------------------------------------------------------------- Total 1,048,714 186,007 246,988 32,605 1,514,314 RATE-SENSITIVE LIABILITIES: Money market deposit accounts 376,016 -- -- -- 376,016 Time deposits 170,906 335,340 92,910 763 599,919 Savings accounts 6,903 -- -- -- 6,903 NOW accounts 53,955 -- -- -- 53,955 Other borrowings 67,350 10,000 60,000 46,500 183,850 Subordinated debentures -- -- -- 72,180 72,180 - --------------------------------------------------------------------------------------------------------------------------- Total 675,130 345,340 152,910 119,443 1,292,823 - --------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ 373,584 $(159,333) $ 94,078 $ (86,838) $ 221,491 =========================================================================================================================== Cumulative interest sensitivity gap $ 373,584 $ 214,251 $ 308,329 $ 221,491 $ 221,491 =========================================================================================================================== Percentage of rate-sensitive assets to rate-sensitive liabilities 155.34 % 53.86 % 161.53 % 27.30 % 117.13 % =========================================================================================================================== Percentage of cumulative gap to total assets 23.63 % 13.55 % 19.51 % 14.01 % 14.01 % ===========================================================================================================================
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 analysis. 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 over the next twelve month period under a variety of interest rate and growth scenarios. At December 31, 2003, the model projected net income would decrease by 8.11% if interest rates immediately fell by 100 basis points. It projected an increase in net income of 0.125% if interest rates immediately rose by 100 basis points. The model projected net income would decrease by 4.44% if interest rates gradually fell by 100 basis points over a one-year time horizon. It projected an increase in net income of 0.599% 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. OFF-BALANCE SHEET ARRANGEMENTS 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 accounting principles generally accepted in the United States, the full notional amount of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit, and standby and commercial letters of 18 credit and are discussed further in footnote 13 on page 44 of this report. Off-balance sheet arrangements also include the Trust Preferred Securities, which have been de-consolidated in this report as required by Financial Accounting Standards Board Interpretation 46, "Consolidation of Variable Interest Entities." Further information regarding the Trust Preferred Securities can be found in footnote 6 on page 38 of this report. 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 November 2002, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 24." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 were effective for financial statements of interim or annual periods ending after December 15, 2002. Implementation of the provisions of FIN 45 did not have a significant impact on Southwest's financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." The objective of this interpretation was to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective upon issuance for all subsequent transactions involving variable interest entities and are required to be adopted no later than the first interim or annual reporting period beginning after December 15, 2003 for all VIE transactions that existed as of the issuance date. On December 24, 2003, the FASB issued a revision of the Interpretation (the "Revised Interpretation 46"). Revised Interpretation 46 codifies both the proposed modifications and other decisions previously issued through certain FASB Staff Positions ("FSPs") and supercedes the original FIN 46 to include: (1) deferring the effective date of the Interpretation's provisions for certain variable interests, (2) providing additional scope exceptions for certain other variable interests, (3) clarifying the impact of troubled debt restructurings on the requirement to reconsider (a) whether an entity is a VIE or (b) which party is the primary beneficiary of a VIE, and (4) revising Appendix B of the Interpretation to provide additional guidance on what constitutes a variable interest. FIN 46 and Revised Interpretation 46 required Southwest to de-consolidate its investments in SBI Capital Trust, OKSB Statutory Trust I, and SBI Capital Trust II (the "Trusts") in this Annual Report and all future reports. This de-consolidation has resulted in the replacement of the Trust Preferred Securities, which were reported as long-term debt in the statement of financial condition, with the subordinated debentures issued by the Trusts to Southwest. In spite of this change in reporting, the adoption of FIN 46 did not have a material impact on Southwest's results of operations or financial position. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." Statement No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim period after June 15, 2003. The adoption of Statement 150 did not have a material impact on Southwest's results of operations or financial position. 19 CRITICAL ACCOUNTING POLICIES Southwest's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation allowance to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The allowance for credit losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable, and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued when it is probable that Southwest will not collect all principal and interest payments according to the loan's contractual terms. Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of probable losses inherent in the credit 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 credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by Southwest, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgments of information available at the time of each examination. 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. Southwest's systematic methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances, and a general allowance, as presented in "Provision for Loan Losses" on page 10 and in Note 1 to the Consolidated Financial Statements on page 29. The formula and specific allowances comprised 92.25% of the total allowance at December 31, 2003. At that date, a 10% decrease or increase in all categories of risk rated credits for which specific allowances had not been recorded would have resulted in a corresponding decrease or increase of approximately $511,000 in the recommended allowance, assuming no change in other elements considered in the methodology. CONTRACTUAL OBLIGATIONS Southwest has various contractual obligations that require future cash payment. The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date. 20
CONTRACTUAL OBLIGATIONS Payments due by period - ------------------------------------------------------------------------------------------------------------------ Less than 1-3 3-5 Over 1 Year Years Years 5 Years Total -------------------------------------------------------------------------- (Dollars in thousands) Deposits without stated maturity: (1) Noninterest bearing $ 167,332 $ -- $ -- $ -- $ 167,332 Interest bearing 436,874 -- -- -- 436,874 Time Deposits (2) 484,834 65,610 58,624 6,447 615,515 Other borrowings (2) 81,001 46,616 24,467 50,455 202,539 Subordinated debentures 4,379 8,758 8,758 167,952 189,847 Operating leases 1,255 2,276 1,529 1,751 6,811 - ------------------------------------------------------------------------------------------------------------------ Total $1,175,675 $123,260 $ 93,378 $226,605 $1,618,918 - ------------------------------------------------------------------------------------------------------------------
(1) Excludes interest. (2) Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2003. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. At December 31, 2003, Southwest's purchase obligations not reflected on the Consolidated Statement of Condition, and its other long-term liabilities (consisting primarily of benefits under deferred compensation arrangements) are not considered material. For additional information regarding contractual obligations, please also see "Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk" on page 17, "Off-Balance Sheet Arrangements" on page 18, and "Note 5. Other Borrowed Funds" on page 37, "Note 6. Subordinated Debentures" on page 38, "Note 11. Operating Leases" on page 43, and "Note 14. Commitments and Contingencies" on page 45, to the Consolidated Financial Statements. 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 non-GAAP ratios and other measures presented by some banking organizations or financial analysts may not be directly comparable to similarly named ratios or other measures used by Southwest or other banking organizations. 21 REPORT OF MANAGEMENT February 2, 2004 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, 2003, and for the year then ended. The consolidated financial statements of Southwest Bancorp, Inc. have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States and FR Y-9C instructions as of December 31, 2003. 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, 2003, its system of internal control over financial reporting as it relates to its financial statements presented in conformity with accounting principles generally accepted in the United States 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, 2003. /s/ Rick Green /s/ Kerby E. Crowell - ------------------------------------- --------------------------- Rick Green Kerby E. Crowell President and Chief Executive Officer Executive Vice President and Chief Financial Officer 22 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, 2003 and 2002, 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, 2003. These financial statements are the responsibility of the Company'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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Dallas, Texas February 2, 2004 23
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SOUTHWEST BANCORP, INC. AT DECEMBER 31, 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) ASSETS Cash and cash equivalents $ 33,981 $ 34,847 Investment securities: Held to maturity, fair value $16,144 (2003) and $32,000 (2002) 15,916 31,154 Available for sale, amortized cost $176,470 (2003) and $145,141 (2002) 177,074 148,476 Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 11,276 9,059 Loans held for sale 218,422 129,702 Loans receivable, net of allowance for loan losses of $15,848 (2003) and $11,888 (2002) 1,074,566 959,522 Accrued interest receivable 11,321 9,283 Premises and equipment, net 19,818 20,202 Other assets 18,351 8,309 - --------------------------------------------------------------------------------------------------------------------------- Total assets $1,580,725 $1,350,554 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 167,332 $ 135,945 Interest-bearing demand 53,955 50,162 Money market accounts 376,016 258,712 Savings accounts 6,903 5,700 Time deposits of $100,000 or more 358,130 309,205 Other time deposits 241,789 262,033 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 1,204,125 1,021,757 Accrued interest payable 3,375 4,498 Income tax payable 2,850 -- Other liabilities 4,410 2,858 Other borrowings 183,850 199,282 Subordinated debentures 72,180 25,787 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,470,790 1,254,182 SHAREHOLDERS' EQUITY: (1) Common stock - $1 par value; 20,000,000 shares authorized; 12,243,042 shares issued and outstanding 12,243 12,243 Paid in capital 6,997 6,196 Retained earnings 92,657 80,724 Accumulated other comprehensive gain (loss) 360 2,201 Treasury stock, at cost; 287,410 (2003) and 696,284 (2002) (2,322) (4,992) - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 109,935 96,372 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities & shareholders' equity $1,580,725 $1,350,554 ===========================================================================================================================
The accompanying notes are an integral part of this statement. (1) All share information has been restated to reflect the two-for-one stock split effected in the form of a stock dividend paid August 29, 2003. 24
CONSOLIDATED STATEMENTS OF OPERATIONS SOUTHWEST BANCORP, INC. FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) INTEREST INCOME: Interest and fees on loans $76,115 $65,503 $76,850 Investment securities: U.S. Government and agency obligations 5,485 5,913 6,329 Mortgage-backed securities 1,036 3,126 4,780 State and political subdivisions 856 1,355 1,638 Other securities 577 554 762 Federal funds sold 10 44 41 - ------------------------------------------------------------------------------------------------------------- Total interest income 84,079 76,495 90,400 INTEREST EXPENSE: Interest-bearing demand 355 372 809 Money market accounts 5,237 4,305 4,386 Savings accounts 17 25 79 Time deposits of $100,000 or more 8,520 9,320 15,468 Other time deposits 6,516 9,429 18,029 Other borrowings 4,887 4,829 7,770 Subordinated Debentures 3,079 2,398 2,398 - ------------------------------------------------------------------------------------------------------------- Total interest expense 28,611 30,678 48,939 - ------------------------------------------------------------------------------------------------------------- Net interest income 55,468 45,817 41,461 Provision for loan losses 8,522 5,443 4,000 OTHER INCOME: Service charges and fees 9,293 8,216 6,733 Other noninterest income 1,068 1,004 734 Gain on sales of loans 4,111 3,170 2,979 Gain (loss) on sales of investment securities 28 328 367 - ------------------------------------------------------------------------------------------------------------- Total other income 14,500 12,718 10,813 OTHER EXPENSE: Salaries and employee benefits 19,792 17,168 15,794 Occupancy 8,107 7,119 6,606 FDIC and other insurance 340 286 280 Other real estate 215 2 57 General and administrative 9,994 8,744 8,428 - ------------------------------------------------------------------------------------------------------------- Total other expense 38,448 33,319 31,165 - ------------------------------------------------------------------------------------------------------------- Income before taxes 22,998 19,773 17,109 Taxes on income 8,106 6,354 5,357 - ------------------------------------------------------------------------------------------------------------- Net income $14,892 $13,419 $11,752 - ------------------------------------------------------------------------------------------------------------- Basic earnings per common share (1) $1.26 $1.17 $1.03 Diluted earnings per common share (1) 1.22 1.11 1.00 Cash dividends declared per share (1) 0.25 0.22 0.16
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 and the two-for-one stock split effected in the form of a stock dividend paid August 29, 2003. 25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SOUTHWEST BANCORP, INC. FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Net income $14,892 $13,419 $11,752 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized holding gain (loss) on available for sale securities (2,703) 42 3,357 Reclassification adjustment for (gains) losses arising during the period (28) (328) (367) - ------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), before tax (2,731) (286) 2,990 Tax (expense) benefit related to items of other comprehensive income (loss) 890 98 (980) - ------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), net of tax (1,841) (188) 2,010 - ------------------------------------------------------------------------------------------------------------ Comprehensive income $13,051 $13,231 $13,762 ============================================================================================================
The accompanying notes are an integral part of this statement. 26
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, 2001 12,243,042 $12,243 $6,626 $59,912 $ 379 $ (5,921) $ 73,239 - --------------------------------------------------------------------------------------------------------------------------------- Cash dividends: Common, $0.16 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 12,243,042 12,243 6,387 69,838 2,389 (5,732) 85,125 - ------------------------------------------------------------------------------------------------------------------------------ Cash dividends: Common, $0.22 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 12,243,042 12,243 6,196 80,724 2,201 (4,992) 96,372 - ------------------------------------------------------------------------------------------------------------------------------ Cash dividends: Common, $0.25 per share, and other dividends -- -- -- (2,959) -- -- (2,959) Common stock issued: Employee Stock Option Plan -- -- (424) -- -- 2,603 2,179 Employee Stock Purchase Plan -- -- 31 -- -- 28 59 Dividend Reinvestment Plan -- -- 41 -- -- 39 80 Tax benefit related to exercise of stock options -- -- 1,153 -- -- -- 1,153 Other comprehensive income (loss), net of tax -- -- -- -- (1,841) -- (1,841) Net income -- -- -- 14,892 -- -- 14,892 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2003 12,243,042 $12,243 $6,997 $92,657 $ 360 $ (2,322) $109,935 ===============================================================================================================================
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 and the two-for-one stock split effected in the form of a stock dividend paid August 29, 2003. 27
CONSOLIDATED STATEMENTS OF CASH FLOWS SOUTHWEST BANCORP, INC. FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) OPERATING ACTIVITIES: Net income $14,892 $13,419 $11,752 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Provision for loan losses 8,522 5,443 4,000 Deferred taxes (4,465) (292) 443 Depreciation and amortization expense 2,745 2,510 2,434 Amortization of premiums and accretion of discounts on securities, net 227 (59) 15 Amortization of intangibles 398 202 178 Tax benefit from exercise of stock options 1,153 285 -- (Gain) Loss on sales/calls of securities (28) (328) (367) (Gain) Loss on sales of loans (4,111) (3,170) (2,979) (Gain) Loss on sales of premises/equipment (53) -- 137 (Gain) Loss on other real estate owned, net 108 (92) (16) Proceeds from sales of residential mortgage loans 177,396 133,207 118,899 Residential mortgage loans originated for resale (169,694) (134,705) (118,717) Proceeds from sales of government-guaranteed student 278,119 117,703 84,658 loans Government-guaranteed student loans originated for (396,920) (153,938) (106,603) resale Changes in assets and liabilities: Accrued interest receivable (2,038) 874 1,885 Other assets (4,133) (613) 1,242 Income taxes payable 2,850 (195) (170) Accrued interest payable (1,123) 1,016 (3,635) Other liabilities 1,440 150 246 - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from operating activities (94,715) (18,583) (6,598) =========================================================================================================================== INVESTING ACTIVITIES: Proceeds from sales of available for sale securities 6,951 18,769 1,993 Proceeds from principal repayments, calls and maturities: Held to maturity securities 15,210 19,533 14,475 Available for sale securities 86,332 71,707 69,475 Proceeds from redemptions of Federal Home Loan Bank stock -- 2,378 718 Purchases of Federal Home Loan Bank stock and Federal Reserve Bank stock (2,217) (1,529) (2,187) Purchases of held to maturity securities -- (2,093) -- Purchases of available for sale securities (124,783) (70,008) (78,688) Loans originated and principal repayments, net (99,996) (135,147) 1,251 Purchases of premises and equipment (3,523) (2,361) (2,640) Proceeds from sales of premises and equipment 1,215 67 67 Proceeds from sales of other real estate owned 1,860 922 963 - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from investing activities (118,951) (97,762) 5,427 - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 182,368 116,961 (40,306) Net increase (decrease) in other borrowings (15,432) 3,915 44,869 Net proceeds from issuance of common stock 2,318 1,509 597 Net proceeds from issuance of subordinated debentures 46,393 -- -- Purchases of treasury stock -- (1,245) (647) Common stock dividends paid (2,847) (2,354) (1,787) - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided from financing activities 212,800 118,786 2,726 - --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (866) 2,441 1,555 CASH AND CASH EQUIVALENTS, Beginning of period 34,847 32,406 30,851 - --------------------------------------------------------------------------------------------------------------------------- End of period $33,981 $34,847 $32,406 ===========================================================================================================================
The accompanying notes are an integral part of this statement. 28 SOUTHWEST BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc. ("Southwest"), incorporated in 1981, is a financial 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, Business Consulting Group, Inc. ("BCG"), a business consulting company established in 2002, Healthcare Strategic Services, Inc. ("HSSI"), a healthcare consulting company established in 2003, SNB Bank of Wichita ("SNB Wichita"), a federal savings bank established in 2003, and consolidated subsidiaries of Stillwater National, including SNB Real Estate Holdings, Inc. and SNB REIT, Inc. Stillwater National, BCG, HSSI and SNB Wichita are wholly owned, direct subsidiaries of Southwest. All significant intercompany balances and transactions have been eliminated in consolidation. 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 affect the determination of material estimates such as the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, income taxes, and the fair value of financial instruments. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions, and federal funds sold. Interest-bearing balances held at depository institutions were $1.2 million at December 31, 2003 and $2.4 million at December 31, 2002. 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. Southwest reviews all individual securities of which the fair values are below the book values on a regular basis. If it is determined that Southwest does not have the ability and intent to hold these securities for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment, or to maturity when the full cost will be recovered, then, an other than temporary loss is recognized in the statement of operations. 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. Loan origination fees and certain costs of originated loans are amortized as an adjustment to the yield over the term of the loan. At December 31, 2003, net unamortized deferred loan fees were $1.6 million; no deferred loan fees or costs 29 were recorded prior to 2003 as these amounts were not material. 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 identifies past due loans based on contractual terms on a loan by loan basis. 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 to one hundred eighty 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. 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. Statement of Financial Accounting Standard ("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's tests have indicated no impairment exists. 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, 2003 and 2002, Southwest had recorded cumulative amortization of $2.8 million and $2.4 million, respectively. DEPOSITS - The total amount of time deposits with a minimum denomination of $100,000 was approximately $358.1 million and $309.2 million at December 31, 2003 and 2002, respectively. The total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2003 and 2002 was $1.9 million and $529,000, respectively. Time deposit maturities are as follows: $506.2 million in 2004, $32.2 million in 2005, $6.4 million in 2006, $15.6 million in 2007 and $39.5 million thereafter. 30 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, 2003, 2002, and 2001, Southwest had zero, 28,000, and 300,000 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:
2003 2002 2001 --------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic earnings per share 11,798,810 11,490,166 11,386,258 EFFECT OF DILUTIVE SECURITIES: Stock options 360,810 561,952 342,586 --------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Diluted earnings per share 12,159,620 12,052,118 11,728,844 - --------------------------------------------------------------------------------------
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, ----------------------------------------------- 2003 2002 2001 ----------------------------------------------- (dollars in thousands, except per share data) Net income, as reported $14,892 $13,419 $11,752 Less: Proforma compensation expense related to options net of tax effects 375 452 439 - ----------------------------------------------------------------------------------------------------------- Net income, proforma $14,517 $12,967 $11,313 - ----------------------------------------------------------------------------------------------------------- Earnings per common share Basic, as presented $1.26 $1.17 $1.03 Basic, proforma $1.23 $1.13 $0.99 Diluted, as presented $1.22 $1.11 $1.00 Diluted, proforma $1.19 $1.08 $0.96 Weighted average fair value at grant date $2.34 $2.41 $2.42
31 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, -------------------------------------- 2003 2002 2001 -------------------------------------- Expected dividend yield 1.78% 1.73% 1.71% Expected volatility 24.71% 25.40% 25.67% Risk-free interest rate 5.45% 5.70% 5.82% Expected option term (in years) 8.49 8.87 9.17 The Stock Plan's activity follows:
Weighted Number of Average Options Exercise Price -------------------------------- - ------------------------------------------------------------------------------- Outstanding at December 31, 2000 1,528,802 $ 6.21 - ------------------------------------------------------------------------------- Granted 50,000 7.45 Exercised (98,102) 5.15 Canceled/expired (157,898) 7.38 - ------------------------------------------------------------------------------- Outstanding at December 31, 2001 1,322,802 6.20 - ------------------------------------------------------------------------------- Granted 243,080 10.34 Exercised (259,234) 5.39 Canceled/expired (8,890) 7.64 - ------------------------------------------------------------------------------- Outstanding at December 31, 2002 1,297,758 7.12 - ------------------------------------------------------------------------------- Granted 153,588 11.72 Exercised (398,713) 5.46 Canceled/expired (18,150) 8.07 - ------------------------------------------------------------------------------- Outstanding at December 31, 2003 1,034,483 $ 8.43 - ------------------------------------------------------------------------------- Total exercisable at December 31, 2001 648,100 $ 5.64 Total exercisable at December 31, 2002 610,159 $ 6.58 Total exercisable at December 31, 2003 502,612 $ 8.40
At December 31, 2003, Southwest had reserved 2,163,752 shares under the Stock Plans, and had 1,034,483 shares under option. The following summarizes the information concerning options outstanding and exercisable at December 31, 2003. Number of Range of Weighted Average Weighted Exercisable Options Exercise Remaining Average Number Weighted Average Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------- 30,000 $ 4.25 - $ 4.46 0.6 $ 4.29 27,000 $ 4.27 184,670 $ 5.21 - $ 6.48 5.9 $ 5.36 78,470 $ 5.32 239,300 $ 7.11 - $ 7.66 5.4 $ 7.14 102,300 $ 7.12 351,544 $ 8.25 - $ 9.37 4.0 $ 8.97 194,259 $ 8.99 160,969 $10.12 - $11.72 4.1 $11.62 55,250 $11.53 40,000 $12.33 - $12.50 3.4 $12.41 26,666 $12.41 28,000 $13.16 - $13.31 3.9 $13.21 18,667 $13.21
32 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 $413,000 and $535,000 at December 31, 2003 and 2002, respectively. RECLASSIFICATIONS - Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 2. INVESTMENT SECURITIES A summary of the amortized cost and fair values of investment securities follows:
At December 31, 2003 ------------------------------------------------------------- Amortized Gross Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------- (dollars in thousands) Held to Maturity: U.S. Government and agency obligations $ 5,047 $ 57 $ - $ 5,104 Obligations of state and political subdivisions 10,869 171 - 11,040 - ---------------------------------------------------------------------------------------------------------------- Total $15,916 $ 228 $ - $16,144 - ----------------------------------------------------------------------------------------------------------------- Available for Sale: U.S. Government and agency obligations $148,002 $ 904 $ 609 $148,297 Obligations of state and political subdivisions 3,930 198 - 4,128 Mortgage-backed securities 19,581 183 83 19,681 Equity securities 4,957 117 106 4,968 - ---------------------------------------------------------------------------------------------------------------- Total $176,470 $ 1,402 $ 798 $177,074 - -----------------------------------------------------------------------------------------------------------------
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 - -----------------------------------------------------------------------------------------------------------------
33 At December 31, 2003, Southwest had securities with unrealized losses totaling $798,000. Of that total, $106,000 in losses had been outstanding for more than one year; the remaining $692,000 in losses had arisen within the last twelve months. Southwest has reviewed all these securities on an individual basis. Southwest has the ability and intent to hold these securities for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment, or to maturity when the full cost will be recovered and, therefore, has determined that none of the losses are other than temporary. 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 $170.8 million and $134.9 million were pledged to meet such requirements of $80.1 million and $80.9 million at December 31, 2003 and 2002, 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, 2003 follows in the next table.
Available for Sale Held to Maturity ------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------------------------------- (dollars in thousands) One year or less $21,090 $21,380 $13,399 $13,545 Two years through five years 153,094 153,444 2,517 2,599 Five years through ten years - - - - More than ten years 2,286 2,250 - - - -------------------------------------------------------------------------------------------------- Total $176,470 $177,074 $15,916 $16,144 - --------------------------------------------------------------------------------------------------
Gross realized gains (losses) on sales of investment securities were $28,000, $328,000, and $367,000 during 2003, 2002, and 2001, respectively. The gross proceeds from such sales of investment securities totaled approximately $7.0 million, $18.8 million, and $2.0 million during 2003, 2002, and 2001, respectively. A portion of the gain on sales of investment securities during 2003, 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, -------------------------------- 2003 2002 -------------------------------- (dollars in thousands) Real estate mortgage: Commercial $ 402,596 $ 374,999 One-to-four family residential 83,250 102,423 Real estate construction 230,292 130,001 Commercial 355,965 348,879 Installment and consumer: Government-guaranteed student loans 211,546 119,064 Other 25,187 25,746 - ----- ------------------------------------------------------------------------- 1,308,836 1,101,112 Allowance for loan losses (15,848) (11,888) - ------------------------------------------------------------------------------- Total loans, net $1,292,988 $1,089,224 - ------------------------------------------------------------------------------- Southwest extends commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas which subjects the loan portfolio to the general economic conditions within these areas. At December 31, 2003 and 2002, substantially all of Southwest's loans were collateralized with real estate, inventory, accounts 34 receivable and/or other assets or are guaranteed by agencies of the United States Government. Loans to individuals and businesses in the healthcare industry totaled $290.2 million, or 22% 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 or guarantors, 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 $218.4 million and $129.7 million at December 31, 2003 and 2002, 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 $14.5 million and $11.5 million at December 31, 2003 and 2002, 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 $802,000, $749,000, and $543,000, for 2003, 2002, and 2001, respectively. The unpaid principal balance of real estate mortgage loans serviced for others totaled $124.4 million and $107.7 million at December 31, 2003 and 2002, respectively. Southwest maintained escrow accounts totaling $468,000 and $321,000 for real estate mortgage loans serviced for others at December 31, 2003 and 2002, respectively. The following table sets forth the remaining maturities for certain loan categories at December 31, 2003. Student loans that do not have stated maturities are treated as due in one year or less. Real estate construction includes certain loans which will convert to permanent financing at the point when construction is completed; these loans are reported according to their final maturity.
One year One to Over or less five years five years Total ------------------------------------------------- (dollars in thousands) Real estate mortgage: Commercial $ 39,701 $ 202,315 $ 160,580 $ 402,596 One-to-four family residential 11,745 34,356 37,149 83,250 Real estate construction 77,666 79,535 73,091 230,292 Commercial 151,459 124,415 80,091 355,965 Installment and consumer: Government-guaranteed student loans 211,546 -- -- 211,546 Other 8,825 15,379 983 25,187 ------------------------------------------------- Total $ 500,942 $ 456,000 $ 351,894 $1,308,836 -------------------------------------------------
The following table sets forth at December 31, 2003 the dollar amount of all loans due more than one year after December 31, 2003.
Fixed Variable Total ------------------------------------------- (dollars in thousands) Real estate mortgage: Commercial $ 26,427 $336,468 $362,895 One-to-four family residential 24,283 47,222 71,505 Real estate construction 4,687 147,939 152,626 Commercial 31,295 173,211 204,506 Installment and consumer 7,829 8,533 16,362 - ----------------------------------------------------------------------------------- Total $ 94,521 $713,373 $807,894 - -----------------------------------------------------------------------------------
35 The allowance for loan losses is summarized as follows: For the Years Ended December 31, --------------------------------------------- 2003 2002 2001 --------------------------------------------- (dollars in thousands) Beginning balance $11,888 $11,492 $12,125 Provision for loan losses 8,522 5,443 4,000 Loans charged off (5,077) (5,396) (5,529) Recoveries 515 349 896 - ---------------------------------------------------------------------------- Total $15,848 $11,888 $11,492 - ---------------------------------------------------------------------------- As of December 31, 2003 and 2002, impaired loans totaled $14.5 million and $11.5 million and had a related allowance for loan loss of $2.2 million and $930,000, respectively. The average balance of impaired loans totaled $12.9 million and $7.5 million for the years ended December 31, 2003 and 2002, respectively. Interest income recognized on impaired loans totaled $11,000, $241,000, and $392,000, respectively, for the years ended December 31, 2003, 2002, and 2001. 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 $1.8 million, $2.6 million and $1.5 million at December 31, 2003, 2002 and 2001, respectively. During 2003, $5.3 million of new loans and advances on existing loans were made to these persons and repayments totaled $6.1 million. 4. PREMISES AND EQUIPMENT These consist of the following: At December 31, ------------------------------ 2003 2002 ------------------------------ (dollars in thousands) Land $4,530 $4,558 Buildings and improvements 11,188 11,218 Furniture, fixtures, and equipment 22,594 21,153 Construction/Remodeling in progress 214 444 - ----------------------------------------------------------------------------- 38,526 37,373 Accumulated depreciation and amortization (18,708) (17,171) - ----------------------------------------------------------------------------- Premises and equipment, net $ 19,818 $ 20,202 - ----------------------------------------------------------------------------- 36 5. OTHER BORROWED FUNDS During 2003, 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, ---------------------------------------------- 2003 2002 2001 ---------------------------------------------- (dollars in thousands) AMOUNTS OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option $ 2,490 $ 2,500 $ 1,493 Federal funds purchased and securities sold under repurchase agreements 61,335 67,895 51,579 Borrowed from the Federal Home Loan Bank 120,025 128,887 142,295 Other - - - WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option 0.73% 0.99% 1.40% Federal funds purchased and securities sold under repurchase agreements 0.71 1.25 1.61 Borrowed from the Federal Home Loan Bank 3.36 3.28 3.27 Other - - - 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 97,893 77,994 58,274 Borrowed from the Federal Home Loan Bank 166,500 141,500 168,590 Other - 250 500 APPROXIMATE AVERAGE SHORT-TERM BORROWINGS OUTSTANDING FOR THE YEAR: Treasury, tax and loan note option $ 752 $ 1,415 $ 1,596 Federal funds purchased and securities sold under repurchase agreements 64,927 48,608 53,128 Borrowed from the Federal Home Loan Bank 134,794 115,684 131,220 Other - 38 165 APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR: Treasury, tax and loan note option 0.91% 1.46% 3.55% Federal funds purchased and securities sold under repurchase agreements 0.84 1.22 3.39 Borrowed from the Federal Home Loan Bank 3.22 3.64 4.50 Other - 4.38 6.76
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, 2003 and 2002, loans pledged under the Agreement were $454.1 million and $385.5 million and investment securities (at carrying value) were $48.3 million and $25.9 million, respectively. Southwest has available various forms of other borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchases, 37 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, 2003. 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, 2003. Southwest has approved federal funds purchase lines totaling $169.5 million with seven financial entities; the outstanding balance on these lines totaled $16.8 million at December 31, 2003. In addition, Southwest has available a $35.0 million line of credit from the SLMA and a $320.4 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, 2003. The FHLB line of credit had an outstanding balance of $120.0 million at December 31, 2003 and maturities as follows: $13.5 million in 2004, $20.0 million in 2005, $20.0 million in 2006, $20.0 million in 2007, $0 in 2008 and $46.5 million after 2008. 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, Citigroup Global Markets, Inc. (previously Salomon Smith Barney), Wachovia Securities, LLC (formerly Prudential Securities, Inc.), UBS Financial Services, Inc. (previously PaineWebber, Inc.), RBC Dain Rauscher, Inc., and CountryWide Securities that total $675.0 million. In conjunction with these lines of credit, $225.9 million in retail certificates of deposit were included in total deposits at December 31, 2003. 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, 2003, no repurchase agreements to any one entity totaled more than 10% of equity capital. 6. SUBORDINATED DEBENTURES 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 "SBI Capital Trust Preferred") in an underwritten public offering for an aggregate price of $25,012,500. Proceeds of the SBI Capital Trust Preferred were invested in the 9.30% Subordinated Debentures (the "SBI Capital 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 of Southwest's 9.20% Redeemable Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"). Interest payments on the SBI Capital Subordinated Debentures are deductible for federal income tax purposes. The SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures each mature on July 31, 2027. If certain conditions are met, the maturity dates of the SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures may be shortened to a date as early as within 2004, or extended to a date not later than July 31, 2036. The SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures also may be redeemed prior to maturity if certain events occur. The SBI Capital Trust Preferred is subject to mandatory redemption, in whole or in part, upon repayment of the SBI Capital 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 SBI Capital Subordinated Debentures, which would result in a deferral of dividend payments on the SBI Capital Trust Preferred, at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period. On June 26, 2003, OKSB Statutory Trust I, a newly-formed subsidiary of Southwest, issued 20,000 of its Floating Rate Capital Securities (the "OKSB Trust Preferred") in a private placement for an aggregate price of $20,000,000. Proceeds of the OKSB Trust Preferred were invested in the Floating Rate Junior Subordinated Deferrable Interest Debentures (the "OKSB 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. Interest payments on the OKSB Subordinated Debentures are deductible for federal income tax purposes. The OKSB Trust Preferred and the OKSB Subordinated Debentures each mature on June 26, 2033. If certain conditions are met, the maturity dates of the OKSB Trust Preferred and the OKSB Subordinated Debentures may be shortened to a date not earlier than June 26, 2008. The OKSB Trust Preferred and the OKSB Subordinated Debentures also may be redeemed prior to maturity if certain events occur. The OKSB Trust Preferred is subject to mandatory redemption, in whole or in part, upon repayment of the OKSB Subordinated Debentures at 38 maturity or their earlier redemption. Southwest also has the right, if certain conditions are met, to defer payment of interest on the OKSB Subordinated Debentures, which would result in a deferral of dividend payments on the OKSB Trust Preferred, at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period. On October 14, 2003, SBI Capital Trust II, a newly-formed subsidiary of Southwest, issued 25,000 of its Floating Rate Trust Preferred Securities (the "SBI II Trust Preferred") in a private placement for an aggregate price of $25,000,000. Proceeds of the SBI II Trust Preferred were invested in the Floating Rate Junior Subordinated Deferrable Interest Debentures (the "SBI II Subordinated Debentures") of Southwest. The proceeds were available to Southwest to increase capital and for general corporate purposes. Interest payments on the SBI II Subordinated Debentures are deductible for federal income tax purposes. The SBI II Trust Preferred and the SBI II Subordinated Debentures each mature on October 7, 2033. If certain conditions are met, the maturity dates of the SBI II Trust Preferred and the SBI II Subordinated Debentures may be shortened to a date not earlier than October 7, 2008. The SBI II Trust Preferred and the SBI II Subordinated Debentures also may be redeemed prior to maturity if certain events occur. The SBI II Trust Preferred is subject to mandatory redemption, in whole or in part, upon repayment of the SBI II 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 SBI II Subordinated Debentures, which would result in a deferral of dividend payments on the OKSB Trust Preferred, at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period. Proceeds from the October trust preferred issuance are expected to be used to retire the $25.0 million in fixed rate trust preferred securities issued in 1997, which became subject to redemption by Southwest in the third quarter of 2002. As of December 31, 2003, the redemption would result in a charge to expense of approximately $630,000, net of tax benefit, upon retirement, however, management estimates that the redemption would have a net positive effect on net income within twelve months from redemption and thereafter. Whether or not Southwest redeems the 1997 trust preferred securities during 2004 depends upon a number of factors, including the currently unsettled regulatory capital rules relating to trust preferred securities as a result of recent changes in accounting standards. Southwest, SBI Capital Trust, OKSB Statutory Trust I and SBI Capital Trust II believe that, taken together, the obligations of Southwest under the Trust Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the Subordinated Debentures, the Indentures and the Agreements as to Expenses and Liabilities, entered into in connection with the offering of the Trust Preferred and the Subordinated Debentures, in the aggregate constitute a full and unconditional guarantee by Southwest of the obligations of SBI Capital Trust, OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred. SBI Capital Trust is a Delaware business trust created for the purpose of issuing the SBI Trust Preferred and purchasing the SBI Subordinated Debentures, which are its sole assets. Southwest owns all of the 30,960 outstanding common securities, liquidation value $25 per share, of SBI Capital Trust. OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated Debentures, which are its sole assets. Southwest owns all of the 619 outstanding common securities, liquidation value $1,000 per share, of OKSB Statutory Trust I. SBI Capital Trust II is a Delaware statutory trust created for the purpose of issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated Debentures, which are its sole assets. Southwest owns all of the 774 outstanding common securities, liquidation value $1,000 per share, of SBI Capital Trust II. Each of 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, 2003, $36.5 million of the Trust Preferred was included in Tier I capital. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." The objective of this interpretation was to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. FIN 46 has required Southwest to de-consolidate its investments in SBI Capital Trust, OKSB Statutory Trust I, and SBI Capital Trust II (the "Trusts") in this Annual Report and all future reports. Due to this required de-consolidation, the Trust Preferred Securities are not presented on the Consolidated Statements of Financial Condition and the Subordinated Debentures are presented on the Consolidated Statements of Financial Condition as a separate liability category. 39 7. INCOME TAXES The components of taxes on income follow: For the Years Ended December 31, ------------------------------------- 2003 2002 2001 ------------------------------------- (dollars in thousands) CURRENT TAX EXPENSE: Federal $11,598 $6,642 $4,707 State 960 6 205 DEFERRED TAX EXPENSE (BENEFIT): Federal (4,295) (307) 399 State (157) 13 46 ------------------------------------------------------------------------ Taxes on income $8,106 $6,354 $5,357 ------------------------------------------------------------------------ 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, ------------------------------- 2003 2002 2001 ------------------------------- (dollars in thousands) Computed tax expense at statutory rates $8,044 $6,921 $5,817 INCREASE (DECREASE) IN INCOME TAXES RESULTING FROM: Benefit of income not subject to U.S. Federal income tax (583) (675) (653) State income taxes, net of Federal income tax benefit 522 12 165 Other 123 96 28 ----------------------------------------------------------------------------- Taxes on income $8,106 $6,354 $5,357 -----------------------------------------------------------------------------
Deferred tax expense (benefit) relating to temporary differences includes the following components: For the Years Ended December 31, ------------------------------- 2003 2002 2001 ------------------------------- (dollars in thousands) Provision for loan losses $(3,589) $(138) $ 344 Accumulated depreciation (1,169) (37) 16 Intangibles 37 36 21 Write-downs on other real estate owned 17 10 (22) Deferred compensation accrual (83) 28 42 Other 334 (193) 44 ------------------------------------------------------------------------ Total $(4,453) $(294) $ 445 ------------------------------------------------------------------------ 40 Net deferred tax assets of $7.9 million and $2.6 million at December 31, 2003 and 2002, respectively, are reflected in the accompanying Consolidated Statements of Financial Condition in other assets. There were no valuation allowances at December 31, 2003 or 2002. Temporary differences that give rise to the deferred tax assets (liabilities) include the following: At December 31, -------------------- 2003 2002 -------------------- (dollars in thousands) Provision for loan losses $ 8,028 $ 4,439 Accumulated depreciation (453) (1,622) Intangibles 49 86 Writedowns on other real estate owned 113 130 Deferred compensation accrual 234 151 Other 188 522 - ------------------------------------------------------------------- 8,159 3,706 Deferred taxes (payable) receivable on investment securities available for sale (244) (1,133) - ------------------------------------------------------------------- Net deferred tax asset $ 7,915 $ 2,573 =================================================================== 8. SHAREHOLDERS' EQUITY On August 29, 2003, Southwest effected a two-for-one stock split of its common stock in the from of a dividend of 6,121,521 shares. 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 these stock splits. In April 2001, Southwest's Board of Directors (the "Board") authorized the repurchase of up to 5%, or 585,000 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. Additional one year programs were authorized by the Board in April 2002 and March 2003 with the Board authorizing the repurchase of another 5%, or approximately 572,000 and 560,000 shares, respectively. The additional repurchases were also to 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, 2004, 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 $36.67. 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 600,000 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, 2003, 80,486 new shares had been issued and 55,780 treasury shares had been reissued by these plans. 9. CAPITAL REQUIREMENTS Southwest, Stillwater National and SNB Wichita are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain 41 mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Southwest's, Stillwater National's, and SNB Wichita's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Southwest, Stillwater National, and SNB Wichita must meet specific capital guidelines that involve quantitative measures of Southwest's, Stillwater National's, and SNB Wichita's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Southwest's, Stillwater National's, and SNB Wichita'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, Stillwater National, and SNB Wichita 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, 2003 and 2002, that Southwest, Stillwater National, and SNB Wichita met all capital adequacy requirements to which they are subject. As of December 31, 2003 and 2002, 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. SNB Wichita began operating in November 2003 and has not yet received notification from the Office of Thrift Supervision concerning analysis of SNB Wichita's capital position. Southwest's, Stillwater National's and SNB Wichita'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, 2003: Total Capital (to risk-weighted assets) Southwest $195,254 14.90% N/A N/A $ 104,828 8.00% Stillwater National 155,596 12.00 $ 129,651 10.00% 103,720 8.00 SNB Wichita 5,940 71.02 836 10.00% 669 8.00 Tier I Capital (to risk-weighted assets) Southwest 145,906 11.13 N/A N/A 52,414 4.00 Stillwater National 139,835 10.79 77,790 6.00 51,860 4.00 SNB Wichita 5,835 69.73 502 6.00 335 4.00 Tier I Leverage (to average assets) Southwest 145,906 9.32 N/A N/A 62,627 4.00 Stillwater National 139,835 8.96 78,072 5.00 62,458 4.00 SNB Wichita 5,835 119.64 244 5.00 195 4.00 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
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, 42 Stillwater National would be under capitalized. Stillwater National's maximum amount of dividends available for payment totaled approximately $25.9 million at December 31, 2003. Dividends declared by Stillwater National for the years ended December 31, 2003, 2002, and 2001 did not exceed the threshold requiring regulatory approval. The same dividend restrictions apply to SNB Wichita with approval required from the Office of Thrift Supervision. SNB Wichita had zero dividends available for payment at December 31, 2003. 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 $1.4 million, $1.1 million, and $1.0 million in 2003, 2002, and 2001, 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, 2003 follow: 2004 $1,255,172 2005 1,190,158 2006 1,085,755 2007 826,017 2008 703,052 Thereafter 1,750,403 The total rental expense was $1.3 million, $1.1 million, and $1.0 million in 2003, 2002, and 2001, 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. SUBORDINATED DEBENTURES - The fair value 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. 43 The carrying values and estimated fair values of Southwest's financial instruments follow:
At December 31, 2003 At December 31, 2002 ----------------------------- ------------------------------ Carrying Fair Carrying Fair Values Values Values Values ----------------------------- ----------------------------- (dollars in thousands) Cash and cash equivalents $ 33,981 $ 33,981 $ 34,847 $ 34,847 Investment securities: Held to maturity 15,916 16,144 31,154 32,000 Available for sale 177,074 177,074 148,476 148,476 FRB and FHLB stock 11,276 11,276 9,059 9,059 Total loans 1,292,988 1,297,256 1,089,224 1,092,325 Accrued interest receivable 11,321 11,321 9,283 9,283 Deposits 1,204,125 1,214,780 1,021,757 1,028,689 Accrued interest payable 3,375 3,375 4,498 4,498 Other liabilities 4,410 4,410 2,858 2,858 Short-term borrowings 183,850 183,850 199,282 199,282 Subordinated Debentures 72,180 72,953 25,787 25,952 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, ------------------------------ 2003 2002 ------------------------------ (dollars in thousands) Commitments to extend commercial and real estate mortgage credit $475,451 $413,098 Standby and commercial letters of credit 7,151 5,670 - -------------------------------------------------------------------------------------------------- Total $482,602 $418,768 - --------------------------------------------------------------------------------------------------
A loan commitment is a binding contract to lend up to a maximum amount for a specified period of time provided there is no violation of any financial, economic or other terms of the contract. A standby letter of credit obligates Southwest to honor a financial commitment to a third party should 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. 44 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, the Office of the Comptroller of the Currency , and the Office of Thrift Supervision routinely examine Southwest's, Stillwater National's, and SNB Wichita'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, Stillwater National's, and SNB Wichita'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, 2003, 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 $1.3 million. 15. SUPPLEMENTAL CASH FLOWS INFORMATION For the Years Ended December 31, --------------------------------- 2003 2002 2001 --------------------------------- (dollars in thousands) Cash paid for interest $29,734 $29,662 $52,574 Cash paid for taxes on income 8,681 6,600 4,650 Loans transferred to other real estate owned 2,920 937 362 16. OPERATING SEGMENTS Southwest operates three principal segments: Oklahoma banking, Other states banking, and loans originated for sale in the secondary market ("Secondary market"). The Oklahoma banking segment consists of three operating units that provide lending and deposit services to customers in the state of Oklahoma. The Other states banking segment consists of two operating units that provide lending and deposit services to customers in the states of Texas and Kansas. The Secondary market segment consists of two operating units that provide government-guaranteed student lending services to post-secondary students in Oklahoma and several other states and residential mortgage lending services to customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is included in Other operations. The primary purpose of this unit is to manage Southwest's overall liquidity needs and interest rate risk. Each segment borrows funds from and provides funds to the funds management unit as needed to support their operations. Southwest identifies reportable segments by type of service provided and geographic location. Operating results are adjusted for intercompany loan participations and borrowings, allocated service costs, and management fees. The accounting policies of each reportable segment are the same as those of Southwest as described in Footnote 1. Expenses for consolidated back-office operations are allocated to operating segments based on estimated uses of those services. General overhead expenses such as executive administration, accounting and internal audit are allocated based on the direct expense and/or deposit and loan volumes of the operating segment. Income tax expense for the operating segments is calculated essentially at the statutory rate. The parent company records the tax expense or benefit necessary to reconcile to the consolidated unit. 45 The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2001 --------------------------------------------------------------- Oklahoma Other States Secondary Other Total Banking Banking Market Operations Company --------------------------------------------------------------- (Dollars in thousands) Net interest income $ 35,329 $ -- $ 3,751 $ 2,381 $ 41,461 Provision for loan losses 3,873 -- -- 127 4,000 Other income 5,058 -- 2,752 3,003 10,813 Other expenses 24,663 -- 2,889 3,613 31,165 - ------------------------------------------------------------------------------------------------- Income before taxes 11,851 -- 3,614 1,644 17,109 Taxes on income 3,817 -- 1,270 270 5,357 - ------------------------------------------------------------------------------------------------- Net income $ 8,034 -- $ 2,344 $ 1,374 $ 11,752 ================================================================================================= Fixed asset expenditures $ 1,967 $ -- $ 13 $ 660 $ 2,640 Total assets at period end 828,441 -- 103,327 339,513 1,271,281
For the Year Ended December 31, 2002 --------------------------------------------------------------- Oklahoma Other States Secondary Other Total Banking Banking Market Operations Company --------------------------------------------------------------- (Dollars in thousands) Net interest income $ 40,141 $ 283 $ 4,763 $ 630 $ 45,817 Provision for loan losses 4,684 76 -- 683 5,443 Other income 5,840 -- 3,187 3,691 12,718 Other expenses 25,497 440 3,320 4,062 33,319 - ------------------------------------------------------------------------------------------------- Income before taxes 15,800 (233) 4,630 (424) 19,773 Taxes on income 5,192 (76) 1,646 (408) 6,354 - ------------------------------------------------------------------------------------------------- Net income $ 10,608 (157) $ 2,984 $ (16) $ 13,419 ================================================================================================= Fixed asset expenditures $ 825 $ 211 $ 3 $ 1,322 $ 2,361 Total assets at period end 889,965 92,498 134,556 233,535 1,350,554
For the Year Ended December 31, 2003 --------------------------------------------------------------- Oklahoma Other States Secondary Other Total Banking Banking Market Operations Company --------------------------------------------------------------- (Dollars in thousands) Net interest income $ 41,997 $ 8,475 $ 9,679 $ (4,663) $ 55,468 Provision for loan losses 6,271 2,251 -- -- 8,522 Other income 6,642 408 4,206 3,244 14,500 Other expenses 25,617 3,880 5,085 3,866 38,448 - ------------------------------------------------------------------------------------------------- Income before taxes 16,731 2,752 8,800 (5,285) 22,998 Taxes on income 6,040 936 3,240 (2,110) 8,106 - ------------------------------------------------------------------------------------------------- Net income $ 10,691 1,816 $ 5,560 $ (3,175) $ 14,892 ================================================================================================= Fixed asset expenditures $ 538 $ 1,548 $ 89 $ 1,348 $ 3,523 Total assets at period end 878,627 230,977 220,346 250,775 1,580,725
46 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, --------------------------- 2003 2002 --------------------------- (dollars in thousands) STATEMENTS OF FINANCIAL CONDITION ASSETS: Cash and due from banks $ 28,209 $ 1,290 Investment in subsidiary bank 140,475 117,984 Investments in other subsidiaries 8,001 774 Investment securities, available for sale 2,875 906 Loans, net of allowance for loan losses of $0 (2003) and $0 151 93 (2002) Other assets 5,467 2,196 - ---------------------------------------------------------------------------------------- Total $185,178 $123,243 - ---------------------------------------------------------------------------------------- LIABILITIES: Subordinated debentures $ 72,180 $ 25,787 Other liabilities 3,063 1,084 SHAREHOLDERS' EQUITY: Common stock and related accounts 109,935 96,372 - ---------------------------------------------------------------------------------------- Total $185,178 $123,243 - ----------------------------------------------------------------------------------------
For the Years Ended December 31, ---------------------------------------- 2003 2002 2001 ---------------------------------------- (dollars in thousands) STATEMENTS OF OPERATIONS INCOME: Cash dividends from subsidiaries $ 3,893 $ 4,472 $ 3,872 Other income 1,023 375 - Investment income 133 43 51 Interest and fees on loans 15 (7) - Security gains (losses) - 1 6 - ---------------------------------------------------------------------------------------------- Total income 5,064 4,884 3,929 EXPENSE: Interest on subordinated debentures 3,079 2,398 2,398 Provision for loan losses - 146 - Other expense 2,015 957 456 - ---------------------------------------------------------------------------------------------- Total expense 5,094 3,501 2,854 - --------------------------------------------------------------------------------------------- Total income (loss) before taxes and equity in undistributed income of subsidiaries (30) 1,383 1,075 Taxes on income (1,488) (1,137) (1,030) - ---------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 1,458 2,520 2,105 Equity in undistributed income of subsidiaries 13,434 10,899 9,647 - ---------------------------------------------------------------------------------------------- Net income $14,892 $13,419 $11,752 - ----------------------------------------------------------------------------------------------
47
For the Years Ended December 31, --------------------------------------------------- 2003 2002 2001 --------------------------------------------------- (dollars in thousands) STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES: Net income $ 14,892 $ 13,419 $ 11,752 Equity in undistributed income of subsidiaries (13,434) (10,899) (9,647) Provision for loan losses - 146 - Other, net 47 (40) 72 - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,505 2,626 2,177 - --------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Available for sale securities: Purchases (2,900) (400) (1,774) Sales - - 399 Maturities 900 409 893 Loans originated and principal repayments, net (58) (239) - Capital contribution to Bank (11,000) - (399) Capital contribution to other subsidiaries (7,393) - - - --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (20,451) (230) (881) - --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings - - (223) Net proceeds from issuance of common stock 2,318 1,509 597 Proceeds from issuance of subordinated debentures 46,393 - - Purchases of treasury stock - (1,245) (647) Cash dividends paid on common stock (2,846) (2,353) (1,787) - --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 45,865 (2,089) (2,060) - --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 26,919 307 (764) Cash and cash equivalents, Beginning of year 1,290 983 1,747 - --------------------------------------------------------------------------------------------------------- End of year $ 28,209 $ 1,290 $ 983 - ---------------------------------------------------------------------------------------------------------
48 BOARD OF DIRECTORS OF SOUTHWEST BANCORP, INC. AND STILLWATER NATIONAL BANK & TRUST COMPANY Robert B. Rodgers Chairman of the Board Owner, Bob Rodgers Motors LLC Rick Green Vice Chairman of the Board President and Chief Executive Officer, Southwest and Stillwater National James E. Berry II Owner, Shading Concepts Tom D. Berry Auctioneer, Real Estate Broker, Oil & Gas Exploration, Investments Joe Berry Cannon Professor of Management, Oral Roberts University School of Business John Cohlmia * Vice President, NAI Harrison Levy Company J. Berry Harrison Oklahoma State Senator and Rancher Erd M. Johnson Petroleum Engineer & Operating Partner, Johnson Oil Partnership Betty B. Kerns Owner, Betty Kerns & Associates David P. Lambert President, Lambert Construction Company Linford R. Pitts President, Stillwater Transfer & Storage Co. Russell W. Teubner Founder, Host Bridge Technology *Director of Stillwater National Bank & Trust Company only BOARD OF DIRECTORS OF SNB BANK OF WICHITA Robert B. Rodgers Chairman of the Board President, Bob Rodgers Motor Company Rick Green Vice Chairman of the Board President and Chief Executive Officer, Southwest and Stillwater National Kerby E. Crowell, CPA Executive Vice President and Chief Financial Officer, Southwest and Stillwater National John M. Frazee President, SNB Bank of Wichita Anthony W. Martin Owner, Martin & Frankenberry D.D.S.P.N. OFFICERS OF SOUTHWEST BANCORP, INC. Rick Green President and Chief Executive Officer Kerby E. Crowell, CPA Executive Vice President and Chief Financial Officer Kay W. Smith Senior Vice President and Comptroller SENIOR MANAGEMENT OF STILLWATER NATIONAL BANK & TRUST COMPANY Rick Green President and Chief Executive Officer Kerby E. Crowell, CPA Executive Vice President and Chief Financial Officer Jerry Lanier Executive Vice President and Chief Lending Officer Kimberly G. Sinclair Executive Vice President and Chief Administrative Officer Chuck Westerheide Executive Vice President and Treasurer Steve Gobel Executive Vice President Rex E. Horning President, Stillwater Division Leonard M. McLaughlin President, Texas Division Joseph P. Root President, Central Oklahoma Division Melanie Pitchford Vice President, Human Resources SENIOR MANAGEMENT OF SNB BANK OF WICHITA John M. Frazee President INDEPENDENT AUDITORS Ernst & Young LLP 2121 San Jacinto Street Dallas, TX 75201 SPECIAL COUNSEL Kennedy, Baris & Lundy, L.L.P. 4701 Sangamore Road Suite P-15 Bethesda, MD 20816 GENERAL COUNSEL Hert, Baker & Koemel 222 E. 7th Avenue Stillwater, OK 74074 TRANSFER AGENTS AND REGISTRARS Common Stock-OKSB Computershare Investor Services, LLC 2 North LaSalle St. Chicago, IL 60602 Trust Preferred Securities-OKSBO U.S. Bank Corporate Trust Services P.O. Box 778 Boston, MA 02102-0778 ANNUAL MEETING The 2004 Annual Meeting of Shareholders will be held on April 22, 2004 at 11:00 a.m. in the Auditorium (Room 215) at the Stillwater Public Library, 1107 S. Duck, Stillwater, Oklahoma. ANNUAL REPORT ON FORM 10-K: Copies of Southwest's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission, may be obtained by shareholders as of the record date for the Annual Meeting at no charge by writing to Kerby E. Crowell, Chief Financial Officer, Southwest Bancorp, Inc., P.O. Box 1988, Stillwater, Oklahoma 74076 and are available via the Internet at www.oksb.com. 49 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 FACILITY WATERFORD BRANCH P.O. Box 1988 P.O. Box 1988 6301 Waterford Blvd., Suite 101 608 S. Main Street 308 S. Main Street Oklahoma City, Oklahoma 73118 Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 405-427-4000 405-372-2230 405-372-2230 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 OSU CAMPUS BRANCH BANK 5300 Town and Country Blvd. P.O. Box 1988 P.O. Box 1988 Suite 100 1624 Cimarron Plaza 1102 W. Hall of Fame Avenue Frisco, Texas 75034 Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74074 972-624-2900 405-372-2230 405-372-2230 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
WEBSITE ADDRESSES SNB BANK OF WICHITA Stillwater National Bank & Trust Company: www.banksnb.com LOCATION Texas Division, Stillwater National: www.snbdallas.com 8415 E. 21st Street North SNB Bank of Wichita: www.snbwichita.com Suite 150 Southwest Bancorp, Inc.: www.oksb.com Wichita Kansas 67206 316-315-1600
STOCK INFORMATION NASDAQ National Market Symbols: Common Stock - OKSB Trust Preferred Securities - OKSBO Number of common shareholders of record at February 27, 2004: 1,800 The following table sets forth the common stock dividends declared for each quarter during 2003 and 2002 and the range of high and low closing trade prices for the common stock for those periods.
2003 2002 ---------------------------------------------------------------------- Dividend Dividend High Low Declared High Low Declared ---------------------------------------------------------------------- For the Quarter Ending: March 31 $13.36 $11.07 $0.063 $10.25 $ 8.81 $0.055 June 30 13.71 11.18 0.063 13.62 10.08 0.055 September 30 17.83 13.63 0.063 13.51 11.90 0.055 December 31 18.91 14.37 0.063 13.49 10.52 0.055
50 EX-21 4 ex21.txt EX 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 OKSB Statutory Trust I Connecticut SBI Capital Trust II Delaware Business Consulting Group, Inc. Oklahoma Healthcare Strategic Support, Inc. Oklahoma SNB Bank of Wichita United States Stillwater National Bank & Trust Company United States Cash Source, Inc.* Oklahoma CRK Properties, Inc.* Oklahoma BNS, Inc.** Oklahoma SNB Insurance Agency, 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 5 ex23.txt EX 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS 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 February 2, 2004, incorporated by reference in this Annual Report on Form 10-K of Southwest Bancorp, Inc. for the year ended December 31, 2003. /s/ Ernst & Young LLP Dallas, Texas March 10, 2004 EX-24 6 ex24.txt EX 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, 2003, 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 26, 2004 - ----------------------------------- Jim Berry, Director /s/ Thomas D. Berry February 26, 2004 - ----------------------------------- Thomas D. Berry, Director /s/ Joe Berry Cannon February 26, 2004 - ----------------------------------- Joe Berry Cannon, Director /s/ J. Berry Harrison February 26, 2004 - ----------------------------------- J. Berry Harrison, Director /s/ Erd M. Johnson February 26, 2004 - ----------------------------------- Erd M. Johnson, Director /s/ Betty B. Kerns February 26, 2004 - ----------------------------------- Betty B. Kerns, Director /s/ David P. Lambert February 26, 2004 - ----------------------------------- David P. Lambert, Director /s/ Linford R. Pitts February 26, 2004 - ----------------------------------- Linford R. Pitts, Director /s/ Robert B. Rodgers February 26, 2004 - ----------------------------------- Robert B. Rodgers, Director /s/ Russell W. Teubner February 26, 2004 - ----------------------------------- Russell W. Teubner, Director EX-31 7 ex31a.txt EX 31A EXHIBIT 31(a) Rule 13a-14(a)/15d-14(a) Certifications I, Rick Green, certify that: 1. I have reviewed this annual report on Form 10-K of Southwest Bancorp, Inc.; 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) N/A c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/ Rick Green ------------------- ------------------------------------- Rick Green President and Chief Executive Officer (Principal Executive Officer) EX-31 8 ex31b.txt EX 31B EXHIBIT 31(b) Rule 13a-14(a)/15d-14(a) Certifications I, Kerby Crowell, certify that: 1. I have reviewed this annual report on Form 10-K of Southwest Bancorp, Inc.; 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) N/A c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the in the registrant's internal control over financial reporting. [Formatting on 5a and 5b were changed, but it does not appear the change has been marked.] Date: March 12, 2004 /s/ Kerby Crowell ------------------- ----------------------------------------- Kerby Crowell Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) EX-32 9 ex32a.txt EX 32A EXHIBIT 32(a) 18 U.S.C. Section 1350 Certifications 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 annual period ended December 31, 2003, 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 12, 2004 -------------------------------------- ----------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) EX-32 10 ex32b.txt EX 32B EXHIBIT 32(b) 18 U.S.C. Section 1350 Certifications 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 annual period ended December 31, 2003, 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 12, 2004 ----------------------------------------- ---------------- Kerby Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----