-----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, K0AkKM0sDqY+AGJkJBXqskeKp1PBPsPrcLd5Z9CmG/LnNyfhKOhBGofbfojPIRZt tt2zv8VfIFdyNP7PbNoHxQ== 0001125282-06-001645.txt : 20060315 0001125282-06-001645.hdr.sgml : 20060315 20060315143845 ACCESSION NUMBER: 0001125282-06-001645 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060315 DATE AS OF CHANGE: 20060315 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: 06687822 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 b412241_10k.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, 2005 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 incorporation or organization) Identification No.) 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [X] NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO* Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO The registrant's Common Stock is traded on the NASDAQ National Market under the symbol OKSB. The aggregate market value of approximately 13,035,316 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2005, the last day of the registrant's most recently completed second fiscal quarter, was approximately $267.0 million based on the closing sales price of $20.48 per share of the registrant's Common Stock on that date. Solely for purposes of this calculation, it is assumed that directors, officers, and 5% stockholders of the registrant (other than institutional investors) are affiliates. As of the close of business on March 3, 2006, 14,110,382 shares of the registrant's Common Stock were outstanding. Documents Incorporated by Reference Part III: Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 27, 2006 (the "Proxy Statement"). * The registrant is required to file reports pursuant to Section 13 of the Act. SOUTHWEST BANCORP, INC. INDEX Forward-Looking Statements ................................................ii Form 10-K Cross Reference Sheet ...........................................ii Southwest Bancorp, Inc. ...................................................iv About This Report .........................................................iv Five Year Summary of Selected Financial Data .............................. 1 Securities Listing, Prices, and Dividends ................................. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 4 Controls and Procedures ...................................................23 Reports of Independent Registered Public Accounting Firm ..................24 Consolidated Financial Statements .........................................26 Notes to the Consolidated Financial Statements ............................31 Other Material Required by Form 10-K ......................................57 Description of Business ...............................................57 Board of Directors ....................................................69 Executive Officers ....................................................70 Risk Factors ..........................................................74 Properties ............................................................80 Exhibits, Financial Statement Schedules ...............................82 Signatures ............................................................84 i FORWARD-LOOKING STATEMENTS Southwest Bancorp, Inc. ("Southwest") makes forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include: statements of Southwest's goals, intentions, and expectations; estimates of risks and of future costs and benefits; expectations regarding future financial performance of Southwest and its operating segments; assessments of loan quality, probable loan losses, and the amount and timing of loan payoffs; liquidity, contractual obligations, off-balance sheet risk, and 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, market behavior, 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. Please see the discussion of Risk Factors on page 74 and Critical Accounting Policies on page 21. SOUTHWEST BANCORP, INC. FORM 10-K CROSS REFERENCE SHEET OF MATERIAL INCORPORATED BY REFERENCE The following table shows the location in this Annual Report on Form 10-K or the accompanying Proxy Statement of the information required to be disclosed by the United States Securities and Exchange Commission ("SEC") Form 10-K. Where indicated below, information has been incorporated by reference in this Report from the Proxy Statement that accompanies it. Other portions of the Proxy Statement are not included in this Report. This Report is not part of the Proxy Statement. References are to pages in this report unless otherwise indicated.
ITEM OF FORM 10-K LOCATION --------------------------------------------- --------------------------------------------------- PART I Item 1. Business "Forward-Looking Statements: on page ii, "Southwest Bancorp, Inc." and "About this Report" on page iv, and "Business" on pages 57 through 73. Item 1A. Risk Factors "Risk Factors" on pages 74 through 78 Item 1B. Unresolved Staff Comments Not applicable. The registrant did not receive any comments from the staff of the Securities and Exchange Commission regarding its periodic or current reports within the last 180 days of 2005. Item 2. Properties "Properties" on page 80. Item 3. Legal Proceedings Note 14 "Commitments and Contingencies" on page 50. Item 4. Submission of Matters to a Vote of Holders Not applicable. No matter was submitted to a Security vote of security holders during the fourth quarter of 2005. PART II Item 5. Market for Registrant's Common Equity, "Securities Listing, Prices, and Dividends" Related Stockholder Matters, and on pages 2 and 3. Issuer Purchases of Equity Securities Item 6. Selected Financial Data "Five Year Summary of Selected Financial Data" on pages 1 and 2.
ii
ITEM OF FORM 10-K LOCATION --------------------------------------------- --------------------------------------------------- Item 7. Management's Discussion and Analysis "Management's Discussion and Analysis of Of Financial Condition and Results of Financial Condition and Results of Operations" on Condition pages 4 through 22. Item 7A. Quantitative and Qualitative Disclosures The section titled "Asset/Liability Management About Market Risk Quantitative and Qualitative Disclosures about Market Risk" on pages 18 thru 20. Item 8. Financial Statements and Supplementary Pages 26 through 56. Data Item 9. Changes in and Disagreements with Not applicable. During the past two years or any Auditors on Accounting and Financial subsequent period there has been no change in or Disclosure reportable disagreement with the independent registered public accounting firm for Southwest or any of its subsidiaries. Item 9A. Controls and Procedures "Controls and Procedures" on page 23. Item 9B. Other Information Not applicable. The registrant reported all items required to be reported in a Form 8-K during the fourth quarter of 2005. PART III Item 10. Directors and Executive Officers of the The material labeled "Election of Directors" on registrant pages 2 through 5 of the Proxy Statement, "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17 of the Proxy Statement, and "Code of Ethics" on page 19 of the Proxy Statement is incorporated by reference in this Report. Information regarding executive officers is included under the caption "Executive Officers" on pages 70 through 73 of this Report. Item 11. Executive Compensation The material labeled "Director Compensation" on page 8 and the material labeled "Executive Compensation and Other Benefits," and "Stock Performance Comparisons" on pages 11 through 16 of the Proxy Statement is incorporated by reference in this Report. Item 12. Security Ownership of Certain The material labeled "Common Stock Owned by Beneficial Owners and Management and Directors and Executive Officers" and "Ownership Related Shareholder Matters of More than 5% of Southwest's Common Stock" on pages 9 and 10 of the Proxy Statement is incorporated by reference in this Report. Item 13. Certain Relationships and Related The material labeled "Certain Transactions" on Transactions page 17 of the Proxy Statement is incorporated by reference in this Report. Item 14. Principal Accounting Fees and Services The material labeled "Fees" on pages 17 and 18 of the Proxy Statement incorporated by reference in this Report. PART IV Item 15. Exhibits, Financial Statement Schedules "Exhibits, Financial Statement Schedules" on pages 82 and 83. SIGNATURES "Signatures" on page 84
iii SOUTHWEST BANCORP, INC. Southwest Bancorp, Inc. ("Southwest") is the financial holding company for the 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"). Through its subsidiaries, Southwest offers commercial and consumer lending, deposit and investment services, and specialized cash management, consulting and other financial services from offices in Oklahoma City, Stillwater, Tulsa, and Chickasha, Oklahoma; Austin, Dallas and San Antonio, Texas; and Kansas City and Wichita, Kansas, and on the Internet, through SNB DirectBanker(R). Southwest's strategic focus includes expansion in carefully selected geographic markets based upon a tested business model developed in connection with its expansion into Oklahoma City in 1982, Tulsa in 1985 and Dallas, Texas and Wichita, Kansas in 2002. This geographic expansion is based on identification of markets with concentrations of customers in Southwest's traditional areas of expertise: healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate lending, and makes use of traditional and specialized financial services. Southwest's banking philosophy has led to the development of a line of deposit, lending, and other financial products that respond to professional and commercial customer needs for speed, efficiency, and information, and complement more traditional banking products. Such specialized financial services include integrated document imaging and cash management services designed to help customers in the healthcare industry and other record-intensive enterprises operate more efficiently. 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. Southwest was organized in 1981 as the holding company for Stillwater National, which was chartered in 1894. Southwest became a public company in late 1993 with assets of approximately $434.0 million. At December 31, 2005, Southwest had total assets of $2.1 billion, deposits of $1.7 billion, and shareholders' equity of $170.4 million. ABOUT THIS REPORT This report comprises the entire 2005 Form 10-K, other than exhibits, as filed with the SEC. The 2005 annual report to shareholders, including this report, and the annual proxy materials for the 2006 annual meeting are being distributed together to shareholders. Copies of exhibits and additional copies of the Form 10-K can be obtained free of charge by writing to Kerby E. Crowell, Chief Financial Officer, Southwest Bancorp, Inc., P.O. Box 1988, Stillwater, OK 74076. This report is provided along with the annual proxy statement for convenience of use and to decrease costs, but is not part of the proxy materials. THE SEC HAS NOT APPROVED OR DISAPPROVED THIS REPORT OR PASSED UPON ITS ACCURACY OR ADEQUACY. iv FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA The following table presents Southwest's selected consolidated financial data for each of the five years in the period ended December 31, 2005. 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, ----------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2005 2004 2003 2002 2001 - -------------------------------------------------- ----------------------------------------------------------------------------- OPERATIONS DATA Interest income $ 137,344 $ 104,723 $ 84,079 $ 76,495 $ 90,400 Interest expense 52,238 32,246 28,611 30,678 48,939 ------------- ------------- ------------- ------------- ------------- Net interest income 85,106 72,477 55,468 45,817 41,461 Provision for loan losses 15,785 12,868 8,408 5,233 4,073 Gain on sales of loans and securities 4,915 3,185 4,139 3,498 3,346 Other income 12,491 10,900 10,361 9,220 7,467 Other expenses 51,873 44,526 38,562 33,529 31,092 ------------- ------------- ------------- ------------- ------------- Income before taxes 34,854 29,168 22,998 19,773 17,109 Taxes on income 13,840 10,539 8,106 6,354 5,357 ------------- ------------- ------------- ------------- ------------- Net income $ 21,014 $ 18,629 $ 14,892 $ 13,419 $ 11,752 ============= ============= ============= ============= ============= DIVIDENDS DECLARED Common stock $ 4,035 $ 3,380 $ 2,959 $ 2,533 $ 1,826 Ratio of total dividends declared to net income 19.20% 18.14% 19.87% 18.87% 15.52% PER SHARE DATA (1) Basic earnings per common share $ 1.60 $ 1.54 $ 1.26 $ 1.17 $ 1.03 Diluted earnings per common share 1.55 1.48 1.22 1.11 1.00 Common stock cash dividends 0.30 0.28 0.25 0.22 0.16 Book value per common share (2) 12.16 10.41 9.20 8.35 7.47 Weighted average common shares outstanding: Basic 13,165,642 12,060,842 11,798,810 11,490,166 11,386,258 Diluted 13,563,904 12,548,059 12,159,620 12,052,118 11,728,844 FINANCIAL CONDITION DATA (2) Investment securities $ 268,093 $ 220,051 $ 204,266 $ 188,689 $ 227,346 Total loans (3) 1,735,880 1,623,875 1,308,836 1,101,112 931,046 Interest-earning assets 2,006,578 1,845,401 1,514,314 1,292,232 1,160,478 Total assets 2,099,639 1,913,787 1,581,564 1,351,279 1,217,796 Interest-bearing deposits 1,433,265 1,316,320 1,036,793 885,812 777,600 Total deposits 1,657,820 1,500,058 1,204,125 1,021,757 904,796 Other borrowings 204,508 200,065 183,850 199,282 195,367 Subordinated debentures 46,393 72,180 72,180 25,787 25,787 Total shareholders' equity (4) 170,444 125,984 109,935 96,372 85,125 Mortgage servicing portfolio 133,470 125,353 124,366 107,733 91,120 SELECTED RATIOS Return on average assets 1.01% 1.03% 0.99% 1.05% 0.96% Return on average equity 13.78 15.80 14.59 14.94 14.87 Net interest margin 4.29 4.16 3.80 3.75 3.53 Efficiency ratio (5) 50.60 51.44 55.11 57.28 59.48 Average assets per employee (6) $ 5,448 $ 5,098 $ 4,513 $ 3,938 $ 3,919
1 SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31, ----------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2005 2004 2003 2002 2001 - -------------------------------------------------- ----------------------------------------------------------------------------- ASSET QUALITY RATIOS Allowance for loan losses to total loans (2) 1.37% 1.17% 1.15% 1.01% 1.18% Nonperforming loans to total loans (2)(7) 1.36 1.43 1.22 1.17 0.99 Allowance for loan losses to nonperforming 100.96 82.00 94.31 86.49 118.98 loans (2)(7) Nonperforming assets to total loans and other real estate owned (2)(8) 1.76 1.72 1.34 1.24 1.06 Net loan charge-offs to average total loans 0.63 0.58 0.36 0.50 0.49 CAPITAL RATIOS Average total shareholders' equity to average assets 7.34 6.51 6.75 7.04 6.44 Tier I capital to risk-weighted assets (2) 12.95 10.88 11.13 10.38 11.15 Total capital to risk-weighted assets (2) 14.21 13.92 14.90 11.42 12.34 Leverage ratio (2) 10.24 8.61 9.32 8.99 8.84
(1) Except as otherwise noted, all share and per share information in this report 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 repurchases of common shares in 2001, 2002 and 2005. 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 full-time equivalent 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. SECURITIES LISTING, PRICES, AND DIVIDENDS STOCK LISTING Common shares of Southwest Bancorp, Inc. are traded on the National Association of Security Dealers (NASDAQ) National Market under the symbol OKSB. TRANSFER AGENT AND REGISTRAR Computershare Investor Services, LLC 2 North LaSalle St. Chicago, IL 60602 2 RECENT STOCK PRICES AND DIVIDENDS Shareholders received quarterly cash dividends totaling $3.8 million in 2005 and $3.3 million in 2004. Regular dividends have been declared and paid every year since Southwest was organized in 1981. Southwest has increased its dividends per share each year since going public in 1993. The dividend amount is established by the Board of Directors each quarter. In making its decision on dividends, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. The ability of Southwest to pay dividends depends upon dividend payments from its subsidiaries. For information regarding the ability of Stillwater National and SNB Wichita to pay dividends to Southwest and the restrictions on bank dividends under federal banking laws, see "Note 9. Capital Requirements" to the Consolidated Financial Statements on page 47 of this report. In June 2005, Southwest completed an offering of 2.4 million shares of common stock resulting in net proceeds after underwriting discounts and offering expenses of approximately $39.5 million. Stifel Nicolaus & Co., Edward Jones & Co., Friedman Billings Ramsey, Keefe Bruyette & Woods, Inc. and SunTrust Robinson Humphrey served as the underwriters in the offering. Shares issued under the employee stock purchase plan, which commenced on January 1, 1996, totaled 3,530 in 2005 and 3,642 in 2004, while issuances pursuant to the stock option plans were 174,262 and 140,726 in the respective years. Southwest has a stock repurchase program that permits the repurchase of up to 5% (approximately 700,000 shares) of Southwest's 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. The share repurchases are expected to be made primarily on the open market from time to time until April 1, 2008, 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, and other factors. This program, which has been publicly announced, replaced a publicly announced program that expired on March 31, 2005. During 2005, 690,696 shares were repurchased under a selling shareholder agreement. As of March 3, 2006, there were approximately 3,700 holders of record of Southwest's common stock. The following table sets forth the common stock dividends declared for each quarter during 2005 and 2004, and the range of high and low closing trade prices for the common stock for those periods.
2005 2004 ------------------------------------ ------------------------------------ DIVIDEND Dividend HIGH LOW DECLARED High Low Declared ---------- ---------- ---------- ---------- ---------- ---------- For the Quarter Ending: March 31 $ 25.45 $ 17.11 $ 0.075 $ 18.94 $ 16.11 $ 0.07 June 30 20.82 16.78 0.075 18.75 15.75 0.07 September 30 23.80 20.01 0.075 22.21 17.70 0.07 December 31 24.25 18.36 0.075 27.10 21.50 0.07
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In 2005, 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 the result of increased yields on portfolio loans (total loans excluding loans held for sale), loan growth, a focus on careful management of interest margins and funding, and increased noninterest income. o Net income for 2005 was $21.0 million, up from $18.6 million in 2004 and $14.9 million in 2003. o Diluted earnings per common share increased to $1.55 in 2005, compared to $1.48 in 2004, and $1.22 in 2003. o Total assets at year-end 2005 increased 10%, ending the year at $2.10 billion compared to $1.91 billion at year-end 2004, and $1.58 billion at year-end 2003. o Total loans grew to $1.74 billion at December 31, 2005, compared to $1.62 billion at December 31, 2004, and $1.31 billion at December 31, 2003. o Total shareholders' equity at year-end 2005 had increased 35% to $170.4 million compared to $126.0 million for 2004 and $109.9 million for 2003. In late June, Southwest completed a public offering of its common stock to provide funds for future loan growth. The difference between the percentage growth in net income and growth in earnings per share reflects the effects of the additional shares issued in this offering. RESULTS OF OPERATIONS For the year ended December 31, 2005, Southwest reported net income of $21.0 million, a $2.4 million, or 13%, increase over the $18.6 million earned in 2004. Basic earnings per common share increased by 4% to $1.60 per share for 2005, from $1.54 per share for 2004. Diluted earnings per common share increased by 5% to $1.55 per share for 2005 from $1.48 per share for 2004. Increased yields on portfolio loans and growth in total loans were the primary factors contributing to Southwest's performance in 2005. In an increasing interest rate environment, Southwest was able to price its loans, deposits, and other borrowings to result in an increase in net interest margin from 4.16% in 2004 to 4.29% in 2005. For the year ended December 31, 2004, Southwest reported net income of $18.6 million, a $3.7 million, or 25%, increase over the $14.9 million earned in 2003. Basic earnings per common share increased by 22% to $1.54 per share for 2004, from $1.26 per share for 2003. Diluted earnings per common share increased by 21% to $1.48 per share for 2004 from $1.22 per share for 2003. These factors are discussed in more detail in the sections that follow. 4 SUMMARY OF ANNUAL CHANGES IN SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial data for the years 2005, 2004, and 2003, and the annual changes between those years.
(Dollars in thousands, except per share 2005 CHANGE 2004 Change 2003 Change data) 2005 FROM 2004 2004 From 2003 2003 From 2002 - ---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS DATA Interest income $ 137,344 $ 32,621 $ 104,723 $ 20,644 $ 84,079 $ 7,584 Interest expense 52,238 19,992 32,246 3,635 28,611 (2,067) ------------ ------------ ------------ ------------ ------------ ------------ Net interest income 85,106 12,629 72,477 17,009 55,468 9,651 Provision for loan losses 15,785 2,917 12,868 4,460 8,408 3,175 Gain on sales of loans and securities 4,915 1,730 3,185 (954) 4,139 641 Other income 12,491 1,591 10,900 539 10,361 1,141 Other expenses 51,873 7,347 44,526 5,964 38,562 5,033 ------------ ------------ ------------ ------------ ------------ ------------ Income before taxes 34,854 5,686 29,168 6,170 22,998 3,225 Taxes on income 13,840 3,301 10,539 2,433 8,106 1,752 ------------ ------------ ------------ ------------ ------------ ------------ Net income $ 21,014 $ 2,385 $ 18,629 $ 3,737 $ 14,892 $ 1,473 ============ ============ ============ ============ ============ ============ PER SHARE DATA Basic earnings per common share $ 1.60 $ 0.06 $ 1.54 $ 0.28 $ 1.26 $ 0.09 Diluted earnings per common share 1.55 0.07 1.48 0.26 1.22 0.11 FINANCIAL CONDITION DATA - AVERAGES Investment securities $ 245,086 $ 30,098 $ 214,988 $ 23,712 $ 191,276 $ (16,739) Total loans 1,734,501 206,566 1,527,935 258,719 1,269,216 256,729 Interest-earning assets 1,983,337 239,351 1,743,986 282,402 1,461,584 238,418 Total assets 2,075,781 265,857 1,809,924 298,185 1,511,739 235,795 Interest-bearing deposits 1,433,013 252,043 1,180,970 159,655 1,021,315 159,156 Total deposits 1,638,511 283,175 1,355,336 194,960 1,160,376 179,816 Other borrowings 209,103 (43,028) 252,131 51,658 200,473 34,728 Subordinated debentures 58,686 (13,494) 72,180 30,138 42,042 16,255 Total shareholders' equity 152,454 34,542 117,912 15,866 102,046 12,201 SELECTED RATIOS Return on average assets 1.01% (0.02)% 1.03% 0.04% 0.99% (0.06)% Return on average equity 13.78 (2.02) 15.80 1.21 14.59 (0.35) Net interest margin 4.29 0.13 4.16 0.36 3.80 0.05 ASSET QUALITY RATIOS Allowance for loan losses to total loans 1.37% 0.20% 1.17% 0.02% 1.15% 0.14% Nonperforming loans to total loans 1.36 (0.07) 1.43 0.21 1.22 0.05 Allowance for loan losses to nonperforming loans 100.96 18.96 82.00 (12.31) 94.31 7.82 Nonperforming assets to total loans and other real estate 1.76 0.04 1.72 0.38 1.34 0.10 Net loan charge-offs to average total loans 0.63 0.05 0.58 0.22 0.36 (0.14)
5 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 83% of total revenue in 2005. Net interest margin is net interest income as a percentage of average earning assets for the period. Net interest income and net interest margin increase or decrease as a result of changes in the levels of interest rates, the volume and the mix of earning assets and interest-bearing liabilities, and the percentage of interest-earning assets funded by noninterest-bearing funding sources. Net interest income for 2005 was $85.1 million, an increase of $12.6 million, or 17%, from the $72.5 million earned in 2004. The net interest margin was 4.29% for the year ended December 31, 2005, an increase of thirteen basis points from 2004. The 2005 increase in net interest income and net interest margin from 2004 is the result of the increase in interest-earning assets, the increase in net interest margin due to the increasing interest rate environment experienced during 2005, and an increased use of noninterest-bearing funding. Please see the discussion of Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk on pages 18 through 20 for additional information concerning net interest income. The table on the next 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 deposits except for 2005 when the percentage of investment securities increased due to the investment of proceeds of the second quarter common stock offering and the percentage of loans took a slight downturn. 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. 6 AVERAGE BALANCES, YIELDS & RATES
For the Year Ended December 31, ---------------------------------------------------------------------------------- 2005 2004 ---------------------------------------- ---------------------------------------- AVERAGE YIELD/ Average Yield/ (Dollars in thousands) BALANCE INTEREST RATE(1) Balance Interest Rate(1) - ----------------------------------------- ----------- ----------- -------------- ----------- ----------- -------------- ASSETS Total loans and leases $ 1,734,501 $ 128,011 7.38% $ 1,527,935 $ 96,832 6.34% Investment securities 245,086 9,211 3.76 214,988 7,881 3.67 Other interest-earning assets 3,750 122 3.25 1,063 10 0.94 ----------- ----------- -------------- ----------- ----------- -------------- Total interest-earning assets 1,983,337 137,344 6.92 1,743,986 104,723 6.00 Other assets 92,444 65,938 ----------- ----------- Total assets $ 2,075,781 $ 1,809,924 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits $ 58,243 $ 267 0.46% $ 58,375 $ 291 0.50% Money market accounts 392,554 10,727 2.73 405,116 6,118 1.51 Savings accounts 8,631 21 0.24 7,819 19 0.24 Time deposits 973,585 29,767 3.06 709,660 15,350 2.16 ----------- ----------- -------------- ----------- ----------- -------------- Total interest-bearing deposits 1,433,013 40,782 2.85 1,180,970 21,778 1.84 Other borrowings (2) 209,103 7,343 3.51 252,131 5,979 2.37 Subordinated debentures 58,686 4,113 7.01 72,180 4,489 6.22 ----------- ----------- -------------- ----------- ----------- -------------- Total interest-bearing liabilities 1,700,802 52,238 3.07 1,505,281 32,246 2.14 ----------- -------------- ----------- -------------- Noninterest-bearing demand deposits 205,498 174,366 Other liabilities 17,027 12,365 Shareholders' equity 152,454 117,912 ----------- ----------- Total liabilities and shareholders' equity $ 2,075,781 $ 1,809,924 =========== =========== Net interest income $ 85,106 $ 72,477 =========== =========== Interest rate spread 3.85% 3.86% ============== ============== Net interest margin (3) 4.29% 4.16% ============== ============== Ratio of average interest- earning assets to average interest-bearing liabilities 116.61% 115.86% ============== ============== For the Year Ended December 31, ---------------------------------------- 2003 ---------------------------------------- AVERAGE YIELD/ (Dollars in thousands) BALANCE INTEREST RATE(1) - ----------------------------------------- ----------- ----------- -------------- ASSETS Total loans and leases $ 1,269,216 $ 76,115 6.00% Investment securities 191,276 7,954 4.16 Other interest-earning assets 1,092 10 0.92 ----------- ----------- -------------- Total interest-earning assets 1,461,584 84,079 5.75 Other assets 50,155 ----------- Total assets $ 1,511,739 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing demand deposits $ 56,011 $ 355 0.63% Money market accounts 336,274 5,237 1.56 Savings accounts 6,608 17 0.26 Time deposits 622,422 15,036 2.42 ----------- ----------- -------------- Total interest-bearing deposits 1,021,315 20,645 2.02 Other borrowings (2) 200,473 4,887 2.44 Subordinated debentures 42,042 3,079 7.22 ----------- ----------- -------------- Total interest-bearing liabilities 1,263,830 28,611 2.26 ----------- -------------- Noninterest-bearing demand deposits 139,061 Other liabilities 6,802 Shareholders' equity 102,046 ----------- Total liabilities and shareholders' equity $ 1,511,739 =========== Net interest income $ 55,468 =========== Interest rate spread 3.49% ============== Net interest margin (3) 3.80% ============== Ratio of average interest- earning assets to average interest-bearing liabilities 115.65% ==============
(1) Yields, interest rate spreads, and net interest margins are calculated using income recorded in accordance with accounting principles 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 average interest-earning assets. 7 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 changes in average volumes and changes in rates.
2005 VS. 2004 2004 vs. 2003 --------------------------------------------------------------------------- DUE TO CHANGE Due to Change INCREASE IN AVERAGE: Increase In Average: OR ----------------------- Or ----------------------- (Dollars in thousands) (DECREASE) VOLUME RATE (Decrease) Volume Rate - ----------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Interest earned on: Loans receivable (1) $ 31,179 $ 14,098 $ 17,081 $ 20,717 $ 16,206 $ 4,511 Investment securities 1,330 1,097 233 (73) 827 (900) Other interest-earning assets 112 56 56 - - - ---------- ---------- ---------- ---------- ---------- ---------- Total interest income 32,621 15,251 17,370 20,644 17,033 3,611 Interest paid on: Interest-bearing demand (24) (1) (23) (64) 12 (76) Money market accounts 4,609 (196) 4,805 881 1,054 (173) Savings accounts 2 2 - 2 3 (1) Time deposits 14,417 6,804 7,613 314 1,850 (1,536) Other borrowings 1,364 (1,149) 2,513 1,092 1,236 (144) Subordinated debentures (376) (903) 527 1,410 1,880 (470) ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense 19,992 4,557 15,435 3,635 6,035 (2,400) ---------- ---------- ---------- ---------- ---------- ---------- Net interest income $ 12,629 $ 10,694 $ 1,935 $ 17,009 $ 10,998 $ 6,011 ========== ========== ========== ========== ========== ==========
(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. Changes in rate-volume (changes in rate multiplied by changes in volume) are allocated between changes in rate and changes in volume in proportion to the relative contribution of each. Net interest income for 2004 was $72.5 million, an increase of $17.0 million, or 31%, from the $55.5 million earned in 2003. Net interest margin was 4.16% for the year ended December 31, 2004, an increase of thirty-six basis points from 2003. Interest rate spread, which represents the difference between the rate earned on interest-earning assets and the rates paid on interest-bearing liabilities, was 3.85% for 2005 compared to 3.86% for 2004 and 3.49% for 2003. Southwest has seen significant growth in noninterest-bearing deposit accounts which are an alternative funding source to interest-bearing deposits and other borrowings. The average balance of noninterest-bearing deposit accounts increased to $205.5 million in 2005 from $174.4 million in 2004 and $139.1 million in 2003. PROVISION AND ALLOWANCE 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 amount of the allowance is based on careful, continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan and lease portfolio. Southwest's systematic methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances and an unallocated allowance. See "Allowance for Loan Losses" in Note 1 to the Consolidated Financial Statements for a description of Southwest's allowance for loan losses methodology. Based upon this methodology, management established an allowance of $23.8 million, or 1.37% of total loans, at December 31, 2005 compared to an allowance of $19.0 million, or 1.17% of total loans, at December 31, 2004. This represents an increase in the allowance of $4.8 million, or 25%, from year-end 2004. 8 At December 31, 2005, total nonperforming loans were $23.6 million, or 1.36% of total loans, compared to $23.2 million, or 1.43% of total loans, at December 31, 2004. The government guaranteed portions of year-end nonperforming loans were $1.6 million for 2005 and $1.5 million for 2004. The allowance for loan losses equaled 100.96% of nonperforming loans at December 31, 2005 compared to 82.00% at December 31, 2004. During 2005, 2004, and 2003, the provisions for loan losses were $15.8 million, $12.9 million, and $8.4 million, respectively, while net charge-offs were $11.0 million, $8.9 million, and $4.6 million, respectively. 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 $62.2 million at December 31, 2005, compared to $25.6 million at December 31, 2004, $37.8 million at December 31, 2003 and $28.9 million at December 31, 2002. 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. Both the dollar amount and the percentage of the allowance to loans increased during 2005. The increase was primarily the result of increases in the balance of potential problem loans, the determination to calculate the required allowance on performing "special mention" loans (the lowest risk rating category, immediately below "pass" credits) separately from non-risk rated loans using credit risk factors, and increases in the loss ratios used for non-risk rated commercial real estate and commercial loans, nonperforming loans, increased allocations on impaired loans, and increases in portfolio loans. At December 31, 2005, the unallocated allowance totaled $2.1 million, a $1.0 million reduction from year-end 2004, and accounted for 9% of the total allowance, down from 16% the prior year. The unallocated allowance related primarily to changes in general economic conditions, including increasing interest rates, and the increase in relatively unseasoned loans as a result of portfolio loan growth. Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to Southwest, but that have not been identified as nonperforming or potential problem loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the unexpected deterioration of one or a few of such loans may cause a significant increase in nonperforming assets, may cause a significant increase in the provision for loan losses, nonperforming assets, and charge-offs. At the beginning of 2005, Southwest established a reserve for unfunded loan commitments as a liability on Southwest's statement of financial condition. The reserve formerly was presented within the allowance for loan losses; all affected prior periods have been restated. At December 31, 2005, this reserve for unfunded loan commitments was $1.9 million, an increase of $937,000, or 98%, from the amount previously included in the allowance for loan losses at December 31, 2004. The reserve is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. 9 The following table presents a five-year history for the allocation of the allowance for loan losses along with the percentage of total loans in each category.
At December 31, ------------------------------------------------------------------------------------------------- (Dollars in thousands) 2005 2004 2003 2002 2001 - -------------------------- ----------------- ----------------- ----------------- ----------------- ----------------- Real estate mortgage - Commercial $ 8,186 32% $ 6,430 32% $ 5,297 31% $ 4,136 34% $ 2,394 32% One to four family residential 584 5 724 5 319 6 491 9 541 11 Real estate construction 1,547 17 1,008 15 1,179 18 1,169 12 616 10 Commercial 10,922 22 6,898 24 6,451 27 3,753 32 6,199 34 Installment and consumer - Guaranteed student loans 189 22 175 22 105 16 59 11 46 10 Other 311 2 648 2 362 2 212 2 297 3 General 2,073 3,108 1,296 1,343 884 -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total $ 23,812 100% $ 18,991 100% $ 15,009 100% $ 11,163 100% $ 10,977 100% ======== ======= ======== ======= ======== ======= ======== ======= ======== =======
The following table analyzes Southwest's allowance for loan losses for the periods indicated.
For the Year Ended December 31, -------------------------------------------------------------- (Dollars in thousands) 2005 2004 2003 2002 2001 - -------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Balance at beginning of period $ 18,991 $ 15,009 $ 11,163 $ 10,977 $ 11,537 LOANS CHARGED-OFF: Real estate mortgage 2,872 812 717 777 445 Real estate construction 155 275 3 - 99 Commercial 8,587 8,382 3,915 4,248 4,364 Installment and consumer 406 565 442 371 621 ---------- ---------- ---------- ---------- ---------- Total charge-offs 12,020 10,034 5,077 5,396 5,529 ---------- ---------- ---------- ---------- ---------- RECOVERIES: Real estate mortgage 186 151 173 93 54 Real estate construction 1 - - - 22 Commercial 706 907 230 107 574 Installment and consumer 163 90 112 149 246 ---------- ---------- ---------- ---------- ---------- Total recoveries 1,056 1,148 515 349 896 ---------- ---------- ---------- ---------- ---------- Net loans charged-off 10,964 8,886 4,562 5,047 4,633 Provision for loan losses 15,785 12,868 8,408 5,233 4,073 ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 23,812 $ 18,991 $ 15,009 $ 11,163 $ 10,977 ========== ========== ========== ========== ========== Ratio of allowance for loan losses to total loans: Average 1.37% 1.24% 1.18% 1.10% 1.17% End of period 1.37 1.17 1.15 1.01 1.18 Ratio of net charge-offs to average total loans during the period 0.63 0.58 0.36 0.50 0.49
10 The following table shows the amounts of nonperforming assets at the end of the periods indicated. Please see Note 1 to the Notes to Consolidated Financial Statements for a description of Southwest's policy for placing loans on nonaccrual status.
At December 31, -------------------------------------------------------------- (Dollars in thousands) 2005 2004 2003 2002 2001 - -------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Total nonaccrual $ 22,099 $ 22,230 $ 14,530 $ 11,455 $ 7,291 Total past due 90 days or more 1,486 929 1,384 1,452 1,935 ---------- ---------- ---------- ---------- ---------- Total nonperforming loans 23,585 23,159 15,914 12,907 9,226 Other real estate owned 7,130 4,937 1,699 747 640 ---------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 30,715 $ 28,096 $ 17,613 $ 13,654 $ 9,866 ========== ========== ========== ========== ========== Nonperforming loans to total loans 1.36% 1.43% 1.22% 1.17% 0.99% Allowance for loan losses to nonperforming loans 100.96% 82.00% 94.31% 86.49% 118.98% Government-guaranteed portion of nonperforming loans $ 1,602 $ 1,458 $ 2,694 $ 1,017 $ 905
At December 31, 2005, a majority of nonperforming assets were commercial loans. At December 31, 2005, three credit relationships represented 77% of nonperforming loans and 59% of nonperforming assets. OTHER INCOME Other income was $17.4 million for 2005, a 24% increase when compared with 2004. Other income in 2004 decreased 3% when compared with 2003. Other income increased by 14% in 2003. COMPARISON SUMMARY-OTHER INCOME
2005 Change 2004 Change (Dollars in thousands) 2005 From 2004 2004 From 2003 2003 - -------------------------------------------------- ---------- ----------- ---------- ----------- ---------- Service charges and fees $ 10,945 $ 1,047 $ 9,898 $ 605 $ 9,293 Gain on sales of loans 4,915 1,668 3,247 (864) 4,111 Other noninterest income 1,546 544 1,002 (66) 1,068 Gain (loss) on sales of investment securities - 62 (62) (90) 28 ---------- ----------- ---------- ----------- ---------- Total other income $ 17,406 $ 3,321 $ 14,085 $ (415) $ 14,500 ========== =========== ========== =========== ==========
Service charges and fees increased $1.0 million, or 11%, in 2005 due to increased fees from the company's multi-state ATM network, increased fees on overdrawn deposit accounts, and increased fees from brokerage services. Service charges and fees increased $605,000, or 7%, in 2004 due to increased fees received on overdrawn deposit accounts and increased servicing fees received on participated loans. Gains on sales of loans, the major factor for the increase of other income in 2005, increased due to a $950,000 increase in gains on sales of student loans and a $743,000 increase in gains on sales of other loans. Gains on sales of mortgage loans decreased $25,000 during the year due primarily to the higher mortgage interest rates. Gain on sales of loans, the major factor in the reduction of other income, declined in 2004 due primarily to a $1.1 million reduction in gain on sales of mortgage loans, which occurred due to the lower refinancing demand created by higher mortgage interest rates during 2004 as compared to those prevalent during 2003. Gains on sales of student loans increased $174,000, or 11%, during 2004. Other noninterest income increased $544,000 in 2005 as compared to 2004 primarily due to a $360,000 increase in income from Southwest's consulting subsidiaries. 11 OTHER EXPENSE Other expense was $51.9 million for 2005, an increase of $7.3 million, or 17%, from 2004. Other expense increased $6.0 million, or 15%, in 2004 from 2003. COMPARISON SUMMARY-OTHER EXPENSE
2005 Change 2004 Change (Dollars in thousands) 2005 From 2004 2004 From 2003 2003 - -------------------------------------------------- ---------- ----------- ---------- ----------- ---------- Salaries and employee benefits $ 25,285 $ 2,686 $ 22,599 $ 2,807 $ 19,792 Occupancy 9,910 687 9,223 1,116 8,107 FDIC and other insurance 486 66 420 80 340 Other real estate 971 729 242 27 215 Provision for unfunded loan commitments 937 823 114 0 114 General and administrative 14,284 2,356 11,928 1,934 9,994 ---------- ----------- ---------- ----------- ---------- Total other expense $ 51,873 $ 7,347 $ 44,526 $ 5,964 $ 38,562 ========== =========== ========== =========== ==========
Salaries and employee benefits increased $2.7 million, or 12%, in 2005 and $2.8 million, or 14% in 2004 primarily as a result of the cost of employees hired to staff the offices opened in the Texas and Kansas markets, as well as normal increases in salaries and benefits of existing staff. Occupancy expense increased $687,000, or 7%, in 2005 and $1.1 million, or 14%, in 2004 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 guaranteed student loans, which are included in occupancy expense, increased $678,000, in 2004 but only $84,000 in 2005. The increases in other real estate expenses occurred as Southwest continued operations of certain acquired properties and prepared other properties to be sold. General and administrative expense increased $2.4 million, or 20%, in 2005 and $1.9 million, or 19%, in 2004. The primary factor for the 2005 increase was the required write-off of $970,000 in unamortized issuance costs related to the SBI Capital trust preferred securities that were redeemed in June 2005. Legal fees increased $650,000, or 55%, and marketing costs increased $234,000, or 37%, in 2005 compared to 2004. The increase in legal fees was primarily related to work involving nonperforming loans. Fees paid to SLMA for the origination of government guaranteed student loans increased $166,000 in 2005 and $361,000 in 2004. 12 OPERATING SEGMENTS FOR THE YEARS ENDED DECEMBER 31, CONTRIBUTION OF OPERATING SEGMENTS ---------------------------------------- (Dollars in thousands) 2005 2004 2003 - ---------------------------------- ----------- ----------- ----------- Oklahoma banking $ 8,819 $ 8,114 $ 10,691 Other states banking 2,393 2,610 1,816 Secondary market 9,428 10,420 5,560 Other operations 374 (2,515) (3,175) ----------- ----------- ----------- Consolidated net income $ 21,014 $ 18,629 $ 14,892 =========== =========== =========== Oklahoma banking $ 836,850 $ 881,682 $ 865,688 Other states banking 518,708 388,002 228,620 Secondary market 380,346 353,812 214,377 Other operations (24) 379 151 ----------- ----------- ----------- Consolidated total loans $ 1,735,880 $ 1,623,875 $ 1,308,836 =========== =========== =========== Oklahoma banking $ 843,584 $ 889,768 $ 878,627 Other states banking 516,212 386,379 230,977 Secondary market 397,940 368,557 220,346 Other operations 341,903 269,083 250,775 ----------- ----------- ----------- Consolidated total assets $ 2,099,639 $ 1,913,787 $ 1,580,725 =========== =========== =========== 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 contribution of the Oklahoma Banking segment increased $705,000, or 9%, in 2005, primarily as a result of increased net interest margin and increased noninterest income after decreasing $2.6 million, or 24%, in 2004, primarily as a result of greater loan loss provision and increased operating expenses. The contribution of the Other States Banking segment decreased by $217,000, or 8%, in 2005, primarily as a result of increased noninterest expense after increasing by $794,000, or 44%, in 2004, as a result of increased net interest margin due to earning asset growth, offset in part by increased provision for loan losses related to loan growth and increased other expenses due in part to expansion. Southwest's Texas and Kansas offices were responsible for the 2005 growth in portfolio loans. At December 31, 2005, Southwest's five Texas and two Kansas offices accounted for $518.7 million in loans, or 38% of total portfolio loans. The Secondary Market segment contributed $9.4 million to net income in 2005, a reduction of $992,000, or 10%, from 2004. The reduction occurred primarily in net interest margin which decreased $1.8 million due primarily to the lower rates on guaranteed student loans. This reduction, and a $297,000 increase in other operating expense, was partially offset by a $1.1 million increase in noninterest income. The Secondary Market segment contributed $10.4 million to net income in 2004, up $4.9 million, or 87%, from 2003, primarily as a result of growth in guaranteed student lending, offset in part by a decrease in yield on private student loans and lower mortgage banking revenues. 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 majority of consolidated net interest income and net income, the newer, Other States Banking segment, consisting of the Texas and Kansas operations, contributed 13 an increasing percentage of consolidated net interest income and net income in 2003 and 2004, and by year-end 2005 accounted for approximately $516.2 million, or 25%, 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 51 of this report, and "Business-Organization" on page 58 of this report. TAXES ON INCOME Southwest's income tax expense for fiscal years 2005, 2004, and 2003 was $13.8 million, $10.5 million, and $8.1 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. FINANCIAL CONDITION Southwest's total assets increased by $185.9 million, or 10%, from $1.91 billion at December 31, 2004 to $2.10 billion at December 31, 2005 after increasing by $332.2 million, or 21%, between December 31, 2004 and 2003. The growth in assets in 2005 was primarily attributable to the $112.0 million, or 7%, increase in total loans. Southwest's investment securities increased by $48.0 million, or 22%, to $268.1 million at December 31, 2005 from $220.1 million at December 31, 2004. The increases in 2005 came from U.S. government and federal agency securities, which increased $49.2 million, or 28%, and mortgage-backed securities, which increased $4.6 million, or 26%. Southwest's investments in Federal Reserve Bank and Federal Home Loan Bank ("FHLB") stock decreased after the sale of $4.6 million in FHLB stock during the fourth quarter. Tax-exempt municipal securities also decreased from $5.5 million at December 31, 2004 to $3.5 million at December 31, 2005. Southwest's investment securities increased by $15.8 million, or 8%, to $220.1 million at December 31, 2004 from $204.3 million at December 31, 2003. The increases in 2004 came primarily from U.S. government and federal agency securities, which increased $24.6 million, or 16%. Southwest's investments in Federal Reserve Bank and Federal Home Loan Bank stock also increased. Decreases occurred during the same period in Southwest's investment in mortgage-backed securities, which decreased $2.1 million, or 11%, and tax-exempt municipal securities, which decreased $9.5 million, or 63%. 14
At December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - ---------------------------------------------------- ---------- ---------- ---------- U.S. Government and agency obligations $ 227,111 $ 177,953 $ 153,344 Obligations of states and political subdivisions 3,457 5,477 14,997 Mortgage-backed securities 22,186 17,565 19,681 Other securities 15,339 19,056 16,244 ---------- ---------- ---------- Total investment securities $ 268,093 $ 220,051 $ 204,266 ========== ========== ========== Available for sale (fair value) $ 256,751 $ 204,092 $ 177,074 Held to maturity (amortized cost) 1,538 2,495 15,916 Federal Reserve Bank and Federal Home Loan Bank Stock 9,804 13,464 11,276 ---------- ---------- ---------- Total investment securities $ 268,093 $ 220,051 $ 204,266 ========== ========== ==========
Southwest does not have any material amounts of investment securities or other interest-earning assets, other than loans, that would have been classified as nonperforming if such assets were loans, or which were recognized by management as potential problem assets based upon known information about possible credit problems of the borrower or issuer. The following table shows the maturities, carrying value (amortized cost for investment securities being held to maturity or estimated fair value for investment securities available for sale), estimated fair market values, and average yields for Southwest's investment portfolio at December 31, 2005. Yields are not presented on a tax-equivalent basis. Maturities of mortgage-backed securities are based on expected maturities. Expected maturities differ from contractual maturities because borrowers 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, 2005.
One Year Two through Five through More than Total Investment or Less Five Years Ten Years Ten Years Securities ---------------- ---------------- ---------------- ---------------- --------------------------- (Dollars in thousands) Cost Yield Cost Yield Cost Yield Cost Yield Cost Market Yield - -------------------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- --------- ----- Held to Maturity: U.S. government and agency obligations $ 1,008 2.51% $ - -% $ - -% $ - -% $ 1,008 $ 1,001 2.51% Obligations of states and political subdivisions 530 2.50 - - - - - - 530 529 2.50 --------- --------- --------- --------- --------- --------- Total 1,538 2.51 - - - - - - 1,538 1,530 2.51 --------- --------- --------- --------- --------- --------- Available for Sale: U.S. government and agency obligations - - 231,285 3.79 - - - - 231,285 226,103 3.79 Obligations of states and political subdivisions 1,170 5.38 1,780 3.16 - - - - 2,950 2,927 4.04 Mortgage-backed securities 24 8.57 22,426 3.81 - - - - 22,450 22,186 3.81 Other securities - - 3,489 - - - 2,006 5.19 5,495 5,535 1.89 --------- --------- --------- --------- --------- --------- Total 1,194 5.44 258,980 3.73 - - 2,006 5.19 262,180 256,751 3.76 --------- --------- --------- --------- --------- --------- Total $ 2,732 $ 258,980 $ - $ 2,006 $ 263,718 $ 258,281 ========= ========= ========= ========= ========= =========
15 Total loans were $1.74 billion at December 31, 2005, an increase of $112.0 million, or 7%, compared to December 31, 2004. All categories of loans increased, except commercial. The allowance for loan losses increased by $4.8 million, or 25%, from December 31, 2004 to December 31, 2005. At December 31, 2005, the allowance for loan losses was $23.8 million, or 1.37% of total loans, compared to $19.0 million, or 1.17% of total loans, at December 31, 2004. Total loans were $1.62 billion at December 31, 2004, an increase of $315.0 million, or 24%, compared to December 31, 2003. All categories of loans increased, except other consumer loans. The allowance for loan losses increased by $4.0 million, or 27%, from December 31, 2003 to December 31, 2004. At December 31, 2004, the allowance for loan losses was $19.0 million, or 1.17% of total loans, compared to 15.0 million, or 1.15% of total loans, at December 31, 2003. (See "Provision for Loan Losses" on page 8.) This table presents the trends in the composition of the loan portfolio over the previous five years.
At December 31, -------------------------------------------------------------------- (Dollars in thousands) 2005 2004 2003 2002 2001 - -------------------------------- ------------ ------------ ------------ ------------ ------------ Real estate mortgage - Commercial $ 563,074 $ 523,358 $ 402,596 $ 374,999 $ 301,578 One to four family residential 93,478 87,858 83,250 102,423 106,206 Real estate construction 299,344 248,278 230,292 130,001 91,897 Commercial 374,101 390,272 355,965 348,879 312,577 Installment and consumer - Guaranteed student loans 377,110 348,970 211,546 119,064 91,841 Other 28,773 25,139 25,187 25,746 26,947 ------------ ------------ ------------ ------------ ------------ 1,735,880 1,623,875 1,308,836 1,101,112 931,046 Less: Allowance for loan loss (23,812) (18,991) (15,009) (11,163) (10,977) ------------ ------------ ------------ ------------ ------------ Total $ 1,712,068 $ 1,604,884 $ 1,293,827 $ 1,089,949 $ 920,069 ============ ============ ============ ============ ============
Southwest has a continuing strategic focus on providing loans and other services to healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate borrowers. At December 31, 2005, loans to individuals and businesses in the healthcare industry totaled $428.2 million, or 25% of total loans. CAPITAL RESOURCES At December 31, 2005, total shareholders' equity was $170.4 million compared to $126.0 million at December 31, 2004. Southwest's common stock offering during the second quarter of 2005 contributed $39.5 million in net proceeds to shareholders' equity. Earnings, net of common dividends, contributed $17.0 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 $2.7 million to shareholders' equity in 2005, 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 losses on investment securities available for sale (net of tax) increased to a loss of $3.3 million at December 31, 2005 compared to a loss of $797,000 at December 31, 2004. Repurchases of 690,696 shares were made during the second and third quarters of 2005 under a selling shareholder agreement. During 2005 and 2004, repurchased shares were used to satisfy the requirements of the employee stock option plan, the employee stock purchase plan, and the dividend reinvestment plan. Repurchases of approximately 700,000 shares may be made under the repurchase plan adopted in January 2006. Repurchases may be made from time to time based on market conditions, projected capital needs, and other factors. At December 31, 2004, total shareholders' equity was $126.0 million compared to $109.9 million at December 31, 2003. Earnings, net of common dividends, contributed $15.2 million to shareholders' equity. Sales of common stock through the dividend reinvestment plan, the employee stock purchase plan, and the employee stock 16 option plan contributed an additional $2.0 million to shareholders' equity in 2004, including tax benefits realized by Southwest relating to option exercises. Net unrealized holding gains (losses) on investment securities available for sale (net of tax) decreased to a loss of $797,000 at December 31, 2004 compared to a gain of $360,000 at December 31, 2003. Although Southwest had share repurchase plans in place during 2004, no shares were repurchased during the year. 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, 2005, Southwest exceeded all applicable capital requirements, having a total risk-based capital ratio of 14.21%, a Tier 1 risk-based capital ratio of 12.95%, and a leverage ratio of 10.24%. As of December 31, 2005, 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, Stillwater National, or SNB Wichita by Federal bank or thrift 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 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 and maturities of investment securities, 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, purchase securities, and operate the organization. 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, 2005: (Dollars in thousands) Amount - -------------------------------- ---------- Three months or less(1) $ 221,466 Over three through six months(1) 134,115 Over six through 12 months(1) 191,061 Over 12 months 62,347 ---------- Total $ 608,989 ========== (1) The amount of certificates of deposit that mature within 12 months is $546.6 million. The Company does not have any liquidity concerns as a result of the volume of these maturities. 17
Percentage of Total Average Assets ---------------------------------- Sources and uses of funds 2005 2004 2003 - ------------------------------------------------------------ --------- --------- --------- Sources of Funds: Deposits: Noninterest-bearing demand 9.90% 9.63% 9.20% Interest-bearing demand and money market accounts 21.72 25.61 25.95 Time and savings deposits 47.32 39.65 41.61 Other borrowings 10.07 13.93 13.26 Subordinated debentures 2.83 3.99 2.78 Other liabilities 0.82 0.68 0.45 Equity capital 7.34 6.51 6.75 --------- --------- --------- Total 100.00% 100.00% 100.00% ========= ========= ========= Uses of Funds: Loans 83.56% 84.42% 83.96% Investment securities 11.81 11.88 12.65 Other interest-earning assets 0.18 0.06 0.07 Noninterest-earning assets 4.45 3.64 3.32 --------- --------- --------- Total 100.00% 100.00% 100.00% ========= ========= =========
Sources and uses of cash are presented in the Consolidated Statements of Cash Flows. Total cash increased by $26.2 million, or 109%, to $50.3 million in 2005 from $24.1 million at year-end 2004, as a result of a $113.1 million increase in cash provided from operating activities (primarily from the increase in proceeds from sales of guaranteed student loans); a $71.5 million reduction in cash used in investing activities (primarily from reductions in net loan originations and purchases of available for sale securities); and a $148.5 million decrease in cash provided from financing activities (primarily from a $138.2 million reduction in the net increase in deposits). Total cash decreased by $9.9 million, or 29%, to $24.1 million in 2004 from $34.0 million at year-end 2003, as a result of a $15.9 million increase in cash used in operating activities (primarily from the increase in originations of guaranteed student loans, net of sales proceeds); a $90.6 million increase in cash used in investing activities (primarily from an increase in loans originated); and a $97.5 million increase in cash provided by financing activities (primarily from a $113.6 million increase in the net increase in deposits). 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 18 Southwest's interest rate risk management activities, the actual magnitude, direction, and relationship of future interest rates are uncertain, and can have adverse effects on net income and liquidity. 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, 2005:
0 to 3 4 to 12 Over 1 to Over (Dollars in thousands) Months Months 5 Years 5 Years Total - ----------------------------------- ------------ ------------ ------------ ------------ ------------ RATE-SENSITIVE ASSETS: Total loans $ 1,308,327 $ 261,197 $ 108,690 $ 57,666 $ 1,735,880 Investment securities 14,283 1,795 232,276 19,739 268,093 Due from banks 2,605 - - - 2,605 ------------ ------------ ------------ ------------ ------------ Total 1,325,215 262,992 340,966 77,405 2,006,578 RATE-SENSITIVE LIABILITIES: Money market deposit accounts 402,709 - - - 402,709 Time deposits 344,967 498,574 128,912 103 972,556 Savings accounts 8,765 - - - 8,765 Interest-bearing demand 49,235 - - - 49,235 Other borrowings 68,008 80,000 25,000 31,500 204,508 Subordinated debentures - - - 46,393 46,393 ------------ ------------ ------------ ------------ ------------ Total 873,684 578,574 153,912 77,996 1,684,166 ------------ ------------ ------------ ------------ ------------ Interest sensitivity gap $ 451,531 $ (315,582) $ 187,054 $ (591) $ 322,412 ============ ============ ============ ============ ============ Cumulative interest sensitivity gap $ 451,531 $ 135,949 $ 323,003 $ 322,412 $ 322,412 ============ ============ ============ ============ ============ Percentage of rate-sensitive assets to rate-sensitive liabilities 151.68% 45.46% 221.53% 99.24% 119.14% ============ ============ ============ ============ ============ Percentage of cumulative gap to total assets 21.51% 6.47% 15.38% 15.36% 15.36% ============ ============ ============ ============ ============
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, 2005, the model projected net income would decrease by 8.68% if interest rates immediately fell by 100 basis points. It projected an increase in net income of 8.64% if interest rates immediately rose by 100 basis points. The model projected net income would decrease by 5.36% if interest rates gradually fell by 100 19 basis points over a one-year time horizon. It projected an increase in net income of 6.49% 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 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 amounts of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of commercial and real estate mortgage credit, and standby and commercial letters of credit and are discussed further in Note 13 to the Consolidated Financial Statements on page 50 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 46R, "Consolidation of Variable Interest Entities." Further information regarding the Trust Preferred Securities can be found in Note 6 to the Consolidated Financial Statements on page 43 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. 20 CONTRACTUAL OBLIGATIONS Southwest has various contractual obligations that require future cash payment. The following table presents, as of December 31, 2005, significant fixed and determinable contractual obligations to third parties by payment date.
Payments due by period ----------------------------------------------------------------------------- Less than 1-3 3-5 Over (Dollars in thousands) 1 Year Years Years 5 Years Total - --------------------------------------------- ------------- ------------- ------------- ------------- ------------- Deposits without stated maturity:(1) Noninterest bearing $ 224,555 $ - $ - $ - $ 224,555 Interest bearing 460,709 - - - 460,709 Time deposits(2) 856,909 105,020 35,033 132 997,094 Other borrowings(2) 152,769 14,263 17,920 32,457 217,409 Subordinated debentures(2) 3,375 6,751 6,751 126,164 143,041 Operating leases 1,841 3,048 2,130 669 7,688 ------------- ------------- ------------- ------------- ------------- Total $ 1,700,158 $ 129,082 $ 61,834 $ 159,422 $ 2,050,496 ============= ============= ============= ============= =============
(1) Excludes interest. (2) Includes interest. Interest on variable rate obligations is shown at rates in effect at December 31, 2005. 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, 2005, Southwest's purchase obligations not reflected on the Consolidated Statements 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 18, "Off-Balance Sheet Arrangements" on page 20, and "Note 5. Other Borrowed Funds" on page 42, "Note 6. Subordinated Debentures" on page 43, "Note 11. Operating Leases" on page 49, "Note 13. Financial Instruments with Off-Balance Sheet Risk" on page 50, and "Note 14. Commitments and Contingencies" on page 50, to the Consolidated Financial Statements. 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 banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information that is subject to change. Certain policies inherently rely more on the use of estimates, assumptions, and judgments, and as such have a greater possibility of producing results that could be materially different than originally reported. Management is required to use estimates, assumptions, and judgments 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 readily available. The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable 21 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 loan portfolio can vary significantly from the amounts that actually occur. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by Southwest, periodically review the loan portfolio and the allowance. These reviews may result in additional provisions based on the agencies judgments based upon information available at the time of each examination. Because the loan portfolio contains a significant number of commercial 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 the provision for loan losses, nonperforming assets, and charge-offs. Southwest's systematic methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances, and an unallocated allowance, as described in "Provision for Loan Losses" on page 8 and in Note 1 to the Consolidated Financial Statements on page 31. The formula and specific allowances comprised 91.29% of the total allowance at December 31, 2005. At that date, a 10% decrease or increase in all categories of risk rated assets for which specific allowances had not been recorded would have resulted in a corresponding decrease or increase of approximately $962,000 in the recommended allowance, assuming no change in other elements considered in the methodology. 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. 22 CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES As required by SEC rules, Southwest's management evaluated the effectiveness of Southwest's disclosure controls and procedures as of December 31, 2005. Southwest's Chief Executive Officer and Chief Financial Officer participated in the evaluation. Based on this evaluation, Southwest's Chief Executive Officer and Chief Financial Officer concluded that Southwest's disclosure controls and procedures were effective as of December 31, 2005. INTERNAL CONTROL OVER FINANCIAL REPORTING Southwest's management is responsible for establishing and maintaining adequate internal control over financial reporting. As required by SEC rules, Southwest's management evaluated the effectiveness of Southwest's internal control over financial reporting as defined in SEC Rule 13a-15 as of December 31, 2005. Southwest's Chief Executive Officer and Chief Financial Officer participated in the evaluation, which was based upon the criteria for effective internal control over financial reporting included in the "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Southwest's Chief Executive Officer and Chief Financial Officer concluded that Southwest's internal control over financial reporting was effective as of December 31, 2005. The report by Southwest's independent registered public accounting firm, Ernst & Young LLP, on management's assessment of internal control over financial reporting is included on page 25. FOURTH QUARTER 2005 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change occurred during the fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, Southwest's internal control over financial reporting. 23 REPORTS OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT ON CONSOLIDATED FINANCIAL STATEMENTS 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, 2005 and 2004, 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, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Southwest Bancorp, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion thereon. Ernst & Young LLP Tulsa, Oklahoma March 10, 2006 24 REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Shareholders of Southwest Bancorp, Inc. We have audited management's assessment, included in the accompanying report on Internal Control over Financial Reporting, that Southwest Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Southwest Bancorp, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Southwest Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Southwest Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of Southwest Bancorp, Inc. and our report dated March 10, 2006 expressed an unqualified opinion thereon. Ernst & Young LLP Tulsa, Oklahoma March 10, 2006 25 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, ---------------------------- (Dollars in thousands, except per share data) 2005 2004 - ------------------------------------------------------------------------------ ------------ ------------ ASSETS Cash and cash equivalents $ 50,277 $ 24,097 Investment securities: Held to maturity, fair value $1,530 (2005) and $2,509 (2004) 1,538 2,495 Available for sale, amortized cost $262,180 (2005) and $205,393 (2004) 256,751 204,092 Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 9,804 13,464 Loans held for sale 383,447 354,557 Loans receivable, net of allowance for loan losses of $23,812 (2005) and $18,991 (2004) 1,328,621 1,250,327 Accrued interest receivable 14,382 15,091 Premises and equipment, net 20,584 19,860 Other assets 34,235 29,804 ------------ ------------ Total assets $ 2,099,639 $ 1,913,787 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 224,555 $ 183,738 Interest-bearing demand 49,235 57,359 Money market accounts 402,709 379,818 Savings accounts 8,765 8,108 Time deposits of $100,000 or more 608,989 609,670 Other time deposits 363,567 261,365 ------------ ------------ Total deposits 1,657,820 1,500,058 Accrued interest payable 8,953 4,911 Income tax payable 288 2,266 Other liabilities 11,233 8,323 Other borrowings 204,508 200,065 Subordinated debentures 46,393 72,180 ------------ ------------ Total liabilities 1,929,195 1,787,803 SHAREHOLDERS' EQUITY: Common stock - $1 par value; 20,000,000 shares authorized; 14,658,042 (2005) and 12,243,042 (2004) shares issued and outstanding 14,658 12,243 Paid in capital 45,672 7,993 Retained earnings 124,882 107,905 Accumulated other comprehensive gain (loss) (3,325) (797) Treasury stock, at cost; 636,125 (2005) and 138,189 (2004) (11,443) (1,360) ------------ ------------ Total shareholders' equity 170,444 125,984 ------------ ------------ Total liabilities & shareholders' equity $ 2,099,639 $ 1,913,787 ============ ============
The accompanying notes are an integral part of this statement. 26 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ (Dollars in thousands, except per share data) 2005 2004 2003 - --------------------------------------------------- ------------ ------------ ------------ INTEREST INCOME: Interest and fees on loans $ 128,011 $ 96,832 $ 76,115 Investment securities: U.S. Government and agency obligations 7,643 6,136 5,485 Mortgage-backed securities 625 659 1,036 State and political subdivisions 171 407 856 Other securities 772 679 577 Federal funds sold 122 10 10 ------------ ------------ ------------ Total interest income 137,344 104,723 84,079 INTEREST EXPENSE: Interest-bearing demand 267 291 355 Money market accounts 10,727 6,118 5,237 Savings accounts 21 19 17 Time deposits of $100,000 or more 19,977 9,762 8,520 Other time deposits 9,790 5,588 6,516 Other borrowings 7,343 5,979 4,887 Subordinated debentures 4,113 4,489 3,079 ------------ ------------ ------------ Total interest expense 52,238 32,246 28,611 ------------ ------------ ------------ Net interest income 85,106 72,477 55,468 Provision for loan losses 15,785 12,868 8,408 OTHER INCOME: Service charges and fees 10,945 9,898 9,293 Other noninterest income 1,546 1,002 1,068 Gain on sales of loans 4,915 3,247 4,111 Gain (loss) on sales of investment securities - (62) 28 ------------ ------------ ------------ Total other income 17,406 14,085 14,500 OTHER EXPENSE: Salaries and employee benefits 25,285 22,599 19,792 Occupancy 9,910 9,223 8,107 FDIC and other insurance 486 420 340 Other real estate 971 242 215 General and administrative 15,221 12,042 10,108 ------------ ------------ ------------ Total other expense 51,873 44,526 38,562 ------------ ------------ ------------ Income before taxes 34,854 29,168 22,998 Taxes on income 13,840 10,539 8,106 ------------ ------------ ------------ Net income $ 21,014 $ 18,629 $ 14,892 ============ ============ ============ Basic earnings per common share (1) $ 1.60 $ 1.54 $ 1.26 Diluted earnings per common share (1) 1.55 1.48 1.22 Cash dividends declared per share (1) 0.30 0.28 0.25
The accompanying notes are an integral part of this statement. (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. 27 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ (Dollars in thousands) 2005 2004 2003 - ------------------------------------------------ ------------ ------------ ------------ Net income $ 21,014 $ 18,629 $ 14,892 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized holding gain (loss) on available for sale securities (4,128) (1,967) (2,703) Reclassification adjustment for (gains) losses arising during the period $ - 62 (28) ------------ ------------ ------------ Other comprehensive income (loss), before tax (4,128) (1,905) (2,731) Tax (expense) benefit related to items of other comprehensive income (loss) 1,600 748 890 ------------ ------------ ------------ Other comprehensive income (loss), net of tax (2,528) (1,157) (1,841) ------------ ------------ ------------ Comprehensive income $ 18,486 $ 17,472 $ 13,051 ============ ============ ============
The accompanying notes are an integral part of this statement. 28 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Total Common Stock Other Share- (Dollars in thousands, except --------------------- Paid in Retained Comprehensive Treasury holders' per share data)(1) Shares Amount Capital Earnings Income (Loss) Stock Equity - -------------------------------------- ----------- -------- -------- -------- ------------- -------- -------- BALANCE, JANUARY 1, 2003 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) Treasury shares purchased - - - - - - - Net income - - - 14,892 - - 14,892 ----------- -------- -------- -------- ------------- -------- -------- BALANCE, DECEMBER 31, 2003 12,243,042 12,243 6,997 92,657 360 (2,322) 109,935 ----------- -------- -------- -------- ------------- -------- -------- Cash dividends: Common, $0.28 per share, and other dividends - - - (3,381) - - (3,381) Common stock issued: Employee Stock Option Plan - - 380 - - 901 1,281 Employee Stock Purchase Plan - - 40 - - 25 65 Dividend Reinvestment Plan - - 57 - - 36 93 Tax benefit related to exercise of stock options - - 519 - - - 519 Other comprehensive income (loss), net of tax - - - - (1,157) - (1,157) Treasury shares purchased - - - - - - - Net income - - - 18,629 - - 18,629 ----------- -------- -------- -------- ------------- -------- -------- BALANCE, DECEMBER 31, 2004 12,243,042 12,243 7,993 107,905 (797) (1,360) 125,984 ----------- -------- -------- -------- ------------- -------- -------- Cash dividends: Common, $0.30 per share, and other dividends - - - (4,037) - - (4,037) Common stock issued: Employee Stock Option Plan - - (422) - - 2,157 1,735 Employee Stock Purchase Plan - - 36 - - 34 70 Dividend Reinvestment Plan - - 49 - - 43 92 Restricted Stock - - 97 - - 99 196 Public Offering 2,415,000 2,415 37,085 - - - 39,500 Tax benefit related to exercise of stock options - - 834 - - - 834 Other comprehensive income (loss), net of tax - - - - (2,528) - (2,528) Treasury shares purchased - - - - - (12,416) (12,416) Net income - - - 21,014 - - 21,014 ----------- -------- -------- -------- ------------- -------- -------- BALANCE, DECEMBER 31, 2005 14,658,042 $ 14,658 $ 45,672 $124,882 $ (3,325) $(11,443) $170,444 =========== ======== ======== ======== ============= ======== ========
The accompanying notes are an integral part of this statement. (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. 29 SOUTHWEST BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- (Dollars in thousands) 2005 2004 2003 - ----------------------------------------------------------------- ------------ ------------ ------------ OPERATING ACTIVITIES: Net income $ 21,014 $ 18,629 $ 14,892 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Provision for loan losses 15,785 12,868 8,408 Deferred taxes (1,252) (626) (1,592) Depreciation and amortization expense 2,610 2,607 2,745 Amortization of premiums and accretion of discounts on securities, net 135 164 227 Amortization of intangibles 379 327 398 Tax benefit from exercise of stock options 834 519 1,153 (Gain) Loss on sales/calls of securities - 62 (28) (Gain) Loss on sales of loans (4,915) (3,247) (4,111) (Gain) Loss on sales of premises/equipment 20 (11) (53) (Gain) Loss on other real estate owned, net 27 63 108 Proceeds from sales of residential mortgage loans 89,238 87,512 177,396 Residential mortgage loans originated for sale (87,808) (86,838) (169,694) Proceeds from sales of guaranteed student loans 778,196 537,246 278,119 Guaranteed student loans originated for sale (817,477) (672,900) (396,920) Changes in assets and liabilities: Accrued interest receivable 709 (3,770) (2,038) Other assets 233 (7,167) (7,006) Income taxes payable (1,978) (584) 2,850 Accrued interest payable 4,042 1,536 (1,123) Other liabilities 2,706 2,974 1,554 ------------ ------------ ------------ Net cash (used in) provided from operating activities 2,498 (110,636) (94,715) ------------ ------------ ------------ INVESTING ACTIVITIES: Proceeds from sales of available for sale securities - 11,040 6,951 Proceeds from principal repayments, calls and maturities: Held to maturity securities 1,995 13,400 15,210 Available for sale securities 9,009 77,679 86,332 Proceeds from redemptions of Federal Home Loan Bank stock 4,629 - - Purchases of Federal Home Loan Bank stock and Federal Reserve Bank stock (969) (2,188) (2,217) Purchases of held to maturity securities (528) - - Purchases of available for sale securities (66,439) (117,848) (124,783) Loans originated and principal repayments, net (87,456) (189,733) (99,996) Purchases of premises and equipment (3,424) (2,864) (3,523) Proceeds from sales of premises and equipment 90 226 1,215 Proceeds from sales of other real estate owned 5,013 734 1,860 ------------ ------------ ------------ Net cash (used in) provided from investing activities (138,080) (209,554) (118,951) ------------ ------------ ------------ FINANCING ACTIVITIES: Net increase (decrease) in deposits 157,762 295,933 182,368 Net increase (decrease) in other borrowings 4,443 16,215 (15,432) Net proceeds from issuance of common stock 41,593 1,439 2,318 Net proceeds from issuance of subordinated debentures - - 46,393 Redemption of subordinated debentures (25,787) - - Purchases of treasury stock (12,416) - - Common stock dividends paid (3,833) (3,281) (2,847) ------------ ------------ ------------ Net cash (used in) provided from financing activities 161,762 310,306 212,800 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 26,180 (9,884) (866) CASH AND CASH EQUIVALENTS, Beginning of period 24,097 33,981 34,847 ------------ ------------ ------------ End of period $ 50,277 $ 24,097 $ 33,981 ============ ============ ============
The accompanying notes are an integral part of this statement. 30 SOUTHWEST BANCORP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 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, the Dallas, Austin, and San Antonio, Texas and Wichita and Kansas City, Kansas areas and in student lending nationally. 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 Support, 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. 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 $2.6 million at December 31, 2005 and $1.5 million at December 31, 2004. 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 liquidity, 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 periodically reviews all individual securities for which the fair values are below the book values. If it is determined that Southwest does not have the ability and intent to hold these securities for a period of time 31 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 will be recognized in the consolidated statements of operations. Southwest had no other-than-temporary losses for 2005, 2004, or 2003. Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are not readily marketable, therefore these investments are carried at cost. LOANS - Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Loan origination fees and certain costs of originated loans are amortized as an adjustment to the yield over the term of the loan. Net unamortized deferred loan fees were $3.1 million and $2.3 million at December 31, 2005 and 2004, respectively. Southwest generally places loans, except for consumer loans, on nonaccrual when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. Interest accrual may also be discontinued earlier if, in management's opinion, collection is unlikely. Generally, consumer installment loans are not placed on nonaccrual, but are charged-off when they are five months past due. Accrued interest is written off when a loan is placed on nonaccrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. 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 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 determined by the investor commitment based upon the pricing of the loan. Guaranteed student loans have typically been sold at the time the student graduates or withdraws from school, however, an increasing number of student loans are now being sold after 90 days of the time the loan is fully disbursed. Real estate mortgage loans held for sale are carried at the lower of cost or market, which is determined on an individual loan basis. Guaranteed student loans held for sale are carried at the lower of cost or market, which is determined on an aggregate basis. Gains or losses recognized upon the sale of loans are determined on a specific identification basis and are received on a contractual 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. The appropriate amount of the allowance is based on continuous review and evaluation of the loan portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan and lease portfolio using a systematic methodology. Southwest's methodology for assessing the appropriateness of the allowance includes determination of a formula allowance, specific allowances and an unallocated 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 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 credit 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. 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 32 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. The unallocated 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 and other conditions including credit administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. RESERVE FOR UNFUNDED LOAN COMMITMENTS - At the beginning of 2005, Southwest established a reserve for unfunded loan commitments as a liability on Southwest's statement of financial condition. The reserve formerly was presented within the allowance for loan losses. All affected prior periods have been restated. The reserve is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. 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 carrying value or fair value less the estimated costs to sell the asset. Write-downs of carrying value required at the time of foreclosure are recorded as a charge to the allowance for loan losses. Costs related to the development of such real estate are capitalized, and costs related to holding the property are expensed. Foreclosed property is subject to periodic revaluation based upon estimates of fair value. In determining the valuation of other real estate 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. At December 31, 2005 and 2004, the balances of other real estate owned were $7.1 million and $4.9 million, respectively. INTANGIBLES - Intangibles consist of goodwill and loan servicing rights and are included in other assets in the consolidated statements of financial condition. Goodwill is no longer amortized, but is reviewed for impairment at least annually. Southwest has determined that no impairment exists. At December 31, 2005 and 2004, the balance of goodwill was $194,000 and Southwest had recorded cumulative amortization of $1.4 million. 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. Southwest reviews the carrying value of loan servicing rights quarterly for impairment. Assets are considered impaired when the balances are not recoverable from estimated future cash flows. At December 31, 2005, the fair value of loan servicing rights was $1.5 million, which exceeded book value. The fair value of loan servicing rights is estimated by calculating the present value of net servicing revenue over the anticipated life of each loan. 33 At December 31, 2005 and 2004, the balances of loan servicing rights were $1.4 million and $1.3 million and Southwest had recorded cumulative amortization of $2.1 million and $1.7 million, respectively. The estimated amortization of loan servicing rights over the next five years is as follows: 2006 $ 310,395 2007 265,507 2008 221,975 2009 178,616 2010 137,433 DEPOSITS - The total amount of time deposits with a minimum denomination of $100,000 was approximately $609.0 million and $609.7 million at December 31, 2005 and 2004, respectively. The total amount of overdrawn deposit accounts that were reclassified as loans at December 31, 2005 and 2004 was $2.5 million and $1.3 million, respectively. Time deposit maturities are as follows: $843.5 million in 2006, $64.5 million in 2007, $34.0 million in 2008, $21.9 million in 2009, and $8.7 million thereafter. LOAN SERVICING INCOME - Southwest earns fees for servicing real estate mortgages and other loans owned by others. These fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned. TAXES ON INCOME - Southwest and its subsidiaries file consolidated income tax returns. Income tax expense is based on the results of operations, adjusted for permanent differences between items of income or expense reported in the financial statements and those reported for tax purposes. Under the liability method, deferred income taxes are determined based on the differences between the financial statement carrying amounts and the income tax bases of 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, 2005, 2004, and 2003, Southwest had 27,500, 2,500, and zero 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:
2005 2004 2003 ------------ ------------ ------------ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic earnings per share 13,165,642 12,060,842 11,798,810 EFFECT OF DILUTIVE SECURITIES: Stock options 398,262 487,217 360,810 ------------ ------------ ------------ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Diluted earnings per share 13,563,904 12,548,059 12,159,620 ============ ============ ============
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 an annual basis over a three to ten year time period and expire 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, 34 Accounting for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma data would have been as follows:
For the Years Ended December 31, ------------------------------------ (Dollars in thousands, except per share data) 2005 2004 2003 - -------------------------------------------------------- ---------- ---------- ---------- Net income, as reported $ 21,014 $ 18,629 $ 14,892 Less: Proforma compensation expense related to options net of tax effects 386 288 375 ---------- ---------- ---------- Net income, proforma $ 20,628 $ 18,341 $ 14,517 ========== ========== ========== Earnings per common share Basic, as presented $ 1.60 $ 1.54 $ 1.26 Basic, proforma $ 1.57 $ 1.52 $ 1.23 Diluted, as presented $ 1.55 $ 1.48 $ 1.22 Diluted, proforma $ 1.52 $ 1.46 $ 1.19 Weighted average fair value at grant date $ 3.04 $ 2.62 $ 2.34
The compensation cost is calculated using the Black-Scholes option pricing model with the following weighted average assumptions:
For the Years Ended December 31, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- Expected dividend yield 1.90% 1.97% 1.78% Expected volatility 28.09% 25.21% 24.71% Risk-free interest rate 4.94% 4.74% 5.45% Expected option term (in years) 7.93 7.82 8.49
The Stock Plan's activity follows:
Number of Weighted Restricted Number of Average Shares Options Exercise Price ---------- ------------ -------------- 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 ---------- ------------ -------------- Granted - 123,402 17.09 Exercised - (140,726) 7.86 Canceled/expired - (27,447) 9.44 ---------- ------------ -------------- Outstanding at December 31, 2004 - 989,712 9.56 ---------- ------------ -------------- Granted 10,800 148,236 20.22 Exercised - (174,262) 9.96 Canceled/expired (900) (41,813) 11.66 ---------- ------------ -------------- Outstanding at December 31, 2005 9,900 921,873 $ 11.21 ========== ============ ============== Total exercisable at December 31, 2003 - 502,612 $ 8.40 Total exercisable at December 31, 2004 - 623,333 $ 9.44 Total exercisable at December 31, 2005 - 636,124 $ 10.50
35 In February 2005, Southwest granted 10,800 shares of restricted stock to independent directors of Southwest, Stillwater National and SNB Wichita at a grant price of $19.75, which was the market price on the date of grant. Subsequently, 900 shares were canceled. The restrictions on these shares will lapse one-third on the first anniversary of the date of grant, one-third on the second anniversary of the date of grant, and one-third on the third anniversary of the date of grant. At December 31, 2005, Southwest had reserved 2,886,566 shares under the Stock Plans, had 921,873 shares under option, and had 501,940 shares available for additional awards. The following summarizes the information concerning options outstanding and exercisable at December 31, 2005.
Number of Range of Weighted Average Weighted Exercisable Options Exercise Remaining Average Number Weighted Average Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price - ---------------- --------------- ---------------- ---------------- ---------------- ---------------- 107,350 $ 4.25 - $ 5.61 4.9 $ 5.30 52,150 $ 5.32 182,920 $ 6.48 - $ 7.31 3.8 $ 7.08 122,320 $ 7.09 269,247 $ 8.25 - $ 9.37 2.0 $ 8.93 227,247 $ 8.97 123,222 $10.12 - $13.16 2.0 $ 11.80 123,222 $ 11.80 211,634 $16.80 - $19.75 3.6 $ 18.39 101,181 $ 17.89 27,500 $22.08 - $25.93 4.8 $ 23.05 10,004 $ 23.29
COMPREHENSIVE INCOME - Southwest'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 $626,000 and $471,000 at December 31, 2005 and 2004, respectively. RECLASSIFICATIONS - Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 36 2. INVESTMENT SECURITIES A summary of the amortized cost and fair values of investment securities follows:
At December 31, 2005 -------------------------------------------------- Gross Unrealized Amortized ----------------------- Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------- ---------- ---------- ---------- ---------- Held to Maturity: U.S. Government and agency obligations $ 1,008 $ - $ (7) $ 1,001 Obligations of state and political subdivisions 530 - (1) 529 ---------- ---------- ---------- ---------- Total $ 1,538 $ - $ (8) $ 1,530 ========== ========== ========== ========== Available for Sale: U.S. Government and agency obligations $ 231,285 $ - $ (5,182) $ 226,103 Obligations of state and political subdivisions 2,950 7 (30) 2,927 Mortgage-backed securities 22,451 21 (286) 22,186 Equity securities 5,494 69 (28) 5,535 ---------- ---------- ---------- ---------- Total $ 262,180 $ 97 $ (5,526) $ 256,751 ========== ========== ========== ==========
At December 31, 2004 -------------------------------------------------- Gross Unrealized Amortized ----------------------- Fair (Dollars in thousands) Cost Gains Losses Value - ----------------------------------------------- ---------- ---------- ---------- ---------- (dollars in thousands) Held to Maturity: U.S. Government and agency obligations $ 1,028 $ - $ (4) $ 1,024 Obligations of state and political subdivisions 1,467 18 - 1,485 ---------- ---------- ---------- ---------- Total $ 2,495 $ 18 $ (4) $ 2,517 ========== ========== ========== ========== Available for Sale: U.S. Government and agency obligations $ 178,330 $ 94 $ (1,499) $ 176,925 Obligations of state and political subdivisions 3,930 80 - 4,010 Mortgage-backed securities 17,612 56 (103) 17,565 Equity securities 5,521 113 (42) 5,592 ---------- ---------- ---------- ---------- Total $ 205,393 $ 343 $ (1,644) $ 204,092 ========== ========== ========== ==========
37 Gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2005 and 2004 are as follows:
Continuous Unrealized Losses Existing for: ----------------------------------------------- Amortized cost of Fair value of securities with Less Than Number of More Than Number of securities with (Dollars in thousands) unrealized losses 12 Months Securities 12 Months Securities unrealized losses - --------------------------------------- ----------------- --------- ---------- --------- ---------- ----------------- AT DECEMBER 31, 2005: HELD TO MATURITY: U.S. Government and agency obligations $ 1,008 $ - - $ (7) 1 $ 1,001 Obligations of state and political subdivisions 530 (1) 1 - - 529 ----------------- --------- ---------- --------- ---------- ----------------- Total $ 1,538 $ (1) 1 $ (7) 1 $ 1,530 ================= ========= ========== ========= ========== ================= AVAILABLE FOR SALE: U.S. Government and agency obligations $ 231,285 $ (1,554) 38 $ (3,628) 54 $ 226,103 Obligations of state and political subdivisions 2,950 (30) 1 - - 2,927 Mortgage-backed securities 22,451 (82) 18 (204) 17 22,186 Equity securities 5,494 (28) 2 - - 5,535 ----------------- --------- ---------- --------- ---------- ----------------- Total $ 262,180 $ (1,694) 59 $ (3,832) 71 $ 256,751 ================= ========= ========== ========= ========== ================= AT DECEMBER 31, 2004: HELD TO MATURITY: U.S. Government and agency obligations $ 1,028 $ (4) 1 $ - - $ 1,024 Obligations of state and political subdivisions 1,467 - - - - 1,485 ----------------- --------- ---------- --------- ---------- ----------------- Total $ 2,495 $ (4) 1 $ - - $ 2,509 ================= ========= ========== ========= ========== ================= AVAILABLE FOR SALE: U.S. Government and agency obligations $ 178,330 $ (1,138) 56 $ (361) 6 $ 176,925 Obligations of state and political subdivisions 3,930 - - - - 4,010 Mortgage-backed securities 17,612 (98) 23 (5) 1 17,565 Equity securities 5,521 (11) 2 (31) 2 5,592 ----------------- --------- ---------- --------- ---------- ----------------- Total $ 205,393 $ (1,247) 81 $ (397) 9 $ 204,092 ================= ========= ========== ========= ========== =================
Southwest has reviewed all these securities on an individual basis and has determined that the unrealized losses are not related to a decline in the credit quality of the issuers. Additionally, 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. As a result, management has determined that none of the unrealized losses are other than temporary. As required by law, investment securities are pledged to secure public and trust deposits, as well as the Sweep Agreement product and borrowings from the FHLB. Securities with an amortized cost of $227.5 million and $192.9 million were pledged to meet such requirements of $90.1 million and $75.9 million at December 31, 2005 and 2004, respectively. Any amount overpledged can be released at any time. 38 A comparison of the amortized cost and approximate fair value of Southwest's debt securities by maturity date at December 31, 2005 follows in the next table.
Available for Sale Held to Maturity ------------------------ ------------------------ Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value - ------------------------------- ---------- ----------- ----------- ---------- (dollars in thousands) One year or less $ 1,194 $ 1,203 $ 1,538 $ 1,530 Two years through five years 258,980 253,547 - - Five years through ten years - - - - More than ten years 2,006 2,001 - - ---------- ----------- ----------- ---------- Total $ 262,180 $ 256,751 $ 1,538 $ 1,530 ========== =========== =========== ==========
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 debt securities for this analysis. Gross realized gains (losses) on sales of investment securities were zero during 2005, $103,000 and $(165,000) during 2004, and $29,000 and $(1,000) during 2003, respectively. The gross proceeds from such sales of investment securities totaled approximately zero, $11.0 million, and $7.0 million during 2005, 2004, and 2003, respectively. A portion of the gain on sales of investment securities during 2004 and 2003 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, -------------------------- (Dollars in thousands) 2005 2004 - ----------------------------------------------- ----------- ----------- Real estate mortgage: Commercial $ 563,074 $ 523,358 One-to-four family residential 93,478 87,858 Real estate construction 299,344 248,278 Commercial 374,101 390,272 Installment and consumer: Guaranteed student loans 377,110 348,970 Other 28,773 25,139 ----------- ----------- 1,735,880 1,623,875 Allowance for loan losses (23,812) (18,991) ----------- ----------- Total loans, net $ 1,712,068 $ 1,604,884 =========== =========== 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, 2005 and 2004, substantially all of Southwest's loans were collateralized with real estate, inventory, accounts receivable, and/or other assets, or are guaranteed by agencies of the United States Government or, in the case of private student loans, insured by a private insurer. Loans to individuals and businesses in the healthcare industry totaled $428.2 million, or 25% of total loans at December 31, 2005. 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. 39 Southwest had loans which were held for sale of $383.4 million and $354.6 million at December 31, 2005 and 2004, respectively. These loans are carried at the lower of cost or market. 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 $22.1 million and $22.2 million at December 31, 2005 and 2004, 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 $889,000, $810,000, and $802,000, for 2005, 2004, and 2003, respectively. The principal balance of loans past due ninety days or more for which Southwest was still accruing interest totaled $1.5 million and $929,000 at December 31, 2005 and 2004, respectively. The unpaid principal balance of real estate mortgage loans serviced for others totaled $133.5 million and $125.4 million at December 31, 2005 and 2004, respectively. Southwest maintained escrow accounts totaling $731,000 and $629,000 for real estate mortgage loans serviced for others at December 31, 2005 and 2004, respectively. The following table sets forth the remaining maturities for certain loan categories at December 31, 2005. 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 (Dollars in thousands) or less five years five years Total - ---------------------------------------- ---------- ---------- ---------- ----------- Real estate mortgage: Commercial $ 99,077 $ 284,718 $ 179,279 $ 563,074 One-to-four family residential 17,309 38,748 37,421 93,478 Real estate construction 129,012 130,068 40,264 299,344 Commercial 137,604 149,839 86,658 374,101 Installment and consumer: Guaranteed student loans 377,110 - - 377,110 Other 13,968 14,063 742 28,773 ---------- ---------- ---------- ----------- Total $ 774,080 $ 617,436 $ 344,364 $ 1,735,880 ========== ========== ========== ===========
The following table sets forth at December 31, 2005 the dollar amount of all loans due more than one year after December 31, 2005. (Dollars in thousands) Fixed Variable Total - --------------------------------------- ---------- ---------- ----------- Real estate mortgage: Commercial $ 35,703 $ 428,294 $ 463,997 One-to-four family residential 26,901 49,268 76,169 Real estate construction 5,634 164,698 170,332 Commercial 30,161 206,336 236,497 Installment and consumer 5,882 8,923 14,805 ---------- ---------- ----------- Total $ 104,281 $ 857,519 $ 961,800 ========== ========== =========== 40 The allowance for loan losses is summarized as follows: For the Years Ended December 31, -------------------------------------- (Dollars in thousands) 2005 2004 2003 - ------------------------------------ ---------- ---------- ---------- Beginning balance $ 18,991 $ 15,009 $ 11,163 Provision for loan losses 15,785 12,868 8,408 Loans charged off (12,020) (10,034) (5,077) Recoveries 1,056 1,148 515 ---------- ---------- ---------- Total $ 23,812 $ 18,991 $ 15,009 ========== ========== ========== As of December 31, 2005 and 2004, impaired loans totaled $22.1 million and $22.2 million and had a related allowance for loan loss of $4.4 million and $4.7 million, respectively. The average balance of impaired loans totaled $12.9 million and $9.0 million for the years ended December 31, 2005 and 2004, respectively. Interest income recognized on impaired loans totaled $195,000, $58,000, and $11,000, respectively, for the years ended December 31, 2005, 2004, and 2003. Directors and officers of Southwest, Stillwater National, and SNB Wichita 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 $1.6 million, $1.4 million, and $1.8 million, at December 31, 2005, 2004 and 2003, respectively. During 2005, $2.7 million of new loans and advances on existing loans were made to these persons and repayments totaled $2.5 million. 4. PREMISES AND EQUIPMENT These consist of the following: At December 31, ------------------------ (Dollars in thousands) 2005 2004 - ------------------------------------------ ---------- ---------- Land $ 4,530 $ 4,530 Buildings and improvements 11,205 11,196 Furniture, fixtures, and equipment 24,908 24,709 Construction/Remodeling in progress 2,108 261 ---------- ---------- 42,751 40,696 Accumulated depreciation and amortization (22,167) (20,836) ---------- ---------- Premises and equipment, net $ 20,584 $ 19,860 ========== ========== 41 5. OTHER BORROWED FUNDS During 2005, the only category of other borrowings whose average exceeded 30% of ending shareholders' equity was funds borrowed from the FHLB.
At December 31, -------------------------------------- (Dollars in thousands) 2005 2004 2003 - ------------------------------------------------------ ---------- ---------- ---------- AMOUNTS OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option $ 2,216 $ 2,359 $ 2,490 Federal funds purchased and securities sold under repurchase agreements 65,342 60,006 61,335 Borrowed from the Federal Home Loan Bank 136,850 137,700 120,025 Other 100 - - WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD: Treasury, tax and loan note option 3.95% 1.87% 0.73% Federal funds purchased and securities sold under repurchase agreements 2.88 1.59 0.71 Borrowed from the Federal Home Loan Bank 4.33 3.54 3.36 Other 5.25 - - MAXIMUM AMOUNTS OF BORROWINGS OUTSTANDING AT ANY MONTH-END: Treasury, tax and loan note option $ 2,216 $ 2,500 $ 2,500 Federal funds purchased and securities sold under repurchase agreements 130,342 111,359 97,893 Borrowed from the Federal Home Loan Bank 146,500 189,788 166,500 Other 100 - - APPROXIMATE AVERAGE SHORT-TERM BORROWINGS OUTSTANDING FOR THE YEAR: Treasury, tax and loan note option $ 672 $ 758 $ 752 Federal funds purchased and securities sold under repurchase agreements 78,641 85,680 64,927 Borrowed from the Federal Home Loan Bank 129,763 165,693 134,794 Other 1 - - APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR: Treasury, tax and loan note option 3.00% 1.12% 0.91% Federal funds purchased and securities sold under repurchase agreements 2.86 1.22 0.84 Borrowed from the Federal Home Loan Bank 3.91 2.97 3.22 Other 5.25 - -
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, 2005 and 2004, loans pledged under the Agreement were $465.1 million and $460.6 million and investment securities pledged (at carrying value) were $101.7 million and $86.1 million, respectively. Southwest has available various forms of other borrowings for cash management and liquidity purposes. These forms of borrowings include federal funds purchases, securities sold under agreements to repurchase, and 42 borrowings from the FRB, the Student Loan Marketing Association ("SLMA"), the F&M Bank of Tulsa ("F&M") and the FHLB. Southwest has a $2.5 million line of credit from F&M, none of which was outstanding at December 31, 2005. 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 $2.2 million at December 31, 2005. Southwest has approved federal funds purchase lines totaling $350.5 million with nine financial entities; the outstanding balance on these lines totaled $1.5 million at December 31, 2005. In addition, Southwest has available a $200.0 million line of credit from the SLMA and a $340.7 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, 2005. The FHLB line of credit had an outstanding balance of $136.9 million at December 31, 2005 and maturities as follows: $80.4 million in 2006, zero in 2007, $10.0 million in 2008, $15.0 million in 2009, zero in 2010, and $31.5 million after 2010. 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 & Co., Inc., Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS Financial Services, Inc., RBC Dain Rauscher, and CountryWide Securities that total $1.5 billion. In conjunction with these lines of credit, $379.3 million in retail certificates of deposit were included in total deposits at December 31, 2005. 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, 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, 2005, one repurchase agreement to one entity totaling $18.0 million exceeded more than 10% of equity capital. 6. SUBORDINATED DEBENTURES On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest, issued its 9.30% Cumulative Trust Preferred Securities (the "SBI Capital Trust Preferred") in an underwritten public offering. Proceeds of the SBI Capital Trust Preferred totaling $25,786,500 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 were redeemed in June 2005. At that time, $970,000 in unamortized issuance costs related to the SBI Capital Trust Preferred were written off to general and administrative expense. On June 26, 2003, OKSB Statutory Trust I, a newly-formed subsidiary of Southwest, issued its Floating Rate Capital Securities (the "OKSB Trust Preferred") in a private placement. Proceeds of the OKSB Trust Preferred totaling $20,619,000 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 43 to mandatory redemption, in whole or in part, upon repayment of the OKSB 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 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 its Floating Rate Trust Preferred Securities (the "SBI II Trust Preferred") in a private placement. Proceeds of the SBI II Trust Preferred totaling $25,774,000 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 SBI II trust preferred issuance were 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. 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 were its sole assets. This entity is now inactive. 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 of OKSB Statutory Trust I; the liquidation value is $1,000 per share. 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 of SBI Capital Trust II; the liquidation value is $1,000 per share. Each of the Trust Preferred issuances meets the regulatory criteria for Tier I capital, subject to Federal Reserve guidelines that limit the amount of the Trust Preferred and cumulative perpetual preferred stock to an aggregate of 25% of Tier I capital. At December 31, 2005, $45.0 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 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 44 of Financial Condition and the Subordinated Debentures are presented on the Consolidated Statements of Financial Condition as a separate liability category. 7. INCOME TAXES The components of taxes on income follow:
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - -------------------------------------------------------- ---------- ---------- ---------- CURRENT TAX EXPENSE: Federal $ 13,657 $ 9,921 $ 8,577 State 1,435 1,244 1,121 DEFERRED TAX EXPENSE (BENEFIT): Federal (1,127) (532) (1,274) State (125) (94) (318) ---------- ---------- ---------- Taxes on income $ 13,840 $ 10,539 $ 8,106 ========== ========== ==========
The amounts of taxes on income in the consolidated statements of operations in this report are different from the expected outcomes using U.S. Federal income tax rates for the following reasons:
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - -------------------------------------------------------- ---------- ---------- ---------- Computed tax expense at statutory rates $ 12,199 $ 10,209 $ 8,044 INCREASE (DECREASE) IN INCOME TAXES RESULTING FROM: Low income housing credit (500) (125) - Benefit of income not subject to U.S. Federal income tax (111) (462) (583) Expenses not deductible for U.S. Federal income tax 172 170 124 State income taxes, net of Federal income tax benefit 852 747 522 Other 1,228 - (1) ---------- ---------- ---------- Taxes on income $ 13,840 $ 10,539 $ 8,106 ========== ========== ==========
Deferred tax expense (benefit) relating to temporary differences includes the following components:
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - -------------------------------------------------------- ---------- ---------- ---------- Provision for loan losses $ (2,241) $ (1,593) $ (1,726) Accumulated depreciation (267) 828 347 Prepaid maintenance 39 39 239 Deferred compensation accrual (9) 65 (73) Mark-to-market adjustments 540 66 (389) FHLB stock dividends 580 (156) (33) Write-downs on other real estate (171) - (4) Other 277 125 47 ---------- ---------- ---------- Total $ (1,252) $ (626) $ (1,592) ========== ========== ==========
45 Net deferred tax assets of $9.3 million and $6.4 million at December 31, 2005 and 2004, respectively, are reflected in the accompanying Consolidated Statements of Financial Condition in other assets. There were no valuation allowances at December 31, 2005 or 2004. Temporary differences that give rise to the deferred tax assets (liabilities) include the following: At December 31, ----------------------- (Dollars in thousands) 2005 2004 - ------------------------------------------- ---------- ---------- Provision for loan losses $ 9,999 $ 7,758 Accumulated depreciation (2,572) (2,839) Prepaid maintenance (317) (278) Deferred compensation accrual 168 159 Mark-to-market adjustments 210 750 FHLB stock dividends (391) 189 Write-downs on other real estate 171 - Other (92) 185 ---------- ---------- 7,176 5,924 Deferred taxes (payable) receivable on investment securities available for sale 2,104 505 ---------- ---------- Net deferred tax asset $ 9,280 $ 6,429 ========== ========== 8. SHAREHOLDERS' EQUITY On August 29, 2003, Southwest effected a two-for-one stock split of its common stock in the form of a dividend of 6,121,521 shares. Share and per share amounts in this report have been retroactively restated to reflect this stock split. In April 2002, Southwest's Board of Directors (the "Board") authorized the repurchase of up to 5%, or 572,000 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 March 2003 and April 2004 with the Board authorizing the repurchase of up to another 5%, or approximately 560,000 and 500,000 shares, respectively. In January 2006, the Board authorized a two year program to repurchase up to another 5%, or approximately 700,000 shares. 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 February 1, 2008, 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, 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. 46 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 Southwest's 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, 2005, 80,486 new shares had been issued and 71,974 treasury shares had been issued under these plans. Southwest has reserved 1,760,000 shares of common stock pursuant to the terms of the 1999 Stock Option Plan. The 1999 Stock Option Plan provides selected key employees with the opportunity to acquire common stock. At December 31, 2005, 90,000 new shares and 1,083,038 treasury shares had been reissued by this plan. See "Stock Option Plan" in Note 1 to the Consolidated Financial Statements beginning on page 34 for additional information on Southwest's stock option 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 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, 2005 and 2004, that Southwest, Stillwater National, and SNB Wichita met all capital adequacy requirements to which they are subject. As of December 31, 2005 and 2004, 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. As of December 31, 2005 and 2004, the most recent notification from the Office of Thrift Supervision ("OTS") categorized SNB Wichita as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, Stillwater National and SNB Wichita 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 these notifications that management believes have changed Stillwater National's or SNB Wichita's categories. 47 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 ----------------------- ----------------------- ----------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 2005: Total Capital (to risk-weighted assets) Southwest $ 239,759 14.21% N/A N/A $ 135,002 8.00% Stillwater National 202,444 12.26 $ 165,087 10.00% 132,069 8.00 SNB Wichita 5,741 17.84 3,218 10.00 2,575 8.00 Tier I Capital (to risk-weighted assets) Southwest 218,587 12.95 N/A N/A 67,501 4.00 Stillwater National 181,729 11.01 99,052 6.00 66,035 4.00 SNB Wichita 5,349 16.62 1,931 6.00 1,287 4.00 Tier I Leverage (to average assets) Southwest 218,587 10.24 N/A N/A 85,393 4.00 Stillwater National 181,729 8.83 102,877 5.00 82,302 4.00 SNB Wichita 5,349 11.43 2,339 5.00 1,871 4.00 AS OF DECEMBER 31, 2004: Total Capital (to risk-weighted assets) Southwest $ 216,038 13.92% N/A N/A $ 124,186 8.00% Stillwater National 177,433 11.69 $ 151,718 10.00% 121,374 8.00 SNB Wichita 5,788 19.63 2,948 10.00 2,358 8.00 Tier I Capital (to risk-weighted assets) Southwest 168,847 10.88 N/A N/A 62,093 4.00 Stillwater National 158,445 10.44 91,031 6.00 60,687 4.00 SNB Wichita 5,471 18.56 1,769 6.00 1,179 4.00 Tier I Leverage (to average assets) Southwest 168,847 8.61 N/A N/A 78,411 4.00 Stillwater National 158,445 8.24 96,091 5.00 76,872 4.00 SNB Wichita 5,471 15.82 1,730 5.00 1,384 4.00
The approval of the Comptroller of the Currency is required if the total of all dividends declared by Stillwater National in any calendar year exceeds the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, Stillwater National may not pay a dividend if, after paying the dividend, Stillwater National would be under capitalized. Stillwater National's maximum amount of dividends available for payment totaled approximately $37.4 million at December 31, 2005. Dividends declared by Stillwater National for the years ended December 31, 2005, 2004, and 2003 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, 2005, 2004, and 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. Southwest's 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 $1.9 million, $1.8 million, and $1.3 million, in 2005, 2004, and 2003, respectively. 48 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, 2005 follow: 2006 $ 1,840,909 2007 1,631,829 2008 1,416,445 2009 1,310,757 2010 819,581 Thereafter 669,268 The total rental expense was $1.7 million, $1.4 million, and $1.3 million, in 2005, 2004, and 2003, 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 due to the short-term maturity rates. 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 based on current book value. The Subordinated debentures have floating rates that reset quarterly. 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. 49 The carrying values and estimated fair values of Southwest's financial instruments follow:
AT DECEMBER 31, 2005 At December 31, 2004 --------------------------- --------------------------- Carrying Fair Carrying Fair (Dollars in thousands) Values Values Values Values - -------------------------- ------------ ------------ ------------ ------------ Cash and cash equivalents $ 50,277 $ 50,277 $ 24,097 $ 24,097 Investment securities: Held to maturity 1,538 1,530 2,495 2,509 Available for sale 256,751 256,751 204,092 204,092 FRB and FHLB stock 9,804 9,804 13,464 13,464 Total loans 1,712,068 1,713,849 1,604,884 1,604,188 Accrued interest receivable 14,382 14,382 15,091 15,091 Deposits 1,657,820 1,654,440 1,500,058 1,595,711 Accrued interest payable 8,953 8,953 4,911 4,911 Other liabilities 11,233 11,233 8,323 8,323 Other borrowings 204,508 204,508 200,065 200,065 Subordinated debentures 46,393 46,393 72,180 72,891 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, and standby and commercial letters of credit. The following table provides a summary of Southwest's off-balance sheet financial instruments:
At December 31, --------------------------- (Dollars in thousands) 2005 2004 - ---------------------------------------------------------------- ------------ ------------ Commitments to extend commercial and real estate mortgage credit $ 451,095 $ 367,105 Standby and commercial letters of credit 16,344 9,599 ------------ ------------ Total $ 467,439 $ 376,704 ============ ============
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. 14. COMMITMENTS AND CONTINGENCIES In the normal course of business, Southwest is at all times subject to various pending and 50 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, 2005, 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 $3.4 million. 15. SUPPLEMENTAL CASH FLOWS INFORMATION
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - -------------------------------------------------------- ---------- ---------- ---------- Cash paid for interest $ 48,196 $ 30,710 $ 29,734 Cash paid for taxes on income 15,544 8,300 8,681 Loans transferred to other real estate owned 7,303 4,035 2,920
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 guaranteed student lending services to post-secondary students in Oklahoma and several other states and residential mortgage lending services to customers primarily 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. The Other Operations segment also includes SNB Investor Services and nonbank cash machine 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 Note 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 51 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. The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2005 ------------------------------------------------------------------------ Oklahoma Other States Secondary Other Total (Dollars in thousands) Banking Banking Market Operations Company - ------------------------------ ------------ ------------ ------------ ------------ ------------ Net interest income $ 46,119 $ 19,272 $ 16,971 $ 2,744 $ 85,106 Provision for loan losses 11,371 4,414 - - 15,785 Other income 8,284 990 4,221 3,911 17,406 Other expenses 28,262 12,082 5,780 5,749 51,873 ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes 14,770 3,766 15,412 906 34,854 Taxes on income 5,951 1,373 5,984 532 13,840 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 8,819 $ 2,393 $ 9,428 $ 374 $ 21,014 ============ ============ ============ ============ ============ Fixed asset expenditures $ 485 $ 1,412 $ - $ 1,527 $ 3,424 Total loans at period end 836,850 518,708 380,346 (24) 1,735,880 Total assets at period end 843,584 516,212 397,940 341,903 2,099,639 For the Year Ended December 31, 2004 ------------------------------------------------------------------------ Oklahoma Other States Secondary Other Total (Dollars in thousands) Banking Banking Market Operations Company - ------------------------------ ------------ ------------ ------------ ------------ ------------ Net interest income $ 42,272 $ 14,331 $ 18,817 $ (2,943) $ 72,477 Provision for loan losses 8,941 3,927 - - 12,868 Other income 7,252 867 3,104 2,862 14,085 Other expenses 27,671 7,281 5,483 4,091 44,526 ------------ ------------ ------------ ------------ ------------ Income before taxes 12,912 3,990 16,438 (4,172) 29,168 Taxes on income 4,798 1,380 6,018 (1,657) 10,539 ------------ ------------ ------------ ------------ ------------ Net income $ 8,114 $ 2,610 $ 10,420 $ (2,515) $ 18,629 ============ ============ ============ ============ ============ Fixed asset expenditures $ 480 $ 650 $ 2 $ 1,732 $ 2,864 Total loans at period end 881,682 388,002 353,812 379 1,623,875 Total assets at period end 889,768 386,379 368,557 269,083 1,913,787
For the Year Ended December 31, 2003 ------------------------------------------------------------------------ Oklahoma Other States Secondary Other Total (Dollars in thousands) Banking Banking Market Operations Company - ------------------------------ ------------ ------------ ------------ ------------ ------------ Net interest income $ 41,977 $ 8,475 $ 9,679 $ (4,663) $ 55,468 Provision for loan losses 6,231 2,177 - - 8,408 Other income 6,642 408 4,206 3,244 14,500 Other expenses 25,657 3,954 5,085 3,866 38,562 ------------ ------------ ------------ ------------ ------------ 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 loans at period end 865,688 228,620 214,377 151 1,308,836 Total assets at period end 879,290 231,153 220,346 250,775 1,581,564
52 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, ----------------------- (Dollars in thousands) 2005 2004 - ------------------------------------------------------------------------------- ---------- ---------- STATEMENTS OF FINANCIAL CONDITION ASSETS: Cash and due from banks $ 3,401 $ 30,459 Investment in subsidiary bank 178,927 157,952 Investments in other subsidiaries 6,701 7,618 Investment securities, available for sale 29,442 2,860 Loans, net of allowance for loan losses of $0 (2005) and $0 (2004) - 151 Other assets 2,564 3,008 ---------- ---------- Total $ 221,035 $ 202,048 ========== ========== LIABILITIES: Subordinated debentures $ 46,393 $ 72,180 Other liabilities 4,198 3,884 SHAREHOLDERS' EQUITY: Common stock and related accounts 170,444 125,984 ---------- ---------- Total $ 221,035 $ 202,048 ========== ==========
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - ------------------------------------------------------------------ ---------- ---------- ---------- STATEMENTS OF OPERATIONS INCOME: Cash dividends from subsidiaries $ 13,624 $ 3,335 $ 3,893 Other income 1,443 1,301 1,023 Investment income 717 346 133 Interest and fees on loans 9 18 15 ---------- ---------- ---------- Total income 15,793 5,000 5,064 EXPENSE: Interest on subordinated debentures 4,113 4,489 3,079 Other expense 3,108 1,924 2,015 ---------- ---------- ---------- Total expense 7,221 6,413 5,094 ---------- ---------- ---------- Total income (loss) before taxes and equity in undistributed income of subsidiaries 8,572 (1,413) (30) Taxes on income (1,840) (1,799) (1,488) ---------- ---------- ---------- Income before equity in undistributed income of subsidiaries 10,412 386 1,458 Equity in undistributed income of subsidiaries 10,602 18,243 13,434 ---------- ---------- ---------- Net income $ 21,014 $ 18,629 $ 14,892 ========== ========== ==========
53
For the Years Ended December 31, ------------------------------------ (Dollars in thousands) 2005 2004 2003 - ------------------------------------------------------------------ ---------- ---------- ---------- STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES: Net income $ 21,014 $ 18,629 $ 14,892 Equity in undistributed income of subsidiaries (10,602) (18,243) (13,434) Provision for loan losses - - - Other, net 1,544 3,705 47 ---------- ---------- ---------- Net cash provided by operating activities 11,956 4,091 1,505 ---------- ---------- ---------- INVESTING ACTIVITIES: Available for sale securities: Purchases (26,998) - (2,900) Sales - - - Maturities - - 900 Loans originated and principal repayments, net 151 - (58) Capital contribution to Bank (12,500) - (11,000) Capital contribution to other subsidiaries - - (7,393) Return of capital contribution to other subsidiaries 774 - - ---------- ---------- ---------- Net cash provided by (used in) investing activities (38,573) - (20,451) ---------- ---------- ---------- FINANCING ACTIVITIES: Proceeds from issuance of common stock - - - Net increase (decrease) in deposits - - - Net increase (decrease) in short-term borrowings - - - Net proceeds from issuance of common stock 41,593 1,439 2,318 Proceeds from issuance of subordinated debentures - - 46,393 Redemption of subordinated debentures (25,787) - - Purchases of treasury stock (12,416) - - Cash dividends paid on common stock (3,831) (3,280) (2,846) ---------- ---------- ---------- Net cash provided by (used in) financing activities (441) (1,841) 45,865 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (27,058) 2,250 26,919 Cash and cash equivalents, Beginning of year 30,459 28,209 1,290 ---------- ---------- ---------- End of year $ 3,401 $ 30,459 $ 28,209 ========== ========== ==========
54 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended --------------------------------------------------------- (Dollars in thousands, except per share data) 12-31-05 09-30-05 06-30-05 03-31-05 - -------------------------------------------------- ------------ ------------ ------------ ------------ OPERATIONS DATA Interest income $ 37,205 $ 34,948 $ 33,245 $ 31,946 Interest expense 15,476 13,555 12,353 10,854 ------------ ------------ ------------ ------------ Net interest income 21,729 21,393 20,892 21,092 Provision for loan losses 4,348 4,142 2,986 4,309 Gain on sales of securities and loans 1,813 1,333 916 853 Other income 3,104 3,258 3,262 2,867 Other expenses 13,220 12,725 13,784 12,144 ------------ ------------ ------------ ------------ Income before taxes 9,078 9,117 8,300 8,359 Taxes on income 4,486 3,310 3,071 2,973 ------------ ------------ ------------ ------------ Net income $ 4,592 $ 5,807 $ 5,229 $ 5,386 ============ ============ ============ ============ PER SHARE DATA (1) Basic earnings per common share $ 0.33 $ 0.41 $ 0.42 $ 0.44 Diluted earnings per common share 0.31 0.41 0.40 0.43 Dividends declared per common share 0.075 0.075 0.075 0.075 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 14,001,209 13,944,877 12,533,323 12,154,300 Diluted 14,387,171 14,359,808 12,893,800 12,579,941 For the Quarter Ended --------------------------------------------------------- (Dollars in thousands, except per share data) 12-31-04 09-30-04 06-30-04 03-31-04 - -------------------------------------------------- ------------ ------------ ------------ ------------ OPERATIONS DATA Interest income $ 30,333 $ 27,209 $ 24,423 $ 22,758 Interest expense 9,509 8,239 7,358 7,140 ------------ ------------ ------------ ------------ Net interest income 20,824 18,970 17,065 15,618 Provision for loan losses 4,641 3,823 2,700 1,704 Gain on sales of securities and loans 908 963 707 607 Other income 2,855 2,957 2,577 2,511 Other expenses 12,302 11,314 10,453 10,457 ------------ ------------ ------------ ------------ Income before taxes 7,644 7,753 7,196 6,575 Taxes on income 2,676 2,898 2,592 2,373 ------------ ------------ ------------ ------------ Net income $ 4,968 $ 4,855 $ 4,604 $ 4,202 ============ ============ ============ ============ PER SHARE DATA (1) Basic earnings per common share $ 0.41 $ 0.40 $ 0.38 $ 0.35 Diluted earnings per common share 0.39 0.39 0.36 0.34 Dividends declared per common share 0.07 0.07 0.07 0.07 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 12,091,688 12,081,379 12,074,336 11,995,400 Diluted 12,650,601 12,547,962 12,504,682 12,463,367
55 19. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. On April 14, 2005, the SEC announced it would provide for a phased-in implementation process for this revised statement. Generally, the approach to accounting for share-based payments in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date, and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. Southwest plans to adopt Statement 123(R) on January 1, 2006 using the modified prospective method. Management of Southwest believes that adoption of Statement 123(R) will not have a material impact on Southwest's consolidated financial condition or results of operations. 56 OTHER MATERIAL REQUIRED BY FORM 10-K 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 is subject to supervision and regulation by the Office of Thrift Supervision ("OTS"). The deposit accounts of Southwest's banking subsidiaries are insured 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 "SNB Digital Lockbox," and deposit products that automatically sweep excess funds from commercial demand deposit accounts and invest them in interest bearing funds ("Sweep 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) 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 SNB Digital Lockbox, 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. Insurance, benefit, and annuity products are offered through SNB Insurance Agency, Inc., a wholly owned subsidiary of Stillwater National. Trust services, personal brokerage, and credit cards are offered through relationships with 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, lending, and other financial products that respond to professional and commercial customer needs for speed, efficiency, and information. These include Southwest's Sweep Agreements, SNB Digital Lockbox, and SNB DirectBanker(R) and other internet banking products, which complement Southwest's more traditional banking products. Southwest also emphasizes marketing personal banking, investment, and other financial services 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. Southwest's strategic focus includes expansion in carefully selected geographic markets based upon a tested business model developed in connection with its expansion into Oklahoma City in 1982. This geographic expansion is based on identification of markets with concentrations of customers in Southwest's traditional areas of expertise: healthcare and health professionals, businesses and their managers and owners, and commercial and commercial real estate lending, and makes uses of traditional and specialized financial services. Specialized services include integrated document imaging and cash management services designed to help our customers in the healthcare 57 industry and other record-intensive enterprises operate more efficiently, and management consulting services through Southwest's management consulting subsidiaries: Healthcare Strategic Support, Inc., serving physicians, hospitals, and healthcare groups, and Business Consulting Group, Inc., serving small and large commercial enterprises. ORGANIZATION Southwest's business operations are conducted through four operating segments that include regional divisions, a Secondary Market segment consisting of student lending and residential mortgage lending services, and an "other" segment that includes funds management (investment portfolio and funding), SNB Investor Services, and nonbank cash machine operations. The organizational structure is designed to facilitate high customer service, prompt response, efficiency, and appropriate, uniform credit standards and other controls. BANKING SEGMENTS. The banking 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 level 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. OKLAHOMA BANKING SEGMENT. The Oklahoma Banking segment accounted for $8.8 million, or 42% of consolidated net income. Net income from this segment increased $705,000, or 9%, primarily as a result of limiting the growth in other expenses to less than 2%. During 2005, total banking assets declined $45.6 million, or 5%. The decline in banking assets, which is primarily loans, can be attributed to some customers seeking long-term fixed rate loans at other institutions as a result of the increasing rate environment. Additionally, Southwest has concentrated on reducing the level of loans in certain higher risk industries. OTHER STATES BANKING SEGMENT. During 2002, Southwest first established offices in Wichita, Kansas and Dallas, Texas. At December 31, 2005, Southwest had six offices (including loan production offices and branches) in Kansas and Texas. During 2005, these offices produced $2.4 million in net income (11% of the consolidated total), and $130.2 million in additional banking assets. (See "Banking Offices and Geographic Markets" on page 59). SECONDARY MARKET SEGMENT. Southwest has a long history of student and residential mortgage lending. These operations comprise the Secondary Market business segment. During 2005, this segment produced $9.4 million in net income, a reduction of $992,000, or 10%, from 2004, and $29.4 million greater year-end assets, primarily loans held for sale. This growth was the result of expanded student lending, which more than offset the effects of the residential mortgage slowdown. Loan volumes in the Secondary Market segment may vary significantly from period to period. 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. Operation of the student lending portion of this segment is substantially dependent on the SLM Corporation ("Sallie Mae"), which provides substantially all of the servicing for government guaranteed and private student loans and provides liquidity through its purchases of student loans and lines of credit. Southwest makes government guaranteed student loans and private student loans. At December 31, 2005, approximately 94% of private student loans were self-insured by Sallie Mae. The remaining $14.0 million in private student loans at year-end 2005 were 58 secured by substantial cash balances held in Stillwater National, but were not government guaranteed or self-insured by Sallie Mae. The majority of private student loans made by this segment were to students who attend schools owned by Career Education Corporation ("CEC"). At December 31, 2005, approximately 57% of total student loans were private CEC-related loans. The profitability of these CEC-related loans began to decrease beginning in 2005, due to an increase in servicing fees. This decrease in profitability was partially offset by an increase in outstanding balances. In October 2005, Sallie Mae received approval to establish Sallie Mae Bank, an FDIC-insured Utah industrial bank. The establishment of Sallie Mae Bank is intended to reduce Sallie Mae's reliance on independent financial institutions, such as Stillwater National, in origination of student loans. The effects of the establishment of Sallie Mae Bank on Stillwater National's future student lending operations are not known. Please see "Risk Factors" on page 74. SUPPORT AND CONTROL FUNCTIONS. Support and control functions are centralized, although each segment has support and control personnel. Costs of centrally managed support and control functions other than funds management (which is included in the Other Operations segment) are allocated to the Banking and Secondary Market segments. 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 (SNB Digital Lockbox), 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 51 of this report. The total of net income of the segments discussed above is less than consolidated net income for 2005 due to income allocated to the Other Operations segment, which provides funding and liquidity services to the rest of the organization. BANKING OFFICES AND GEOGRAPHIC MARKETS Southwest intends to focus its efforts on markets with characteristics that will allow it to capitalize on its strengths, and to continue establishing new offices in those markets. Southwest considers acquisitions of other financial institutions and other companies, from time to time. Southwest also extends loans to borrowers in Oklahoma and neighboring states through participations with correspondent banks. Southwest has thirteen full-service banking offices, three located in Stillwater, Oklahoma, two located in Tulsa, Oklahoma, two each located in the Dallas and Austin, Texas metropolitan areas, and one each in Oklahoma City and Chickasha, Oklahoma, San Antonio, Texas, and Wichita, Kansas; loan production offices in the Kansas City, Kansas area, and on the campus of the University of Oklahoma Health Sciences Center; 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. 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 59 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 Texas and Kansas offices 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 such as Southwest may engage in banking as well as types of securities, insurance, consulting, 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 greater advantage of the ability to conduct new types of activities and provide a wider array of products. 60 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 and its subsidiaries 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 and federal savings banks, unless otherwise indicated. The term "commercial banks" includes nationally and state chartered banks, but not federal savings associations or federal savings banks. 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 national 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 national 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 commercial 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 federal savings bank), 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. 61 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. 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, loans, allowance for loan losses, investments, liquidity, interest rate risk, 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. 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. 62 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 must 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 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, 2005, approximately 96.05% of SNB Wichita's assets were invested in Qualified Thrift Investments, which exceeded 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 also is 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 the 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 63 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. Stillwater National and SNB Wichita 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 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 Southwest's other 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. FEDERAL DEPOSIT INSURANCE. The FDIC has established a risk-based deposit insurance premium assessment system for insured depository institutions. Under the system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, based upon the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well-capitalized, adequately capitalized, or undercapitalized -- based on the data reported to regulators. Well-capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well-capitalized institutions but that satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Institutions that do not qualify as either well-capitalized or adequately capitalized are deemed to be undercapitalized. Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk it poses to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions with demonstrated weaknesses that, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. Both Stillwater National and SNB Wichita have been informed that they are in the lowest-cost/best risk assessment category for the first assessment period of 2006. REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve, the OCC, and the OTS have established guidelines for maintenance of appropriate levels of capital by bank holding companies, national banks, and federal savings banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and national banks to maintain a specified minimum ratio of capital to total 64 assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets. The regulations of the Federal Reserve and the federal banking regulators require bank holding companies, national banks, and federal savings banks, respectively, to maintain a minimum leverage ratio of Tier 1 capital (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. The capital regulations state, however, that only the strongest bank holding companies, national banks, and federal savings 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, national banks, and federal savings 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 federal savings bank, national bank, or bank holding company experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. In addition, the Federal Reserve has indicated that it also may consider the level of an organization's ratio of tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall assessment of capital. 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 risk-based capital rules of the Federal Reserve, the OCC, and the OTS require bank holding companies, national banks, and federal savings 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 federal savings banks, national banks, and bank holding companies to maintain a minimum ratio of total capital to total risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of calculating these ratios: (i) supplementary capital is limited to no more than 100% of core capital; and (ii) the aggregate amount of certain types of supplementary capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses that may be included in capital to 1.25% of total risk-weighted assets. The federal banking regulatory agencies have established a joint policy regarding the evaluation of federal savings banks' and national 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 65 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 national banks and federal savings 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 2004, 2003, or 2002, and were not required to maintain such supplemental capital. The federal banking regulators have established regulations that classify national banks and federal savings banks by capital levels and provide for various "prompt corrective actions" to resolve the problems of any national bank or federal savings 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 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, 2005, 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 16 of this report, and, in the Notes to Consolidated Financial Statements in this report "Note 6-Subordinated Debentures" on page 43 and "Note 9- Capital Requirements" on pages 47 through 48. BROKERED DEPOSITS. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew, or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Stillwater National and SNB Wichita are each eligible to accept brokered deposits as a result of their capital levels. Stillwater National regularly makes use of brokered deposits. SNB Wichita has not used brokered deposits but may do so in the future when management deems it appropriate from an asset/liability management perspective. 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 financial statements to FNMA, FHA, and VA, 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, Home Mortgage Disclosure Act, Fair Credit Reporting Act, the National Flood Insurance Act, and the Real Estate Settlement Procedures Act, and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Southwest's mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors. COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution's discretion to develop the types of products and services that it believes 66 are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution's record of making loans in its assessment areas; (b) investment, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (c) service, to evaluate the institution's delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches, and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. Stillwater National was assigned a "satisfactory" rating as a result of its last CRA examination. SNB Wichita has not yet received a CRA rating. BANK SECRECY ACT. Under the Bank Secrecy Act ("BSA"), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the "USA PATRIOT Act" or the "Patriot Act," enacted in response to the September 22, 2001, terrorist attacks, enacted prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition. SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") established a broad range of corporate governance and accounting measures intended to increase corporate responsibility and protect investors by improving the accuracy and reliability of disclosures under federal securities laws. Southwest is subject to Sarbanes-Oxley because it is required to file periodic reports with the SEC under the Securities and Exchange Act of 1934. Among other things, Sarbanes-Oxley, its implementing regulations, and related Nasdaq Stock Market rules, have established new membership requirements and additional responsibilities for Southwest's audit committee, imposed restrictions on the relationship between Southwest and its outside auditors (including restrictions on the types of non-audit services auditors may provide to their clients), imposed additional financial statement certification responsibilities for Southwest's chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate Southwest's disclosure controls and procedures and its internal control over financial reporting, and required Southwest's auditors to issue a report on Southwest's internal control over financial reporting. 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. Stillwater National's federal student lending activities are subject to regulation and examination by the United States Department of Education. 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 67 establishment of branches, investments, interest rates on loans, credit practices, the disclosure of credit terms, and discrimination in credit transactions. ENFORCEMENT ACTIONS. Federal statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease and desist orders, receivership, conservatorship, or the termination of deposit insurance. EMPLOYEES As of December 31, 2005, Southwest employed 381 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. 68 BOARD OF DIRECTORS OF SOUTHWEST BANCORP, INC. AND STILLWATER NATIONAL BANK & TRUST COMPANY 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 James E. Berry II Owner, Shading Concepts Tom D. Berry Auctioneer, Real Estate Broker, Oil & Gas Exploration Joe Berry Cannon Assistant Professor of Management, Oral Roberts University School of Business J. Berry Harrison Oklahoma State Senator and Rancher Erd M. Johnson Petroleum Engineer & Operating Partner, Johnson Oil Partnership David P. Lambert Chairman of the Board, Lambert Construction Company Linford R. Pitts President, Stillwater Transfer & Storage, Inc. Russell W. Teubner Founder and Chief Executive Officer, HostBridge Technology John Cohlmia * Real Estate Broker, Grubb & Ellis/Levy Beffort
*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, Stillwater National, and SNB Bank of Wichita Steven N. Hadley President, SNB Bank of Wichita Anthony W. Martin Dentist/Owner, Martin & Frankenberry D.D.S.P.A.
69 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 - ---------------------------------- --- ---------------------------------------------------------------- Robert H. Beuttas................. 50 President, SNB Bank of Dallas-Preston Center Division of Stillwater National Kerby E. Crowell.................. 56 Executive Vice President, Chief Financial Officer, and Secretary of Southwest and Stillwater National; Director, Chief Financial Officer, and Secretary of SNB Wichita Allen Glenn....................... 36 President, Business Consulting Group, Inc., Senior Vice President, Stillwater National Steven M. Gobel................... 54 Executive Vice President and Associate Chief Financial Officer of Stillwater National Steven N. Hadley.................. 48 President, SNB Wichita Rex E. Horning.................... 54 President, Stillwater Division of Stillwater National Jerry L. Lanier................... 57 Executive Vice President and Chief Lending Officer of Stillwater National Len McLaughlin.................... 53 President, SNB Bank of Dallas-Frisco Division of Stillwater National J. Randall Mills.................. 51 President, Healthcare Strategic Support, Inc. Jason D. Osborn................... 35 President, Oklahoma City Division of Stillwater National Steven M. Peterson................ 41 President, SNB Bank of Austin Division of Stillwater National Kimberly G. Sinclair.............. 50 Executive Vice President and Chief Administrative Officer of Stillwater National Charles H. Westerheide............ 57 Executive Vice President and Treasurer of Stillwater National David L. York..................... 59 President, Tulsa Division of Stillwater National
The principal occupations and business experience of each executive officer of Southwest are shown below. ROBERT H. BEUTTAS joined Stillwater National in October 2005 as President, SNB Bank of Dallas-Preston Center Division of Stillwater National. Prior to joining Stillwater National, Mr. Beuttas was Senior Vice President and Texas State Manager for Commercial Real Estate of SouthTrust Bank and its successor, Wachovia Bank, from December 1995 to October 2005. He previously served as an Oversight Manager with the Resolution Trust Company from 1990 to 1995. From 1977 to 1990, he served as an officer of Lomas & Nettleton Co., a national mortgage banking company. 70 KERBY E. CROWELL joined Stillwater in 1969; has served as Executive Vice President and Chief Financial Officer of Southwest and Stillwater National since 1986; became Secretary of Southwest and Stillwater National in 2000; and was named Director, Chief Financial Officer, and Secretary of SNB Wichita in 2003. He is currently a Board member of MetaFund Corporation (an Oklahoma Community Development Financial Institution) and a member of Independent Community Bankers of America's ("ICBA") Large Bank Advisory Committee and the Oklahoma City Chapter of the Financial Executives Institute. He is a past Board member of ICBA's Credit Card Subsidiary. Mr. Crowell is also past President and Board member of the Oklahoma City Chapter of the Financial Executives Institute, and has served on the Federal Reserve's Industry Advisory Group on Electronic Check Presentment. In 1996, Mr. Crowell was recognized by the Oklahoma Society of Certified Public Accountants as the Outstanding Certified Public Accountant in Business and Industry. ALLEN GLENN serves as President of the Business Consulting Group, Inc. ("BCG"), a management consulting subsidiary of Southwest Bancorp, Inc., and as a Senior Vice President of Stillwater National. Mr. Glenn previously served as Vice President of BCG, beginning in January 2002. From 2000 until joining BCG, Mr. Glenn was President of Glenn Solutions, Inc., a management consulting firm that specialized in developing strategic and operational solutions for national retailers to improve their profitability and service levels. From 1995 to 2000, Mr. Glenn was a manager with Kurt Salmon Associates, an international management consulting firm to the retail consumer products and healthcare industries. STEVEN M. GOBEL serves as Executive Vice President, Audit Facilitator, 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 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. STEVEN N. HADLEY was named President and CEO of SNB Bank of Wichita in October 2004. Mr. Hadley has over twenty-three years of banking experience. Prior to joining SNB Bank of Wichita, Mr. Hadley spent four years with Commerce Bank in their Wichita and Garden City, Kansas markets. Before that, Mr. Hadley was with Bank of America in Garden City, Kansas. Mr. Hadley holds a bachelors degree in Agricultural Economics from Kansas State University. Mr. Hadley is a member of the booster club for the Kapaun Mt. Carmel High School and is involved in the Wichita Swim Club and the St. Thomas Aquinas Catholic Church. REX E. HORNING was appointed President of the Stillwater Division of Stillwater National in May 2001. Mr. Horning has 31 years of banking experience. Prior to joining Stillwater National, he most recently 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 as Executive Director of the Oklahoma State University Alumni Association, is a Trustee for the Oklahoma State University Foundation, is a recent past president of the OSU Spears College of Business Associates and is a board member of the OSU Center for Research and Economic Development. Mr. Horning is a past chairman of the Stillwater Chamber of Commerce and also serves on the Board of Directors of the Oklahoma Chamber of Commerce. 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 71 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 Support, 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 Partner and Healthcare Consultant for Madole & Wagner, PLLC, 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. Before that, he was a senior executive with Saint Francis Health System for ten years, responsible for development of a 160 physician medical group, development of a start-up HMO, management of two affiliated small or rural hospitals, physician joint venture development, and managed care strategic planning and network development. He is a fellow of the American College of Healthcare Executives, and a member of the Medical Group Management Association, American Society of Certified Public Accountants, and Oklahoma Society of Certified Public Accountants. JASON D. OSBORN was appointed President of the Oklahoma City Division in September 2005. Prior to that, he was Senior Vice President in Healthcare/Commercial Lending in the Oklahoma City Division and Leader of the Healthcare Business Development Group. Mr. Osborn holds a Bachelor of Science degree in Finance from Oklahoma State University and a Master of Business Administration from the University of Oklahoma. Mr. Osborn joined Stillwater National in 1996, coming from Bank of Oklahoma where he had spent three years in the Retail Banking department in the Oklahoma City metro area. Mr. Osborn is currently President of the Board of Directors at Infant Crisis Services, a non-profit organization in Oklahoma City. STEVEN M. PETERSON was appointed President of SNB Bank of Austin in September 2004. Mr. Peterson previously served as City President for Compass Bank in Williamson County, Texas, and Commerce Bank in Wichita, Kansas from 1998 to August of 2004. Mr. Peterson began his banking career with Fourth Financial Holding Company in Wichita, Kansas. Mr. Peterson currently serves as a Board Member of the Georgetown Symphony and Director of the Chamber of Commerce. He has served as the Chairman of The 100,000 Economic Committee. 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 Executive Board of Directors for the Stillwater United Way, and chaired the 2005 Day of Caring. 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 various organizations throughout Stillwater. 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 Bank IV and NationsBank), Wichita, Kansas, where he served as 72 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. DAVID L. YORK was appointed President of the Tulsa Division in March 2004. Mr. York came to Stillwater National with over thirty years in the Tulsa banking market, most recently serving as Senior Vice President and Manager of the Professional Banking Group of The F&M Bank & Trust Company in Tulsa from 1989 to 2004. From 1983 to 1989, Mr. York previously served in various management and senior lending positions with Utica National Bank & Trust Company, which was acquired by F&M Bank. Mr. York began his banking career with the First National Bank and Trust Company of Tulsa in 1973 and served there until 1983 in various commercial lending and management capacities. Currently, Mr. York serves on the Board of Trustees of St. Simeon's Episcopal Home, Inc., where he was President of the Board for four years, has served as Vice President and is currently Treasurer of its Foundation. Additionally, Mr. York has served on the Board of Trustees of Holland Hall School as its Treasurer. Mr. York is also an Advisory Director of the Tulsa Metro Chamber of Commerce. 73 RISK FACTORS Investing in our common stock involves risks. You should carefully consider the following risk factors before you decide to make an investment decision regarding our stock. The risk factors may cause our future earnings to be lower or our financial condition to be less favorable than we expect. In addition, other risks of which we are not aware, or which we do not believe are material, may cause earnings to be lower, or may hurt our financial condition. You should also consider the other information in this Annual Report on Form 10-K, as well as in the documents incorporated by reference into it. WE MAY BE UNABLE TO EXECUTE OUR GROWTH STRATEGY. We have pursued, and intend to continue to pursue, an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and funding at acceptable risk and expense. There can be no assurance that we will be successful in continuing our growth strategy, however, since it depends upon economic conditions, our ability to identify appropriate markets for expansion, our ability to recruit and retain qualified personnel, our ability to fund growth at reasonable cost, sufficient capital, competitive factors, banking laws, and other factors described in this prospectus. We intend to increase the level of our assets and deposits and the number of our offices, including offices in new markets that may be considerable distances from our current markets and executive headquarters. We cannot be certain as to our ability to manage increased levels of assets and liabilities, or offices in these new markets, without increased expenses and higher levels of non performing assets. We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances, which may adversely affect earnings, shareholder returns, and our efficiency ratio. Increases in operating expenses or non-performing assets may decrease the value of our common stock. In addition, in the future we may acquire banks, branches of other financial institutions, or other businesses. We cannot assure you that we will be able to adequately or profitably manage any such acquisitions. The acquisition of banks, bank branches, and other businesses involves risks, including exposure to unknown or contingent liabilities, the uncertainties of asset quality assessment, the difficulty and expense of integrating the operations and personnel of the acquired companies with ours, the potential negative effects on our other operations of the diversion of management's time and attention, and the possible loss of key employees and customers of the banks, businesses, or branches we acquire. Our failure to execute our internal growth strategy or our acquisition strategy could adversely affect our business, results of operations, financial condition, and future prospects. CHANGES IN INTEREST RATES AND OTHER FACTORS BEYOND OUR CONTROL MAY ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION. Our net income depends to a great extent upon the level of our net interest income. Changes in interest rates can increase or decrease net interest income and net income. Net interest income is the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in world financial markets. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on 74 our net interest margin and results of operations. Changes in the market interest rates for types of products and services in our various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors. The results of our interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that we will be able to successfully manage our interest rate risk. CHANGES IN LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS. Our commercial and commercial real estate lending operations are concentrated in the metropolitan areas of Stillwater, Oklahoma City, and Tulsa, Oklahoma; Dallas, Austin, and San Antonio, Texas; and Wichita and Kansas City, Kansas. Our success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase our problem loans and charge-offs, and otherwise negatively affect our performance and financial condition. ADVERSE CHANGES IN HEALTHCARE-RELATED BUSINESSES COULD LEAD TO SLOWER LOAN GROWTH AND HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS. We have a substantial amount of loans to individuals and businesses involved in the healthcare industry, including business and personal loans to physicians, dentists, and other healthcare professionals, and loans to for-profit hospitals, nursing homes, suppliers and other healthcare-related businesses. Our strategy calls for continued growth in healthcare lending. This concentration exposes us to the risk that adverse developments in the healthcare industry could hurt our profitability and financial condition as a result of increased levels of nonperforming loans and charge-offs, and reduced loan demand and deposit growth. INCOME FROM OUR SECONDARY MARKET ACTIVITIES CAN VARY SIGNIFICANTLY FROM YEAR TO YEAR. OUR ABILITY TO CONDUCT STUDENT LENDING ACTIVITIES AND THE PROFITABILITY OF OUR STUDENT LENDING OPERATIONS ARE HIGHLY DEPENDENT ON SALLIE MAE AND FEDERAL LAW. SALLIE MAE RECENTLY CREATED A BANK, WHICH MAY ADVERSELY AFFECT OUR STUDENT LENDING OPERATIONS. Our secondary market activities, which consist of student lending to post-secondary students and residential mortgage lending, contribute a significant portion of our consolidated net income. The volume of residential mortgage and mortgage loans and profits depend on market interest rates, economic conditions in our markets, and competition, and can vary significantly from year to year. A significant increase in interest rates would be likely to reduce residential lending loan volume and profits. Our student lending activities include government guaranteed loans and private student loans. Our ability to conduct our student lending operations depends significantly on the SLM Corporation, which we refer to as Sallie Mae. Sallie Mae provides substantially all of the servicing for government guaranteed and private student loans; provides liquidity through its purchases of student loans and lines of credit; and guarantees substantially all of our private student loans. Future changes in servicing fees or in our ability to generate government guaranteed private loans from private lenders may adversely affect our net income. The volume and profitability of our government guaranteed student loans depends upon our ability to generate loans from schools and individuals and upon federal laws and regulations that authorize government guaranteed student loans made by banks and other lenders and establish their terms. Although they are not possible to predict, adverse changes in these laws and regulations may reduce, or even eliminate our ability to make government guaranteed student loans, and adversely affect our net income. In October 2005, Sallie Mae received approval to establish Sallie Mae Bank, an FDIC-insured Utah industrial bank. The establishment of Sallie Mae Bank is intended to reduce Sallie Mae's reliance on independent financial institutions, such as Stillwater National, in origination of student loans. The effects of the establishment of Sallie Mae Bank on Stillwater National's future student lending operations are not known. 75 OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER OUR ACTUAL LOAN LOSSES, WHICH COULD ADVERSELY AFFECT OUR EARNINGS. We maintain an allowance for loan losses in an amount which we believe is adequate to provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of incorrect assumptions by management in determining the allowance. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operations. Our loan portfolio contains a high percentage of commercial and commercial real estate loans in relation to our total loans and total assets. Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or other loans or investments. These types of loans also typically are larger than residential real estate loans and other consumer loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in: a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition. UNSEASONED LOANS MAY INCREASE THE RISK OF CREDIT DEFAULTS IN THE FUTURE. Due to our rapid growth over the past several years, a large portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as "seasoning." As a result, a portfolio of older loans may behave more predictably than a newer portfolio. Because a significant portion of our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. WE USE WHOLESALE FUNDING SOURCES TO SUPPLEMENT OUR CORE DEPOSITS, WHICH EXPOSES US TO LIQUIDITY RISK AND POTENTIAL EARNINGS VOLATILITY OR OTHER ADVERSE EFFECTS IF WE ARE UNABLE TO SECURE ADEQUATE FUNDING. We rely on wholesale funding, including Federal Home Loan Bank borrowings and brokered deposits, to supplement core deposits to fund our business. At December 31, 2005, these wholesale funding sources constituted approximately 28% of our total deposits and other borrowings. Wholesale funding sources are affected by general market conditions and the condition and performance of the borrower, and the availability of funding from wholesale lenders may be dependent on the confidence these investors have in our operations. The continued availability to us of these funding sources cannot be assured, and we may find it difficult to retain or replace them at attractive rates as they mature. Our liquidity will be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available to us in the future at acceptable rates of interest or at all. We may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. If we do not have adequate sources of liquidity at attractive rates, we may have to restrain the growth of assets or reduce our asset size, which may adversely affect shareholder value. 76 WE RELY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY OF THEM MAY ADVERSELY AFFECT OUR OPERATIONS. We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial condition. THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE. The overall market and the price of our common stock may continue to be volatile. There may be a significant impact on the market price for our common stock due to, among other things: o Variations in our anticipated or actual operating results or the results of our competitors; o Changes in investors' or analysts' perceptions of the risks and conditions of our business; o The size of the public float of our common stock; o Regulatory developments; o The announcement of acquisitions or new branch locations by us or our competitors; o Market conditions; and o General economic conditions. COMPETITION MAY DECREASE OUR GROWTH OR PROFITS. We compete for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than ours. Credit unions have federal tax exemptions, which may allow them to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably. GOVERNMENT REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS. The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Stillwater National is subject to regulation and supervision by the Office of the Comptroller of the Currency. SNB Wichita is subject to regulation and supervision by the Office of Thrift Supervision. Southwest is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies and leasing companies. Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and monetary policy may also affect our ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads. OUR ABILITY TO PAY DIVIDENDS IS LIMITED BY LAW AND CONTRACT. Our ability to pay dividends to our shareholders largely depends on Southwest's receipt of dividends from Stillwater National. SNB Wichita does not currently pay dividends, and is not expected to do so during the next 77 several years. The amount of dividends that Stillwater National may pay to Southwest is limited by federal laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business. We also are prohibited from paying dividends on our common stock if the required payments on our subordinated debentures have not been made. RESTRICTIONS ON UNFRIENDLY ACQUISITIONS COULD PREVENT A TAKEOVER. Our certificate of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by the board of directors. The Oklahoma General Corporation Act includes provisions that make an acquisition of Southwest more difficult. These provisions may prevent a future takeover attempt in which our shareholders otherwise might receive a substantial premium for their shares over then-current market prices. These provisions include supermajority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. Our certificate of incorporation also authorizes the issuance of additional shares without shareholder approval on terms or in circumstances that could deter a future takeover attempt. In addition, we have adopted a shareholder rights plan designed to protect our shareholders against acquisitions that our board of directors believes are unfair or otherwise not in the best interests of Southwest and its shareholders. Under the rights plan, adopted in 1999 and expiring in 2009, each holder of record of our common stock, subject to the limits of the rights plan, has received, or will receive, 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 our voting stock. Each right entitles the holder (other than the acquiring party) to buy, under specified circumstances, shares of our common stock or equivalent securities, or shares of the acquiror's securities, having a value of twice the right's exercise price. Under the rights plan, we also may exchange each right, other than rights owned by an acquiring party, for a share of our common stock or equivalent securities. FUTURE SALES OF OUR COMMON STOCK OR OTHER SECURITIES MAY DILUTE THE VALUE OF OUR COMMON STOCK. In many situations, our board of directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued stock, including shares authorized and unissued under our stock option plans. In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms. The sale, or availability for sale, of a substantial number of shares of common stock in the public market could adversely affect the price of our common stock and could impair our ability to raise additional capital through the sale of equity securities. 78 AVAILABILITY OF FILINGS 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. The public also may read and copy materials filed by Southwest with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 79 PROPERTIES The locations of Southwest and its subsidiaries are shown below: SOUTHWEST BANCORP, INC. CORPORATE HEADQUARTERS 608 S. Main Street P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 www.oksb.com BUSINESS CONSULTING GROUP, INC.* 1624 Cimarron Plaza P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 HEALTHCARE STRATEGIC SUPPORT, INC.* 2431 E. 61st, Suite 170 P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3690 SNB BANK OF WICHITA* CORPORATE HEADQUARTERS 8415 E. 21st Street North, Suite 150 Wichita, Kansas 67206 316-315-1660 www.snbwichita.com STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS CORPORATE HEADQUARTERS 608 S. Main Street P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 www.banksnb.com DRIVE-IN FACILITY 308 S. Main Street P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 OPERATIONS CENTER* 1624 Cimarron Plaza P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 WATERFORD BRANCH* 6301 Waterford Blvd., Suite 101 Oklahoma City, Oklahoma 73118 405-427-3100 CHICKASHA BRANCH 500 W. Grand Avenue Chickasha, Oklahoma 73018 405-427-3100 TULSA UTICA BRANCH 1500 S. Utica Avenue P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3750 TULSA 61ST BRANCH* 2431 E. 61st, Suite 170 P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3750
80 SNB BANK OF DALLAS* 5300 Town and Country Blvd., Suite 100 Frisco, Texas 75034 972-624-2960 SNB BANK OF DALLAS-PRESTON CENTER* 5950 Berkshire Lane, Suite 350 Dallas, Texas 75225 972-624-2960 SNB BANK OF AUSTIN* 3600 Bee Cave Road, Suite 100 Austin, Texas 78746 512-314-6741 SNB BANK OF SAN ANTONIO* 777 E. Sonterra Blvd., Suite 190 San Antonio, Texas 78258 210-442-6141 STILLWATER NATIONAL BANK LOAN PRODUCTION OFFICE* 11350 Tomahawk Creek Parkway Suite 100 Leawood, Kansas 66211 913-906-4400 OSU CAMPUS BRANCH BANK* 1102 W. Hall of Fame Avenue P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234 OUHSC LOAN OFFICE* 1106 N. Stonewall Oklahoma City, Oklahoma 73190 405-427-3100 OSU-STILLWATER MARKETING OFFICE* Student Union, Room 150 P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
*Leased from third parties. Other properties are owned. 81 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents Filed as Part of this Report (1) Financial Statements. The following financial statements are filed as a part of this report: Independent Registered Public Accounting Firm's Report for the Years Ended December 31, 2005 and 2004 Consolidated Statements of Financial Condition at December 31, 2005 and 2004 Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, and 2003 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005, 2004, and 2003 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004, and 2003 Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003 Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2004, and 2003 (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 from Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004.) * 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.) * 10.6 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan for Rick Green (incorporated by reference from Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 2002.) 82 * 10.7 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan for Kerby E. Crowell (incorporated by reference from Exhibit 10.7 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004.) * 10.8 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan for Jerry L. Lanier (incorporated by reference from Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004.) 10.9 Indemnification Agreements dated December 14 and 15, 2005 by and between Southwest Bancorp, Inc. and James E. Berry II, Thomas D. Berry, Joe Berry Cannon, J. Berry Harrison, Erd M. Johnson, David P. Lambert, Linford R. Pitts, Robert B. Rodgers, Russell W. Teubner, John Cohlmia, and Anthony W. Martin. 10.10 Indemnification Agreements dated December 14 and 15, 2005 by and between Southwest Bancorp, Inc. and Rick Green, Kerby E. Crowell, David Dietz, Allen Glenn, Steve Gobel, Steven N. Hadley, Jerry L. Lanier, Randy Mills, Kimberly Sinclair, Kay Smith, and Charles H. Westerheide. 10.11 Selling Shareholder Agreement dated May 13, 2005 by and among certain shareholders, Betty B. Kerns, and Southwest Bancorp, Inc. (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K dated May 16, 2005). 21 Subsidiaries of the Registrant 23 Consent of Registered Public Accounting Firm 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. 83 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 10, 2006 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 10, 2006 - ----------------------- Rick Green Director and Chief Executive Officer (Principal Executive Officer) /s/ Kerby E. Crowell March 10, 2006 - ---------------------------------- 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 Annual Report on Form 10-K for the year ended December 31, 2005. This report has been signed below by such attorney-in-fact as of March 10, 2006. By: /s/ Rick Green ----------------------- Rick Green Attorney-in-Fact for Majority of the Directors of Southwest 84 EX-10.9 2 b412241ex10-9.txt EXHIBIT 10.9 EXHIBIT 10.9 Form of Indemnification Agreements dated December 14 and 15, 2005 by and between Southwest Bancorp, Inc. and each of James E. Berry II, Thomas D. Berry, Joe Berry Cannon, J. Berry Harrison, Erd M. Johnson, David P. Lambert, Linford R. Pitts, Robert B. Rodgers, Russell W. Teubner, John Cohlmia, and Anthony W. Martin, each identical except for the date and the name and title of the Indemnitee. INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement"), made this ____ day of December 2005, by and between Southwest Bancorp, Inc., a registered bank holding company ("Southwest") and __________________________, a member of the board of directors of _____________ ("Indemnitee"). W I T N E S S E T H WHEREAS, it is essential to Southwest to attract and retain as directors, officers, and agents the most capable persons available. WHEREAS, the Board of Directors of Southwest (the "Board") and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public corporations. WHEREAS, it has come to the attention of the Board that in certain circumstances highly competent persons have become more reluctant to serve publicly held corporations as directors, officers, or agents unless they are provided with adequate protection from the risk of liability due to claims and actions against them arising out of their service to and activities on behalf of such corporations. WHEREAS, the Board understands that a delay in providing advancement of expenses or uncertainty regarding the availability of indemnification may place significant financial and other pressures on a director of Southwest, which may cause such person to settle an action for reasons other than its merits to the ultimate detriment of such person and of Southwest, and, accordingly, Southwest and the Indemnitee wish to ensure that any assertion that Indemnitee is not entitled to indemnification, advancement of expenses, insurance, or other rights provided hereunder is resolved in a timely manner, such that Indemnitee is not subject to such undue pressure to settle any actions because of the burden of legal costs and potentially unindemnifiable liabilities. WHEREAS, the Board has determined that it is in the best interests of Southwest to provide contractual protection for Indemnitee in order to (i) enhance Indemnitee's continued service to Southwest in an effective manner; (ii) encourage Indemnitee to resist what he considers unjustifiable suits and claims made against the Indemnitee in connection with the good faith performance of Indemnitee's duties to Southwest and its shareholders; and (iii) encourage Indemnitee to exercise his or her best business judgment regarding matters which come before the board of directors without undue concern for the risk that claims may be made against Indemnitee based on such actions. WHEREAS, Southwest and Indemnitee wish to enter this agreement to establish such specific contractual assurance (i) to ensure indemnification protection provided by Page 1 of 9 Southwest's Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment of or revocation of provisions in such Certificate of Incorporation and Bylaws or any change in the composition of the Board); (ii) to provide for the indemnification of and the advancement of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement; and (iii) to the extent any insurance is maintained, to provide for the continued coverage of Indemnitee under Southwest's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed as follows: 1. CERTAIN DEFINITIONS. For the purposes of this Agreement: (a) "Expenses" shall mean all expenses, including, without limitation, legal and professional fees and expenses, actually and reasonably incurred by Indemnitee. (b) "Proceeding" shall mean any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative. (c) "Southwest Subsidiary" shall mean any corporation, partnership, limited liability company, or other entity directly or indirectly controlled by Southwest. 2. SERVICES BY INDEMNITEE; COOPERATION. (a) Indemnitee agrees to serve or continue to serve as a director of Southwest and, at its request, as a director of certain other related corporations and entities so long as he is duly elected or appointed or until such time as he resigns in writing. Indemnitee may at any time and for any reason resign from any such position (subject to any other contractual obligation or any obligation imposed by operation of law). (b) Indemnitee agrees to use reasonable efforts to cooperate with Southwest in the investigation and defense of any action or claim that is subject to indemnification hereunder. 3. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. To the extent that Indemnitee is, by reason of his status with Southwest, a party to and is successful in, on the merits or otherwise, any Proceeding, he shall be indemnified against all Expenses in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues, or matters in such Proceeding, Southwest shall indemnify Indemnitee against all Expenses in connection with each successfully resolved claim, issue, or matter. For the purposes of this Section 3 and without limiting the foregoing, the termination of any claim, issue, or matter in any such Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue, or matter except as prohibited by law. 4. INDEMNIFICATION OF EXPENSES OF A WITNESS. In addition to the Indemnitees other rights hereunder, to the extent that Indemnitee is, by reason of his status with Southwest or any Southwest Subsidiary, a witness in any Proceeding as to which he is not, and is not threatened to be made, a party, he shall be indemnified against all Page 2 of 9 Expenses in connection therewith. 5. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF SOUTHWEST. Indemnitee shall be entitled to the rights of indemnification provided in this Section 5 if, by reason of his status with Southwest or a Southwest Subsidiary, he is, or is threatened to be made, a party to any Proceeding, other than a Proceeding by or in the right of Southwest. Pursuant to this Section 5, Indemnitee shall be indemnified against Expenses and against judgments, penalties, fines, and amounts paid in settlement in connection with any such Proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of Southwest and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. 6. PROCEEDINGS BY OR IN THE RIGHT OF SOUTHWEST. Indemnitee shall be entitled to the rights of indemnification provided in this Section 6 if, by reason of his status with Southwest or a Southwest Subsidiary, he is, or is threatened to be made, a party to any Proceeding brought by or in the right of Southwest to procure a judgment in its favor. Pursuant to this Section 6, Indemnitee shall be indemnified against Expenses in connection with any such Proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of Southwest. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any such Proceeding as to which Indemnitee shall have been adjudged to be liable to Southwest except to the extent, if any, that, the court in which such Proceeding shall have been brought, upon application, determines that despite the adjudication, but in view of all the circumstance, he is fairly and reasonably entitled to indemnification. 7. ADVANCEMENT OF EXPENSES. (a) Unless and until, and except to the extent that, (i) a final determination has been made the indemnification of Expenses pursuant to Sections 3, 4, 5, and 6 is impermissible under applicable law, or (ii) Southwest obtains a legal opinion of independent legal counsel that advancement of Expenses is both expressly prohibited by applicable law and would subject Southwest or the Board to possible legal sanctions, Southwest shall advance all Expenses in connection with any Proceeding within thirty (30) days after the receipt by Southwest of a statement or statements from Indemnitee requesting such advancement, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by Indemnitee. For purposes of this Section 7(a), final determination shall mean an express determination by a court of competent jurisdiction which is no longer subject to possible or pending appeal or other form of review. (b) Southwest shall act promptly and in good faith to conduct such investigation and consideration, and, if warranted by such investigation and consideration, to make and issue such determinations, as are necessary for advancement of Expenses pursuant to 12 U.S.C. 1828(k) or applicable regulations thereunder. (c) The Indemnitee hereby agrees that he will repay expenses advanced, without interest, by the later of 90 days after the termination of the Proceeding or thirty Page 3 of 9 (30) days after demand by Southwest, if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such expenses. 8. PAYMENT OF INDEMNIFIED AMOUNTS. Payment of all other amounts, other than Advanced Expenses, shall be made no later than thirty (30) days after receipt of the written request, of the Indemnitee therefor, unless, in the case of an indemnification, a determination is made within said thirty (30) day period by: (a) The Board by a majority vote of a quorum thereof consisting of directors who were not parties to such Proceedings, or (b) Independent legal counsel in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in this agreement. 9. PRESUMPTIONS AND EFFECTS OF CERTAIN PROCEEDINGS. The termination of any Proceeding or of any claim, issue, or matter therein, by judgment, order, settlement, or conviction, or upon plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided there or in this Agreement or mandated by applicable law or regulation) of itself create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to the best interests of, Southwest or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 10. REMEDIES OF INDEMNITEE. (a) In the event that a determination by independent legal counsel or the Board is made pursuant to Sections 6, 7, or 19 that Indemnitee is not entitled to indemnification or advancement of expenses under this Agreement, Indemnitee shall be entitled to adjudication of his entitlement to such indemnification or advancement of expenses. (b) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from Southwest, and shall be indemnified by Southwest against, any and all Expenses in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication shall be appropriately prorated. 11. FUNDING OF TRUST. Upon the earlier of the tenth business day following (i) the filing of any action for which indemnification is called for hereunder or (ii) the failure of Southwest to reimburse amounts as required hereunder, Southwest shall (A) establish a valid trust under the law of the State of Oklahoma and qualifying as a "Rabbi Trust" for federal income tax purposes with an independent trustee that has or may be granted corporate trust powers under Oklahoma law, (B) deposit in such trust the sum of $100,000, and (C) provide the trustee of the trust with a written direction to hold said amount and any investment return thereon in a segregated account, and to pay such Page 4 of 9 amounts as demanded by Indemnitee from the trust upon written demand from Indemnitee stating the amount of the payment demanded from the trust and the basis for his rights to such payment hereunder; provided that Southwest shall not be required hereby to create, and shall not create, any such trust by reason of a claim for indemnification of liabilities, fines, or penalties prohibited by Section 19 of this Agreement. Southwest shall restore the balance therein within two business days following notice from the Trustee of payments therefrom so that that the total amount held in such trust is at least $100,000. Upon the earlier of the final judgment or binding settlement of any and all such claims for which indemnification is then called for hereunder, the trustee of the trust shall pay to Southwest, as applicable, the entire balance remaining in the trust. Payments from the trust to Indemnitee shall be considered payments made by Southwest for purposes of this Agreement. Payment of such amounts to Indemnitee from the trust, however, shall not relieve Southwest from any obligation to pay amounts in excess of those paid from the trust, or from any obligation to take actions or refrain from taking actions otherwise required by this Agreement. Indemnitee's rights under this Agreement shall be those of a general, unsecured creditor, and he shall have no claim against the assets of the trust, and the assets of the trust shall remain subject to the claims of creditors of Southwest. 12. NOTICE BY INDEMNITEE; PURSUIT OF DEFENSE. (a) Indemnitee agrees to notify Southwest promptly in writing upon being served with any summons, subpoena, complaint, indictment or other document relating to any Proceeding which may be subject to indemnification or advancement of expenses covered hereunder and Southwest shall assume the defense thereof, including the employment of counsel reasonably satisfactory to Indemnitee and the payment of all expenses; provided, however, that the failure to so notify Southwest shall relieve it from any liability which it may have to Indemnitee only to the extent, if any, that it is prejudiced thereby. (b) Indemnitee shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of Indemnitee unless (i) the employment thereof has been specifically authorized by Southwest in writing, (ii) if he is, or is threatened to be made a party to a Proceeding brought by or in the right of Southwest to procure a judgment in its favor, (iii) Southwest has failed to assume the defense or to employ counsel reasonably satisfactory to Indemnitee, or (iii) the named parties to any such action (including any impleaded parties) include both Indemnitee and Southwest and Indemnitee shall have been advised by such counsel that there may be one or more legal defenses available to him that are different from or in addition to those available to Southwest (in which case, if Indemnitee notifies Southwest in writing that he elects to employ separate counsel at the expense of Southwest, Southwest shall not have the right to assume the defense of such action on behalf of Indemnitee); it being understood, however, that Southwest shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys at any time and such firm shall be designated in writing Page 5 of 9 by Indemnitee. 13. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS: INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation or Bylaws of Southwest, any agreement, resolution of directors, or otherwise. No amendment, alteration, or repeal of this Agreement or any provision hereof shall be effective as to Indemnitee with respect to any action taken or omitted by such Indemnitee in his corporate capacity prior to such amendment, alteration, or repeal. (b) To the extent that Southwest maintains an insurance policy providing liability insurance of persons serving Southwest, Indemnitee shall be covered by such policy in accordance with its terms for the maximum extent of the coverage available for any person under such policy. If any such policy contains a provision which limits coverage under such policy to the extent of Southwest's contractual obligations of indemnification Southwest shall have no obligations hereunder to the extent that Indemnitee shall have been afforded coverage under such policy. (c) In the event of any payment under this Agreement, Southwest shall be subrogated to the extent of such payment of all rights of recovery of Indemnitee, who shall execute all documents required and take all actions necessary to secure such rights, including execution of such documents as are necessary to enable Southwest to bring suit to enforce such rights. 14. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of Southwest which shall acquire, directly or indirectly, by merger, consolidation, purchase, or otherwise, all or substantially all of the assets or stock of Southwest. Southwest shall not enter into any agreement to effect any such transaction without obtaining a binding contractual commitment from the acquirer to honor the terms of this agreement. (b) The rights to indemnification and enforcement of this agreement may be exercised by the Indemnitee's personal representative on behalf of his estate in the event of his death during the term hereof. 15. SEVERABILITY. If any portion of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever, the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 16. TERM. The term of this Agreement shall begin on the date first written above and shall extend until the seventh anniversary of the day upon which Indemnitee last served as a member of the Board. 17. SETTLEMENT. (a) Southwest shall have no obligation to indemnify Indemnitee hereunder for any amounts paid in settlement of any Proceeding effected without Southwest's written consent, which shall not be unreasonably withheld. Page 6 of 9 (b) Southwest shall not, without the prior written consent of Indemnitee, settle, compromise, or consent to the entry of any judgment in any Proceeding in respect of which indemnity may be sought hereunder (whether or not Indemnitee is a party to such claim, action, suit or proceeding), unless such settlement, compromise, or consent includes a release of Indemnitee, reasonably satisfactory to him, from all liability arising out of such Proceeding or unless Southwest shall confirm in a written agreement of Southwest to Indemnitee, that such settlement, compromise, or consent shall not alter the right of Indemnitee to indemnification as provided in this Agreement. 18. MODIFICATION AND WAIVER. No supplement, modification, amendment, or termination of this Agreement shall be binding unless executed in writing by both of the parties hereto. No failure or delay in exercising any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or future exercise thereof or the exercise of any other right, power, or privilege hereunder. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof nor shall such waiver constitute a continuing waiver. 19. CERTAIN LEGAL AND REGULATORY LIMITATIONS. Notwithstanding anything herein to the contrary: (a) If the Board, with the advice of legal counsel determines in good faith that (i) a claim for indemnification hereunder has arisen under the Securities Act of 1933 (the 1933 Act"), and (ii) that Southwest is legally required to submit to a court of appropriate jurisdiction the question of whether or not such indemnification by it is against public policy, as expressed in the 1933 Act, and is, therefore, prohibited, then Southwest may defer payment of such amounts until thirty days following final adjudication of such question. Southwest shall (i) make any such determination under clause and provide notice to Indemnitee of its determination within thirty days of the assertion of such claim, and (ii) vigorously pursue the adjudication of such question at its own cost and expense in a manner, and in such forum or forums, as it determines in good faith are most likely to result in the swiftest judicial determination. To the extent allowed by law, Indemnitee shall be afforded the opportunity to participate in such adjudicatory process. Notwithstanding the above, this Section 19(a) shall not affect the rights of Indemnitee for (i) indemnification of expenses incurred or paid by him in the successful defense of any Proceeding, or (ii) unless and to the extent it is determined by opinion of independent counsel to be prohibited by law, for advancement of expenses under Section 7 hereof. (b) This Agreement is not intended to be, and is not, an agreement to make any indemnification payment to any institution affiliated party of the type prohibited pursuant to 18 U.S.C. 1828(k) (relating to indemnification payments with respect to certain administrative proceedings or civil actions initiated by any Federal banking agency) and regulations thereunder. Accordingly, regardless of any other requirement of this agreement to the contrary, to the extent required by such section and regulations, Southwest shall not indemnify Indemnitee for that portion of the costs sustained by him with regard to an administrative or civil enforcement Page 7 of 9 action commenced by any federal banking agency which results in a final order or settlement pursuant to which the Indemnitee is assessed a civil money penalty, removed from office, prohibited from participating in the affairs of an insured depository institution, or required to cease and desist from or take an affirmative action described in 12 U.S.C. 1818(b). This Section 19(b) does not, however, prohibit Southwest from purchasing insurance to cover other expenses (that is, excluding judgments and penalties) in connection with any such action, or from advancement legal and professional expenses pursuant to Section 7 of this agreement. 20. NOTICES. (a) All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given three business days after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows or to such other address provided in writing by the party, except that a change in address will not be deemed given until it is actually received. Notices also may be given by facsimile transmission, hand delivery, or next business day delivery by a nationally recognized delivery service such as FedEx or UPS and, in that event, will be deemed to be given as of the date they are actually received. If to Southwest: Southwest Bancorp, Inc. 608 S. Main Street Stillwater, Oklahoma 74076 Attention: President and Chief Executive Officer Copy to: Corporate Secretary If to Indemnitee: ________________________ ________________________ ________________________ ________________________ (b) Southwest will provide copies of any and all notices received by it hereunder to the Board promptly following receipt. 21. INJUNCTIVE RELIEF. It is understood and agreed that money damages would not be a sufficient remedy for any breach of this Agreement by Southwest, and that Indemnitee shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach. Such remedies shall not be deemed to be the exclusive remedies for a breach by Southwest of this agreement but shall be in addition to all other remedies available at law or equity to Indemnitee. 22. GOVERNING LAW, OKLAHOMA COURTS. Except to the extent preempted by Federal law, the laws of the State of Oklahoma (without regard to its conflict of laws principles) shall govern this Agreement in all respects, whether as to its validity, construction, Page 8 of 9 capacity, performance or otherwise. Southwest and any of its successors or assigns each agrees that any suit or other action to enforce or otherwise with respect to this Agreement will be instituted and maintained in the courts of the State of Oklahoma or federal courts located in the State of Oklahoma, and not to seek removal or transfer of any such suit or action to a court located outside of Oklahoma by objection based upon inconvenience of the forum or otherwise. 23. WAIVER OF JURY TRIAL. THE PARTIES HERETO FULLY, VOLUNTARILY, KNOWINGLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHTS TO A TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN ANY DISPUTE, ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (WHETHER BASED UPON STATUE, REGULATION, RULING, CONTRACT, TORT, OR OTHERWISE) UNDER THIS AGREEMENT. ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 24. HEADINGS. Headings contained herein are for convenience of reference only. 25. COUNTERPARTS. This agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. SOUTHWEST BANCORP, INC. By: ------------------------------------------ Title: President and Chief Executive Officer _____________________, INDEMNITEE ---------------------------------------------- Title: ---------------------------------------- Page 9 of 9 EX-10.10 3 b412241ex10-10.txt EXHIBIT 10.10 EXHIBIT 10.10 Form of Indemnification Agreements dated December 14 and 15, 2005 by and between Southwest Bancorp, Inc. and each of Rick Green, Kerby E. Crowell, David Dietz, Allen Glenn, Steve Gobel, Steven N. Hadley, Jerry L. Lanier, Randy Mills, Kimberly Sinclair, Kay Smith, and Charles H. Westerheide, each identical except for the date and the name and title of the Indemnitee. INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement"), made this ___th day of December 2005, by and between Southwest Bancorp, Inc., a registered bank holding company ("Southwest") and __________________________ ("Indemnitee"). W I T N E S S E T H WHEREAS, it is essential to Southwest to attract and retain as directors, officers, and agents the most capable persons available. WHEREAS, the Board of Directors of Southwest (the "Board") and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public corporations. WHEREAS, it has come to the attention of the Board that in certain circumstances highly competent persons have become more reluctant to serve publicly held corporations as directors, officers, or agents unless they are provided with adequate protection from the risk of liability due to claims and actions against them arising out of their service to and activities on behalf of such corporations. WHEREAS, the Board understands that a delay in providing advancement of expenses or uncertainty regarding the availability of indemnification may place significant financial and other pressures on a director of Southwest, which may cause such person to settle an action for reasons other than its merits to the ultimate detriment of such person and of Southwest, and, accordingly, Southwest and the Indemnitee wish to ensure that any assertion that Indemnitee is not entitled to indemnification, advancement of expenses, insurance, or other rights provided hereunder is resolved in a timely manner, such that Indemnitee is not subject to such undue pressure to settle any actions because of the burden of legal costs and potentially unindemnifiable liabilities. WHEREAS, the Board has determined that it is in the best interests of Southwest to provide contractual protection for Indemnitee in order to (i) enhance Indemnitee's continued service to Southwest in an effective manner; (ii) encourage Indemnitee to resist what he considers unjustifiable suits and claims made against the Indemnitee in connection with the good faith performance of Indemnitee's duties to Southwest and its shareholders; and (iii) encourage Indemnitee to exercise his or her best business judgment regarding matters which come before the board of directors without undue concern for the risk that claims may be made against Indemnitee based on such actions. WHEREAS, Southwest and Indemnitee wish to enter this agreement to establish such specific contractual assurance (i) to ensure indemnification protection provided by Southwest's Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment of or revocation of provisions in such Certificate of Incorporation and Bylaws or any change in the composition of the Board); Page 1 of 9 (ii) to provide for the indemnification of and the advancement of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement; and (iii) to the extent any insurance is maintained, to provide for the continued coverage of Indemnitee under Southwest's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed as follows: 1. CERTAIN DEFINITIONS. For the purposes of this Agreement: (a) "Expenses" shall mean all expenses, including, without limitation, legal and professional fees and expenses, actually and reasonably incurred by Indemnitee. (b) "Proceeding" shall mean any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative. (c) "Southwest Subsidiary" shall mean any corporation, partnership, limited liability company, or other entity directly or indirectly controlled by Southwest. 2. SERVICES BY INDEMNITEE; COOPERATION. (a) Indemnitee agrees to serve or continue to serve as a director of Southwest and, at its request, as a director of certain other related corporations and entities so long as he is duly elected or appointed or until such time as he resigns in writing. Indemnitee may at any time and for any reason resign from any such position (subject to any other contractual obligation or any obligation imposed by operation of law). (b) Indemnitee agrees to use reasonable efforts to cooperate with Southwest in the investigation and defense of any action or claim that is subject to indemnification hereunder. 3. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. To the extent that Indemnitee is, by reason of his status with Southwest, a party to and is successful in, on the merits or otherwise, any Proceeding, he shall be indemnified against all Expenses in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues, or matters in such Proceeding, Southwest shall indemnify Indemnitee against all Expenses in connection with each successfully resolved claim, issue, or matter. For the purposes of this Section 3 and without limiting the foregoing, the termination of any claim, issue, or matter in any such Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue, or matter except as prohibited by law. 4. INDEMNIFICATION OF EXPENSES OF A WITNESS. In addition to the Indemnitees other rights hereunder, to the extent that Indemnitee is, by reason of his status with Southwest or any Southwest Subsidiary, a witness in any Proceeding as to which he is not, and is not threatened to be made, a party, he shall be indemnified against all Expenses in connection therewith. 5. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF SOUTHWEST. Indemnitee shall be entitled to the rights of indemnification provided in this Section 5 if, by Page 2 of 9 reason of his status with Southwest or a Southwest Subsidiary, he is, or is threatened to be made, a party to any Proceeding, other than a Proceeding by or in the right of Southwest. Pursuant to this Section 5, Indemnitee shall be indemnified against Expenses and against judgments, penalties, fines, and amounts paid in settlement in connection with any such Proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of Southwest and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. 6. PROCEEDINGS BY OR IN THE RIGHT OF SOUTHWEST. Indemnitee shall be entitled to the rights of indemnification provided in this Section 6 if, by reason of his status with Southwest or a Southwest Subsidiary, he is, or is threatened to be made, a party to any Proceeding brought by or in the right of Southwest to procure a judgment in its favor. Pursuant to this Section 6, Indemnitee shall be indemnified against Expenses in connection with any such Proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of Southwest. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any such Proceeding as to which Indemnitee shall have been adjudged to be liable to Southwest except to the extent, if any, that, the court in which such Proceeding shall have been brought, upon application, determines that despite the adjudication, but in view of all the circumstance, he is fairly and reasonably entitled to indemnification. 7. ADVANCEMENT OF EXPENSES. (a) Unless and until, and except to the extent that, (i) a final determination has been made the indemnification of Expenses pursuant to Sections 3, 4, 5, and 6 is impermissible under applicable law, or (ii) Southwest obtains a legal opinion of independent legal counsel that advancement of Expenses is both expressly prohibited by applicable law and would subject Southwest or the Board to possible legal sanctions, Southwest shall advance all Expenses in connection with any Proceeding within thirty (30) days after the receipt by Southwest of a statement or statements from Indemnitee requesting such advancement, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by Indemnitee. For purposes of this Section 7(a), final determination shall mean an express determination by a court of competent jurisdiction which is no longer subject to possible or pending appeal or other form of review. (b) Southwest shall act promptly and in good faith to conduct such investigation and consideration, and, if warranted by such investigation and consideration, to make and issue such determinations, as are necessary for advancement of Expenses pursuant to 12 U.S.C. 1828(k) or applicable regulations thereunder. (c) The Indemnitee hereby agrees that he will repay expenses advanced, without interest, by the later of 90 days after the termination of the Proceeding or thirty (30) days after demand by Southwest, if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such expenses. Page 3 of 9 8. PAYMENT OF INDEMNIFIED AMOUNTS. Payment of all other amounts, other than Advanced Expenses, shall be made no later than thirty (30) days after receipt of the written request, of the Indemnitee therefor, unless, in the case of an indemnification, a determination is made within said thirty (30) day period by: (a) The Board by a majority vote of a quorum thereof consisting of directors who were not parties to such Proceedings, or (b) Independent legal counsel in a written opinion (which counsel shall be appointed if such a quorum is not obtainable), that the Indemnitee has not met the relevant standards for indemnification set forth in this agreement. 9. PRESUMPTIONS AND EFFECTS OF CERTAIN PROCEEDINGS. The termination of any Proceeding or of any claim, issue, or matter therein, by judgment, order, settlement, or conviction, or upon plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided there or in this Agreement or mandated by applicable law or regulation) of itself create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to the best interests of, Southwest or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 10. REMEDIES OF INDEMNITEE. (a) In the event that a determination by independent legal counsel or the Board is made pursuant to Sections 6, 7, or 19 that Indemnitee is not entitled to indemnification or advancement of expenses under this Agreement, Indemnitee shall be entitled to adjudication of his entitlement to such indemnification or advancement of expenses. (b) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from Southwest, and shall be indemnified by Southwest against, any and all Expenses in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication shall be appropriately prorated. 11. FUNDING OF TRUST. Upon the earlier of the tenth business day following (i) the filing of any action for which indemnification is called for hereunder or (ii) the failure of Southwest to reimburse amounts as required hereunder, Southwest shall (A) establish a valid trust under the law of the State of Oklahoma and qualifying as a "Rabbi Trust" for federal income tax purposes with an independent trustee that has or may be granted corporate trust powers under Oklahoma law, (B) deposit in such trust the sum of $100,000, and (C) provide the trustee of the trust with a written direction to hold said amount and any investment return thereon in a segregated account, and to pay such amounts as demanded by Indemnitee from the trust upon written demand from Indemnitee stating the amount of the payment demanded from the trust and the basis for his rights to such payment hereunder; provided that Southwest shall not be required Page 4 of 9 hereby to create, and shall not create, any such trust by reason of a claim for indemnification of liabilities, fines, or penalties prohibited by Section 19 of this Agreement. Southwest shall restore the balance therein within two business days following notice from the Trustee of payments therefrom so that that the total amount held in such trust is at least $100,000. Upon the earlier of the final judgment or binding settlement of any and all such claims for which indemnification is then called for hereunder, the trustee of the trust shall pay to Southwest, as applicable, the entire balance remaining in the trust. Payments from the trust to Indemnitee shall be considered payments made by Southwest for purposes of this Agreement. Payment of such amounts to Indemnitee from the trust, however, shall not relieve Southwest from any obligation to pay amounts in excess of those paid from the trust, or from any obligation to take actions or refrain from taking actions otherwise required by this Agreement. Indemnitee's rights under this Agreement shall be those of a general, unsecured creditor, and he shall have no claim against the assets of the trust, and the assets of the trust shall remain subject to the claims of creditors of Southwest. 12. NOTICE BY INDEMNITEE; PURSUIT OF DEFENSE. (a) Indemnitee agrees to notify Southwest promptly in writing upon being served with any summons, subpoena, complaint, indictment or other document relating to any Proceeding which may be subject to indemnification or advancement of expenses covered hereunder and Southwest shall assume the defense thereof, including the employment of counsel reasonably satisfactory to Indemnitee and the payment of all expenses; provided, however, that the failure to so notify Southwest shall relieve it from any liability which it may have to Indemnitee only to the extent, if any, that it is prejudiced thereby. (b) Indemnitee shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of Indemnitee unless (i) the employment thereof has been specifically authorized by Southwest in writing, (ii) if he is, or is threatened to be made a party to a Proceeding brought by or in the right of Southwest to procure a judgment in its favor, (iii) Southwest has failed to assume the defense or to employ counsel reasonably satisfactory to Indemnitee, or (iii) the named parties to any such action (including any impleaded parties) include both Indemnitee and Southwest and Indemnitee shall have been advised by such counsel that there may be one or more legal defenses available to him that are different from or in addition to those available to Southwest (in which case, if Indemnitee notifies Southwest in writing that he elects to employ separate counsel at the expense of Southwest, Southwest shall not have the right to assume the defense of such action on behalf of Indemnitee); it being understood, however, that Southwest shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys at any time and such firm shall be designated in writing by Indemnitee. Page 5 of 9 13. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS: INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation or Bylaws of Southwest, any agreement, resolution of directors, or otherwise. No amendment, alteration, or repeal of this Agreement or any provision hereof shall be effective as to Indemnitee with respect to any action taken or omitted by such Indemnitee in his corporate capacity prior to such amendment, alteration, or repeal. (b) To the extent that Southwest maintains an insurance policy providing liability insurance of persons serving Southwest, Indemnitee shall be covered by such policy in accordance with its terms for the maximum extent of the coverage available for any person under such policy. If any such policy contains a provision which limits coverage under such policy to the extent of Southwest's contractual obligations of indemnification Southwest shall have no obligations hereunder to the extent that Indemnitee shall have been afforded coverage under such policy. (c) In the event of any payment under this Agreement, Southwest shall be subrogated to the extent of such payment of all rights of recovery of Indemnitee, who shall execute all documents required and take all actions necessary to secure such rights, including execution of such documents as are necessary to enable Southwest to bring suit to enforce such rights. 14. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of Southwest which shall acquire, directly or indirectly, by merger, consolidation, purchase, or otherwise, all or substantially all of the assets or stock of Southwest. Southwest shall not enter into any agreement to effect any such transaction without obtaining a binding contractual commitment from the acquirer to honor the terms of this agreement. (b) The rights to indemnification and enforcement of this agreement may be exercised by the Indemnitee's personal representative on behalf of his estate in the event of his death during the term hereof. 15. SEVERABILITY. If any portion of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever, the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 16. TERM. The term of this Agreement shall begin on the date first written above and shall extend until the seventh anniversary of the day upon which Indemnitee last served as a member of the Board. 17. SETTLEMENT. (a) Southwest shall have no obligation to indemnify Indemnitee hereunder for any amounts paid in settlement of any Proceeding effected without Southwest's written consent, which shall not be unreasonably withheld. (b) Southwest shall not, without the prior written consent of Indemnitee, settle, compromise, or consent to the entry of any judgment in any Proceeding in respect Page 6 of 9 of which indemnity may be sought hereunder (whether or not Indemnitee is a party to such claim, action, suit or proceeding), unless such settlement, compromise, or consent includes a release of Indemnitee, reasonably satisfactory to him, from all liability arising out of such Proceeding or unless Southwest shall confirm in a written agreement of Southwest to Indemnitee, that such settlement, compromise, or consent shall not alter the right of Indemnitee to indemnification as provided in this Agreement. 18. MODIFICATION AND WAIVER. No supplement, modification, amendment, or termination of this Agreement shall be binding unless executed in writing by both of the parties hereto. No failure or delay in exercising any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or future exercise thereof or the exercise of any other right, power, or privilege hereunder. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof nor shall such waiver constitute a continuing waiver. 19. CERTAIN LEGAL AND REGULATORY LIMITATIONS. Notwithstanding anything herein to the contrary: (a) If the Board, with the advice of legal counsel determines in good faith that (i) a claim for indemnification hereunder has arisen under the Securities Act of 1933 (the 1933 Act"), and (ii) that Southwest is legally required to submit to a court of appropriate jurisdiction the question of whether or not such indemnification by it is against public policy, as expressed in the 1933 Act, and is, therefore, prohibited, then Southwest may defer payment of such amounts until thirty days following final adjudication of such question. Southwest shall (i) make any such determination under clause and provide notice to Indemnitee of its determination within thirty days of the assertion of such claim, and (ii) vigorously pursue the adjudication of such question at its own cost and expense in a manner, and in such forum or forums, as it determines in good faith are most likely to result in the swiftest judicial determination. To the extent allowed by law, Indemnitee shall be afforded the opportunity to participate in such adjudicatory process. Notwithstanding the above, this Section 19(a) shall not affect the rights of Indemnitee for (i) indemnification of expenses incurred or paid by him in the successful defense of any Proceeding, or (ii) unless and to the extent it is determined by opinion of independent counsel to be prohibited by law, for advancement of expenses under Section 7 hereof. (b) This Agreement is not intended to be, and is not, an agreement to make any indemnification payment to any institution affiliated party of the type prohibited pursuant to 18 U.S.C. 1828(k) (relating to indemnification payments with respect to certain administrative proceedings or civil actions initiated by any Federal banking agency) and regulations thereunder. Accordingly, regardless of any other requirement of this agreement to the contrary, to the extent required by such section and regulations, Southwest shall not indemnify Indemnitee for that portion of the costs sustained by him with regard to an administrative or civil enforcement action commenced by any federal banking agency which results in a final order or settlement pursuant to which the Indemnitee is assessed a civil money penalty, Page 7 of 9 removed from office, prohibited from participating in the affairs of an insured depository institution, or required to cease and desist from or take an affirmative action described in 12 U.S.C. 1818(b). This Section 19(b) does not, however, prohibit Southwest from purchasing insurance to cover other expenses (that is, excluding judgments and penalties) in connection with any such action, or from advancement legal and professional expenses pursuant to Section 7 of this agreement. 20. NOTICES. (a) All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given three business days after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed as follows or to such other address provided in writing by the party, except that a change in address will not be deemed given until it is actually received. Notices also may be given by facsimile transmission, hand delivery, or next business day delivery by a nationally recognized delivery service such as FedEx or UPS and, in that event, will be deemed to be given as of the date they are actually received. If to Southwest: Southwest Bancorp, Inc. 608 S. Main Street Stillwater, Oklahoma 74076 Attention: President and Chief Executive Officer Copy to: Corporate Secretary If to Indemnitee: _______________________ _______________________ _______________________ _______________________ (b) Southwest will provide copies of any and all notices received by it hereunder to the Board promptly following receipt. 21. INJUNCTIVE RELIEF. It is understood and agreed that money damages would not be a sufficient remedy for any breach of this Agreement by Southwest, and that Indemnitee shall be entitled to equitable relief, including injunction and specific performance, as a remedy for any such breach. Such remedies shall not be deemed to be the exclusive remedies for a breach by Southwest of this agreement but shall be in addition to all other remedies available at law or equity to Indemnitee. 22. GOVERNING LAW, OKLAHOMA COURTS. Except to the extent preempted by Federal law, the laws of the State of Oklahoma (without regard to its conflict of laws principles) shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. Southwest and any of its successors or assigns each agrees that any suit or other action to enforce or otherwise with respect to this Page 8 of 9 Agreement will be instituted and maintained in the courts of the State of Oklahoma or federal courts located in the State of Oklahoma, and not to seek removal or transfer of any such suit or action to a court located outside of Oklahoma by objection based upon inconvenience of the forum or otherwise. 23. WAIVER OF JURY TRIAL. THE PARTIES HERETO FULLY, VOLUNTARILY, KNOWINGLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHTS TO A TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN ANY DISPUTE, ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (WHETHER BASED UPON STATUE, REGULATION, RULING, CONTRACT, TORT, OR OTHERWISE) UNDER THIS AGREEMENT. ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 24. HEADINGS. Headings contained herein are for convenience of reference only. 25. COUNTERPARTS. This agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. SOUTHWEST BANCORP, INC. By: ---------------------------------------- Title: President and Chief Executive Officer ______________________, INDEMNITEE -------------------------------------------- Title: -------------------------------------- Page 9 of 9 EX-21 4 b412241ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the Registrant. Jurisdiction of Name Incorporation ------------------------------------------------ --------------- 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 SWB, Inc.* Oklahoma SNB Insurance Agency, Inc. * Oklahoma SNB Real Estate Holdings, Inc. * Delaware Stillwater National Building Corporation* Oklahoma BNS, Inc.** Oklahoma SNB REIT, Inc.*** Delaware Stillwater Properties, Inc.**** Oklahoma Grand Hill Investments, LLC***** Oklahoma * Direct subsidiary of Stillwater National Bank & Trust Company. ** Direct subsidiary of CRK Properties, Inc. *** Direct subsidiary of SNB Real Estate Holdings, Inc. **** Direct subsidiary of Stillwater National Building Corporation ***** Direct subsidiary of Stillwater Properties, Inc. EX-23 5 b412241ex23.txt EXHIBIT 23 EXHIBIT 23 Consent of Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement Nos. 33-81276 (1994 Stock Option Plan), 333-92143 and 333-120685 (1999 Stock Option Plan), and 33-97850 (Employee Stock Purchase Plan), each on Form S-8; and Registration Statement Nos. 33-94378 (Dividend Reinvestment Plan) and 333-124502 (Offering of Securities), each on Form S-3, of our reports dated March 10, 2006, with respect to the consolidated financial statements of Southwest Bancorp, Inc., Southwest Bancorp, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Southwest Bancorp, Inc., included in the Annual Report (Form 10-K) of Southwest Bancorp, Inc. for the year ended December 31, 2005. Ernst & Young LLP Tulsa, Oklahoma March 10, 2006 EX-24 6 b412241ex24.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY We, the undersigned directors of the Registrant, hereby severally constitute and appoint Rick Green our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said person may deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the annual report on Form 10-K for the year ended December 31, 2005, 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 January 26, 2006 - ---------------------------------------- Jim Berry, Director /s/ Thomas D. Berry January 26, 2006 - ---------------------------------------- Thomas D. Berry, Director /s/ Joe Berry Cannon January 26, 2006 - ---------------------------------------- Joe Berry Cannon, Director /s/ J. Berry Harrison January 26, 2006 - ---------------------------------------- J. Berry Harrison, Director /s/ Erd M. Johnson January 26, 2006 - ---------------------------------------- Erd M. Johnson, Director /s/ David P. Lambert January 26, 2006 - ---------------------------------------- David P. Lambert, Director /s/ Linford R. Pitts January 26, 2006 - ---------------------------------------- Linford R. Pitts, Director /s/ Robert B. Rodgers January 26, 2006 - ---------------------------------------- Robert B. Rodgers, Director /s/ Russell W. Teubner January 26, 2006 - ---------------------------------------- Russell W. Teubner, Director EX-31.(A) 7 b412241ex31-a.txt EXHIBIT 31(A) 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 functions): 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 registrant's internal control over financial reporting. Date: March 10, 2006 /s/ Rick Green ------------------------------------- Rick Green President and Chief Executive Officer (Principal Executive Officer) EX-31.(B) 8 b412241ex31-b.txt EXHIBIT 31(B) EXHIBIT 31(b) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS I, Kerby E. Crowell, certify that: 1. I have reviewed this annual report on Form 10-K of Southwest Bancorp, Inc.; 2. Based on my knowledge, this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 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 functions): 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 registrant's internal control over financial reporting. Date: March 10, 2006 /s/ Kerby E. Crowell ------------------------------- Kerby E. Crowell Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) EX-32.(A) 9 b412241ex32-a.txt EXHIBIT 32(A) 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, 2005, 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 10, 2006 -------------------------------------- ----------------------- Rick Green Date President and Chief Executive Officer (Principal Executive Officer) EX-32.(B) 10 b412241ex32-b.txt EXHIBIT 32(B) 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, 2005, 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 E. Crowell March 10, 2006 ------------------------------------------ ----------------------- Kerby E. Crowell Date Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----