EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2001
Southwest Bancorp, Inc. ("Southwest") is the financial holding company for
Stillwater National Bank and Trust Company ("Stillwater National"). A
substantial portion of Southwest's current business and focus for the future are
services for local businesses, their primary employees, and other managers and
professionals living and working in its Oklahoma market areas. Information
regarding Southwest can be retrieved via the Internet, at www.oksb.com.
Southwest and Stillwater National offer commercial and consumer lending and
deposit services from offices in Stillwater, Tulsa, Oklahoma City, and
Chickasha, Oklahoma; loan production offices on the campuses of Oklahoma State
University-Tulsa and the University of Oklahoma Health Sciences Center; and a
marketing presence in the Student Union at Oklahoma State University-Stillwater.
Southwest was organized in 1981 as the holding company for Stillwater
National, which was chartered in 1894. At December 31, 2001, Southwest had total
assets of $1.2 billion, deposits of $904.8 million and shareholders' equity of
$85.1 million.
Southwest's philosophy is to provide a high level of quality customer
service, a wide range of financial services, and products responsive to customer
needs. This philosophy has led to the development of financial products that
respond to customers' needs for speed, efficiency and information. These include
SNB DirectBanker(R) and other Internet banking products, which complement
Southwest's more traditional banking products. Information regarding products
and services of Stillwater National, including SNB DirectBanker(R), can also be
retrieved via the Internet, at www.banksnb.com. Stillwater National's web site
and online banking technology are frequently updated in response to the changing
needs of Stillwater National's large base of Internet banking customers.
Southwest has established and pursued a strategy of independent operation
for the benefit of all of its shareholders, and has capitalized on its position
as an Oklahoma owned and operated organization to increase its banking business.
1
LETTER TO SHAREHOLDERS FROM THE C.E.O.
February 25, 2002
In 2001, Southwest produced consistent performance and solid results for
our shareholders in a challenging environment.
- Net Income: $11.8 million, up 15%
- Diluted EPS: $2.00, up 14%
- Book Value per Share: $14.93, up 16%
- Return on Equity: 14.87%
- Total Assets: $1.22 billion
- Dividends per Share: $0.32, up 10%
We also accomplished a number of important "Bests" in 2001, including: the
best mortgage lending year in our history; and the best personal and business
Internet transaction year in our history.
Our stock price ended the year at $17.61 per share, up 60.1% from year-end
2000. As I write this letter, our price is $19.62, up 11.4% from year-end 2001
and 78.4% from year-end 2000.
The year 2001 started in Oklahoma with a deep freeze winter that extended
through mid-March, disrupting the traditional real estate construction and other
business activities. The tragedy of September 11th, the Fed's successive
interest rate reductions, the Wall Street crises, and the psychological
implications of war created a unique financial environment - one that demanded
intensity and flexibility.
INTENSITY
Intensity, discipline and a sense of urgency are "Business as Usual" at
Southwest Bancorp. Over the years, we have attracted and served our customers
through "normal" channels, through technology, by going to their place of
business, and by building relationships through the attention, service, and
sophisticated product offerings that our customers have come to expect. We think
this intense focus on our customers and their current and future opportunities
keeps our company resources directed where they should be for short-, mid-, and
long-term success.
FLEXIBILITY
The flexibility of our Company is reflected in the ability of our managers
to adjust to the rapid and significant market changes to deliver their financial
goals. Our structure and strategies, which do not rely on an extensive brick and
mortar network, give us the flexibility to adjust. The talent of our managers
and staff allow us to use this flexibility. This year, all of our managers rose
to the occasion, but special thanks are due to our Treasury Management Group,
who overcame the intense margin pressures created by the Fed's 11 interest rate
drops, and to our Loan Administration Group, which quickly acted to mitigate the
challenges created by the 2001 environment.
We also remain committed to the communities we serve. Southwest supports
local, state and national service organizations and the arts financially, by
donating many hours of voluntary assistance, and by providing leadership.
The Board of Directors joins me in thanking you for your investment and
support. We look forward to the future with high energy, a vision for success,
and dedication to achieve high performance.
Sincerely,
/s/ Rick Green
- ----------------------
Rick Green
President and Chief Executive Officer
2
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents Southwest's selected consolidated financial
information for each of the five years in the period ended December 31, 2001.
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,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
(dollars in thousands, except per share data)
Operations Data
Interest income $ 90,400 $ 97,274 $ 80,595 $ 80,252 $ 76,849
Interest expense 48,867 57,155 42,495 42,274 41,247
------------------------------------------------------------------
Net interest income 41,533 40,119 38,100 37,978 35,602
Provision for loan losses (1) 4,000 3,550 2,495 3,380 12,104
Gain on sales of securities and loans 3,346 1,753 2,395 2,918 5,199
Other income 7,395 6,736 6,049 4,025 4,696
Other expenses 31,165 29,615 30,426 26,982 25,746
------------------------------------------------------------------
Income before taxes 17,109 15,443 13,623 14,559 7,647
Taxes on income 5,357 5,238 4,757 5,181 2,667
------------------------------------------------------------------
Net income $ 11,752 $ 10,205 $ 8,866 $ 9,378 $ 4,980
==================================================================
Net income available to common shareholders $ 11,752 $ 10,205 $ 8,866 $ 7,392 $ 3,393
==================================================================
Dividends Declared
Preferred stock $ -- $ -- $ -- $ 1,190 $ 1,587
Common stock 1,824 1,678 1,601 1,366 1,208
Ratio of total dividends declared to net income 15.52% 16.44% 18.06% 27.26% 56.12%
Per Share Data (2)
Basic earnings per common share $ 2.06 $ 1.78 $ 1.49 $ 1.30 $ 0.60
Diluted earnings per common share 2.00 1.76 1.46 1.26 0.58
Common stock cash dividends 0.32 0.29 0.27 0.24 0.21
Book value per common share (3) 14.93 12.88 11.03 10.14 8.92
Weighted average common shares outstanding:
Basic 5,693,129 5,733,624 5,960,817 5,692,704 5,659,556
Diluted 5,864,422 5,792,852 6,082,002 5,871,218 5,809,333
Financial Condition Data (3)
Investment securities $ 227,346 $ 229,792 $ 211,682 $ 174,671 $ 187,740
Loans (4) 931,046 912,550 852,808 793,319 719,113
Interest-earning assets 1,160,478 1,142,945 1,064,496 969,002 916,860
Total assets 1,216,495 1,203,566 1,120,420 1,027,865 963,286
Interest-bearing deposits 777,600 825,370 761,481 722,962 744,865
Total deposits 904,796 945,102 871,235 842,717 841,112
Short-term borrowings 195,367 150,498 151,820 94,572 20,548
Long-term debt 25,013 25,013 25,013 25,013 25,013
Total shareholders' equity (5)(6) 85,125 73,239 64,254 57,801 68,048
Common shareholders' equity 85,125 73,239 64,254 57,801 50,666
Mortgage servicing portfolio 91,120 94,545 109,297 126,410 132,824
Selected Ratios
Return on average assets 0.96% 0.87% 0.84% 0.95% 0.54%
Return on average total shareholders' equity 14.87 14.89 13.83 14.33 7.54
Return on average common equity 14.87 14.89 13.83 13.70 6.95
Net interest margin 3.54 3.57 3.82 4.04 4.03
Efficiency ratio (7) 59.62 60.93 65.37 60.07 56.59
Average assets per employee (8) $ 3,916 $ 3,780 $ 3,476 $ 3,116 $ 2,667
3
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
(dollars in thousands, except per share data)
Asset Quality Ratios
Allowance for loan losses to loans (3) 1.23% 1.33% 1.31% 1.31% 1.15%
Nonperforming loans to loans (3)(9) 0.99 1.32 0.63 0.17 0.99
Allowance for loan losses to nonperforming loans (3)(9) 124.56 100.71 207.26 786.17 116.08
Nonperforming assets to loans and other real estate
owned (3)(10) 1.06 1.45 0.83 0.62 1.04
Net loan charge-offs to average loans 0.49 0.29 0.21 0.17 1.57
Capital Ratios
Average shareholders' equity to average assets
Total 6.45 5.82 6.11 6.64 7.12
Common 6.45 5.82 6.11 5.48 5.26
Tier I capital to risk-weighted assets (3) 11.15 10.36 9.76 8.88 8.96
Total capital to risk-weighted assets (3) 12.34 11.68 11.34 10.81 13.30
Leverage ratio (3) 8.84 8.08 8.06 7.69 6.95
(1) 1997 reflects provisions for loan losses that significantly exceeded
historical levels.
(2) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001.
(3) At period end.
(4) Net of unearned discounts but before deduction of allowance for loan
losses.
(5) On September 1, 1998, Southwest redeemed all of its Series A Preferred
Stock at its stated liquidation value of $17.25 million.
(6) Reflects the public offering of 250,000 shares of common stock in May 1999,
and repurchases of common shares in 1999, 2000, and 2001. Please see note 8
to the consolidated financial statements.
(7) The efficiency ratio = other expenses/(net interest income + gain on sales
of securities and loans + other income).
(8) Ratio = year-to-date average assets divided by the number of FTE employees
at year-end.
(9) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms.
(10) Nonperforming assets consist of nonperforming loans and foreclosed assets.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of financial condition and
results of operations, the letter from the President which precedes it, and
other portions of this annual report include forward-looking statements such as:
statements of Southwest's goals, intentions, and expectations; estimates of
risks and of future costs and benefits; assessments of loan quality, problem
loan payoffs, and probable loan losses; assessments of the effects on
Southwest's performance of possible Federal Reserve actions to decrease interest
rates; and statements of Southwest's ability to achieve financial and other
goals. These forward-looking statements are subject to significant uncertainties
because they are based upon: the amount and timing of future changes in interest
rates and other economic conditions; future laws and regulations; and a variety
of other matters. Because of these uncertainties, the actual future results may
be materially different from the results indicated by these forward-looking
statements. In addition, Southwest's past growth and performance do not
necessarily indicate its future results.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Southwest Bancorp, Inc.'s ("Southwest") net income available to common
shareholders, and diluted earnings per common share exceeded the levels achieved
for 2000.
o Net income for 2001 was $11.8 million, up from $10.2 million in 2000 and
$8.9 million in 1999;
o Return on average common equity for 2001 was 14.87%, compared to 14.89% in
2000 and 13.83% in 1999; and
o Diluted earnings per common share increased to $2.00 in 2001, compared to
$1.76 in 2000 and $1.46 in 1999.
Overall balance sheet growth was positive:
o Total assets at year-end 2001 increased 1%, ending the year at $1,216.5
million compared to $1,203.6 million at year-end 2000 and $1,120.4 million
for 1999.
o Total loans grew to $931.0 million at December 31, 2001, compared to $912.6
million for 2000, and $852.8 million for 1999.
o Common shareholders' equity at year-end increased 16% to $85.1 million for
2001 compared to $73.2 million for 2000 and $64.3 million for 1999.
On August 29, 2001, Southwest effected a 3:2 stock split of its common
stock in the form of a dividend of 2,040,465 shares. All share and per share
amounts in this annual report have been retroactively restated to reflect this
stock split.
Southwest repurchased 40,000 shares of its outstanding common stock during
2001 at an average price of $16.19 per share under its share repurchase program.
SUMMARY OF EARNINGS
NET INCOME
Net income for 2001 was $11.8 million, a $1.6 million increase over the
$10.2 million earned in 2000. Basic earnings per common share increased 16% to
$2.06 per share for 2001 from $1.78 per share for 2000. Diluted earnings per
common share increased 14% to $2.00 per share for 2001 from $1.76 per share for
2000. The increase in earnings was primarily the result of a $2.3 million, or
27%, increase in other income. Earnings for 2001 also benefited from an $1.4
million, or 4%, increase in net interest income. These positive developments
offset a $1.6 million, or 5%, increase in other expenses, a $450,000, or 13%,
increase in the provision for loan loss and a $119,000, or 2%, increase in taxes
on income.
Net income for 2000 was $10.2 million, a $1.3 million increase over the
$8.9 million earned in 1999. Basic earnings per common share increased 19% to
$1.78 per share for 2000 from $1.49 per share for 1999. Diluted earnings per
common share increased 21% to $1.76 per share for 2000 from $1.46 per share for
1999. The increase in earnings was primarily the result of a $2.0 million, or
5%, increase in net interest income. Earnings for 2000 also benefited from an
$811,000, or 3%, reduction in other expenses and a $45,000, or 1%, increase in
other income. These positive developments more than offset a $1.1 million, or
42%, increase in the provision for loan loss and a $481,000, or 10%, increase in
taxes on income.
These increases and decreases in the components of income are discussed
further in other sections of this Management's Discussion.
NET INTEREST INCOME
Years Ended December 31, 2001 and 2000
Net interest income for 2001 increased to $41.5 million from $40.1 million
in 2000, primarily as a result of increases in Southwest's loan portfolio, the
interest rate spread, and noninterest-bearing funds. The interest rate spread
increased to 2.92% for 2001 from 2.87% for 2000 as a result of the 99 basis
point reduction in rates paid on Southwest's interest-bearing liabilities which
exceeded the 94 basis point reduction in yields on Southwest's interest-earning
assets. The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 114.92% for 2001 from 113.68% for 2000.
Interest income for 2001 was $90.4 million, down from $97.3 million in 2000
as a result of reductions in the yields earned on interest-earning assets.
Yields on total interest-earning assets were 7.71% in 2001 and 8.65% in 2000.
Loan interest and fee income declined $6.6 million, or 8%, and average loans
outstanding increased $38.0 million, or 4%, to $938.3 million in 2001 from
$900.2 million in 2000. Interest on investment securities declined $146,000, or
1% and average investment securities outstanding increased $11.9 million, or 5%,
to $233.7 million in 2001 from $221.8 million in 2000. The increase in
interest-earning assets was funded by short-term borrowings and retention of
earnings.
5
Total interest expense for 2001 was $48.9 million, a $8.3 million, or 15%,
decrease from $57.2 million in 2000. The decrease in interest expense was due to
decreases in the rates paid on all categories of interest-bearing liabilities.
Average interest-bearing deposits increased $3.3 million, or less than 1%, to
$809.7 million for 2001 from $806.5 million for 2000. Average short-term
borrowings increased $28.6 million, or 18%, to $186.1 million for 2001 from
$157.5 million for 2000. Rates paid on interest-bearing liabilities declined to
4.79% in 2001 from 5.78% in 2000.
The reductions in yields earned on interest-earning assets and rates paid
on interest-bearing liabilities reflected the Federal Reserve's actions to
decrease interest rates during 2001. The Federal Reserve lowered interest rates
eleven times during 2001, reducing the benchmark federal funds rate by 475 basis
points.
Years Ended December 31, 2000 and 1999
Net interest income for 2000 increased to $40.1 million from $38.1 million
in 1999, primarily as a result of increases in Southwest's loan portfolio and
the yield earned on those loans. The interest rate spread declined to 2.87% for
2000 from 3.18% for 1999 as a result of the 89 basis point increase in rates
paid on Southwest's interest-bearing liabilities which exceeded the 58 basis
point increase in yields on Southwest's interest-earning assets. The ratio of
average interest-earning assets to average interest-bearing liabilities declined
to 113.68% for 2000 from 114.78% for 1999.
Interest income for 2000 was $97.3 million, up from $80.6 million in 1999
as a result of increases in both interest-earning assets and the yields earned
on those assets. Yields on total interest-earning assets were 8.65% in 2000 and
8.07% in 1999. Loan interest and fee income increased $14.1 million, or 20%, and
average loans outstanding increased $92.1 million, or 11%, to $900.2 million in
2000 from $808.1 million in 1999. Interest on investment securities increased
$2.5 million, or 22%, and average investment securities outstanding increased
$32.8 million, or 17%, to $221.8 million in 2000 from $189.0 million in 1999.
The increase in interest-earning assets was funded by growth in deposits and
short-term borrowings and retention of earnings.
Total interest expense for 2000 was $57.2 million, a $14.7 million, or 35%,
increase from $42.5 million in 1999. The increase in interest expense was due to
increases in all categories of average interest-bearing liabilities and the
associated rates paid on those liabilities. Average interest-bearing deposits
increased $83.0 million, or 11%, to $806.5 million for 2000 from $723.5 million
for 1999. Average short-term borrowings increased $36.1 million, or 30%, to
$157.5 million for 2000 from $121.4 million for 1999. Rates paid on
interest-bearing liabilities increased to 5.78% in 2000 from 4.89% in 1999.
THREE YEAR COMPARISON OF CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST, YIELDS,
AND RATES
The table on the following page provides certain information relating to
Southwest's average consolidated statements of financial condition and reflects
the interest income on interest-earning assets, interest expense of
interest-bearing liabilities, and the average yields earned and rates paid for
the periods indicated. Yields and rates are derived by dividing income or
expense 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 loans receivable.
6
For the Year Ended December 31,
----------------------------------------------------------------------
2001 2000
-------------------------------- -------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------- -------------------------------------
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivable $ 938,278 $ 76,850 8.19% $ 900,241 $ 83,480 9.27%
Investment securities 233,686 13,509 5.78 221,783 13,655 6.16
Other interest-earning assets 1,212 41 3.38 2,263 139 6.14
------------------------------- -------------------------------------
Total interest-earning assets 1,173,176 90,400 7.71 1,124,287 97,274 8.65
Noninterest-earning assets:
Other assets 52,586 53,252
---------- ----------
Total assets $1,225,762 $1,177,539
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 49,156 809 1.65% $ 47,902 1,263 2.64%
Money market accounts 130,828 4,386 3.35 97,056 4,690 4.83
Savings accounts 5,361 79 1.47 4,731 94 1.99
Time deposits 624,359 33,497 5.37 656,765 39,205 5.97
------------------------------- -------------------------------------
Total interest-bearing deposits 809,704 38,771 4.79 806,454 45,252 5.61
Short-term borrowings (1) 186,109 7,770 4.17 157,517 9,577 6.08
Long-term debt 25,013 2,326 9.30 25,013 2,326 9.30
------------------------------- -------------------------------------
Total interest-bearing liabilities 1,020,826 48,867 4.79 988,984 57,155 5.78
------------------- -------------------
Noninterest-bearing liabilities:
Noninterest-bearing demand 110,438 105,177
Other noninterest-bearing liabilities 15,452 14,861
Shareholders' equity 79,046 68,517
---------- ----------
Total liabilities and shareholders' $1,225,762 $1,177,539
equity ========== ==========
Net interest income $ 41,533 $ 40,119
========== ==========
Interest rate spread 2.92% 2.87%
====== ======
Net interest margin (2) 3.54% 3.57%
====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 114.92% 113.68%
======= =======
--------------------------------------
1999
-------------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
-------------------------------------
ASSETS
Interest-earning assets:
Loans receivable $ 808,142 $69,373 8.58%
Investment securities 188,951 11,157 5.90
Other interest-earning assets 1,336 65 4.87
--------------------------------
Total interest-earning assets 998,429 80,595 8.07
Noninterest-earning assets:
Other assets 51,229
----------
Total assets $1,049,658
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 45,520 876 1.92%
Money market accounts 96,371 3,611 3.75
Savings accounts 3,709 74 2.00
Time deposits 577,880 29,512 5.11
--------------------------------
Total interest-bearing deposits 723,480 34,073 4.71
Short-term borrowings (1) 121,367 6,096 5.02
Long-term debt 25,013 2,326 9.30
--------------------------------
Total interest-bearing liabilities 869,860 42,495 4.89
-----------------
Noninterest-bearing liabilities:
Noninterest-bearing demand 101,202
Other noninterest-bearing liabilities 14,511
Shareholders' equity 64,085
----------
Total liabilities and shareholders' $1,049,658
equity ==========
Net interest income $38,100
=======
Interest rate spread 3.18%
======
Net interest margin (2) 3.82%
======
Ratio of average interest-earning asset
to averge interest-bearing liabilities 114.78%
=======
(1) The increase in short-term borrowings resulted mainly from increases in
Federal Home Loan Bank borrowings and in Sweep Repurchase Agreements, under
which commercial demand deposits are moved into repurchase agreements.
(2) Net interest margin = net interest income / total interest-earning assets.
7
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain
the allowance for loan losses at the level Southwest deems appropriate. The
allowance is based on careful, continuous review and evaluation of the credit
portfolio and ongoing, quarterly assessments of the probable losses inherent in
the loan and lease portfolio, and to a lesser extent, unused commitments to
provide financing. Southwest's systematic methodology for assessing the
appropriateness of the allowance includes determination of a formula allowance,
specific allowances and an unallocated reserve. The formula allowance is
calculated by applying loss factors to corresponding categories of outstanding
loans and leases. Loss factors are based on Southwest's historical loss
experience in the various portfolio categories over the prior six quarters or
four quarters, whichever is greater. The use of these loss factors is intended
to reduce the differences between estimated losses inherent in the portfolio and
observed loss. Formula allowances also are established for credits that do not
have specific allowances according to the application of credit risk factors.
These factors are set by management to reflect its assessment of the relative
level of risk inherent in each grade. Specific allowances are established in
cases where management has identified significant conditions or circumstances
related to a credit that management believes indicate the probability that a
loss may be incurred in an amount different from the amount determined by
application of the formula allowance. The allowance for loan losses related to
loans that are identified for evaluation of impairment is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain collateral dependent 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 other conditions
including credit administration and management and the quality of risk
identification systems. Management reviews these conditions quarterly. Based
upon this review, management established an allowance of $11.5 million, or 1.23%
of total loans, at December 31, 2001 compared to an allowance of $12.1 million,
or 1.33% of total loans, at December 31, 2000. At December 31, 2001, total
nonperforming loans were $9.2 million, or 0.99% of total loans, compared to
$12.0 million, or 1.32% of total loans, at December 31, 2000. The allowance for
loan losses equaled 124.56% of nonperforming loans at December 31, 2001 compared
to 100.71% at December 31, 2000. During 2001, 2000, and 1999, the provisions for
loan losses were $4.0 million, $3.6 million, and $2.5 million, respectively,
while net charge-offs were $4.6 million, $2.6 million, and $1.7 million.
During 2001, there were no changes in estimation methods or assumptions
that affected the methodology for determining the allowance. Southwest
determined the level of the allowance for loan losses at December 31, 2001 was
appropriate, based on that methodology.
The decrease in the total allowance was primarily the result of net
decreases in specific allocations (including allowance allocations on impaired
loans) as a result of charge-offs, decreases in both nonperforming and problem
loans, and the successful resolution of certain large problem credits.
Management strives to carefully monitor credit quality and to identify
loans that may become nonperforming. At any time, however, there are loans
included in the portfolio that will result in losses to Southwest, but that have
not been identified as nonperforming or potential problem loans. Because the
loan portfolio contains a significant number of commercial and commercial real
estate loans with relatively large balances, the unexpected deterioration of one
or a few of such loans may cause a significant increase in nonperforming assets,
and may lead to a material increase in charge-offs and the provision for loan
losses in future periods.
8
The following table shows the amounts of nonperforming loans at the end of
the periods indicated.
At December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
(dollars in thousands)
Total nonaccrual $ 7,291 $ 3,138 $ 5,205 $ 872 $ 5,458
Total past due 90 days or more 1,935 208 194 451 1,677
Total restructured -- 8,694 -- -- --
-----------------------------------------------------------
Total nonperforming loans 9,226 12,040 5,399 1,323 7,135
Other real estate owned 640 1,225 1,729 3,650 362
-----------------------------------------------------------
Total nonperforming assets $ 9,866 $13,265 $ 7,128 $ 4,973 $ 7,497
===========================================================
Nonperforming loans to loans 0.99% 1.32% 0.63% 0.17% 0.99%
Allowance for loan losses to nonperforming loans 124.56% 100.71% 207.26% 786.17% 116.08%
The following table analyzes Southwest's allowance for loan losses for the
periods indicated.
For the Year Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
(dollars in thousands)
Balance at beginning of period $12,125 $11,190 $10,401 $ 8,282 $ 7,139
Loans charged-off:
Real estate mortgage 445 563 307 460 1,305
Real estate construction 99 1,083 10 -- --
Commercial 4,364 1,170 1,229 1,320 8,691
Installment and consumer 621 474 802 594 1,532
-----------------------------------------------------------
Total charge-offs 5,529 3,290 2,348 2,374 11,528
-----------------------------------------------------------
Recoveries:
Real estate mortgage 54 155 30 105 85
Real estate construction 22 -- -- -- --
Commercial 574 360 382 582 300
Installment and consumer 246 160 230 426 182
-----------------------------------------------------------
Total recoveries 896 675 642 1,113 567
-----------------------------------------------------------
Net loans charged-off 4,633 2,615 1,706 1,261 10,961
Provision for loan losses 4,000 3,550 2,495 3,380 12,104
-----------------------------------------------------------
Balance at end of period $11,492 $12,125 $11,190 $10,401 $ 8,282
===========================================================
Ratio of allowance for loan losses to loans outstanding:
Average 1.22% 1.35% 1.38% 1.37% 1.18%
End of period 1.23 1.33 1.31 1.31 1.15
Ratio of net charge-offs to average loans
outstanding during the period 0.49 0.29 0.21 0.17 1.57
9
OTHER INCOME
Southwest has developed sources of noninterest income through student
lending, mortgage banking, and expansion of Southwest's ATM network, in addition
to traditional deposit and loan service charges and fees.
Total other income increased by $2.3 million for fiscal year 2001 compared
to 2000 primarily due to a $749,000 increase in gains on sales of residential
mortgage loans. Other income also benefited from a $535,000 increase in service
charges, a $485,000 increase in gains on sales of investment securities, and a
$386,000 increase in gains on sales of Small Business Administration ("SBA")
loans. The principal balance of residential mortgage loans sold was $117.4
million compared to $56.2 million during 2000. Sales of residential mortgage
loans increased principally as a result of reduced interest rates, which
increased refinances and overall originations. The increase in service charges
can be attributed to increases in transaction accounts and in fees earned by
Southwest's ATM network. The lower interest rate environment during 2001 also
contributed to the increase in service charge income by reducing the earnings
credit on commercial transaction accounts. The gains on sales of investment
securities during 2001 occurred when securities were called prior to their
stated maturity date.
Total other income increased by $45,000 for fiscal year 2000 compared to
1999 primarily due to a $1.4 million increase in services charges. The increase
in service charges can be attributed to increases both in transaction accounts
and in fees earned by Southwest's ATM network. Other income also benefited from
a $174,000 increase in gains on sales of government-guaranteed student loans and
a $107,000 increase in gains in sales of SBA loans. These increases were offset
by a $678,000 reduction in other noninterest income and a $435,000 reduction in
gains on sales of residential mortgage loans. The reduction in other noninterest
income was due primarily to $840,000 in gains on sales of property recorded in
1999. Government-guaranteed student loans sold during 2000 totaled $53.4 million
compared to $38.4 million during 1999. The principal balance of residential
mortgage loans sold was $56.2 million during 2000 compared to $85.7 million
during 1999. Sales of mortgage loans declined principally as a result of
increased interest rates, which reduced refinances and overall originations.
OTHER EXPENSES
Southwest's other expenses increased $1.6 million, or 5%, for fiscal year
2001 compared to 2000. This increase was primarily the result of a $1.4 million,
or 10%, increase in personnel expense which can be attributed to additional
compensation and higher benefit costs for Southwest's employee base. In
addition, general and administrative expense increased $772,000, or 10%, and
occupancy expense increased $130,000, or 2%. These increases in expense were
partially offset by a $751,000, or 93%, reduction in other real estate expense.
Southwest's other expenses declined $811,000, or 3%, for fiscal year 2000
compared to 1999. This decline was primarily the result of a $1.6 million, or
67%, reduction in other real estate expense. During fiscal year 1999, other real
estate expense included a $2.0 million write-down on a single property. This
property was sold during the second quarter of 2000. In addition, general and
administrative expense declined $567,000 for fiscal year 2000 compared to 1999
due to a $600,000 payment in 1999 to settle pending litigation and $303,000 in
offering expenses paid in 1999 on behalf of selling shareholders in a public
offering. These reductions in expense were partially offset by an $800,000, or
6%, increase in personnel expense, a $559,000, or 9%, increase in occupancy
expense and a $35,000, or 15%, increase in FDIC and other insurance.
TAXES ON INCOME
Southwest's income tax expense for fiscal years 2001, 2000, and 1999 was
$5.4 million, $5.2 million, and $4.8 million, respectively. Southwest's
effective tax rates have been lower than statutory federal and state rates
primarily because of tax-exempt income on municipal obligations and loans.
10
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended
-------------------------------------------------------------
12-31-01 09-30-01 06-30-01 03-31-01
-------------------------------------------------------------
(dollars in thousands, except per share data)
Operations Data
Interest income $ 19,878 $ 22,368 $ 23,518 $ 24,636
Interest expense 9,110 11,828 13,142 14,787
-------------------------------------------------------------
Net interest income 10,768 10,540 10,376 9,849
Provision for loan losses 1,150 900 1,125 825
Gain on sales of securities and loans 897 1,021 832 596
Other income 2,001 1,936 1,868 1,590
Other expenses 8,139 8,007 7,772 7,247
-------------------------------------------------------------
Income before taxes 4,377 4,590 4,179 3,963
Taxes on income 1,379 1,357 1,287 1,334
-------------------------------------------------------------
Net income $ 2,998 $ 3,233 $ 2,892 $ 2,629
=============================================================
Per Share Data (1)
Basic earnings per common share $ 0.52 $ 0.57 $ 0.51 $ 0.46
Diluted earnings per common share $ 0.51 $ 0.54 $ 0.50 $ 0.45
Dividends declared per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08
Weighted average common shares outstanding (1)
Basic 5,680,190 5,704,012 5,698,049 5,690,258
Diluted 5,867,729 5,905,128 5,835,735 5,820,277
For the Quarter Ended
-------------------------------------------------------------
12-31-00 09-30-00 06-30-00 03-31-00
-------------------------------------------------------------
(dollars in thousands, except per share data)
Operations Data
Interest income $ 25,999 $ 24,682 $ 23,742 $ 22,851
Interest expense 15,494 15,039 13,765 12,857
-------------------------------------------------------------
Net interest income 10,505 9,643 9,977 9,994
Provision for loan losses 825 925 975 825
Gain on sales of securities and loans 355 699 246 453
Other income 1,796 1,689 1,708 1,543
Other expenses 7,652 7,239 7,292 7,432
-------------------------------------------------------------
Income before taxes 4,179 3,867 3,664 3,733
Taxes on income 1,409 1,292 1,250 1,287
-------------------------------------------------------------
Net income $ 2,770 $ 2,575 $ 2,414 $ 2,446
=============================================================
Per Share Data (1)
Basic earnings per common share $ 0.49 $ 0.45 $ 0.42 $ 0.42
Diluted earnings per common share $ 0.48 $ 0.45 $ 0.41 $ 0.42
Dividends declared per common share $ 0.07 $ 0.07 $ 0.07 $ 0.07
Weighted average common shares outstanding (1)
Basic 5,681,822 5,698,184 5,756,163 5,799,285
Diluted 5,712,704 5,744,861 5,816,556 5,888,513
(1) All share and per share information has been restated to reflect the
three-to-two stock split effected in the form of a stock dividend paid
August 29, 2001.
11
FINANCIAL CONDITION
Southwest's total assets increased by $12.9 million, or 1%, from $1,203.6
million at December 31, 2000 to $1,216.5 million at December 31, 2000 after
increasing by $83.2 million, or 7%, between December 31, 1999 and 2000. The
growth in assets in 2001 was attributable to an increase in outstanding loans.
The growth in assets in 2000 was attributable to increases in both investment
securities and outstanding loans.
Southwest's investment securities decreased by $2.4 million, or 1%, from
$229.8 million at December 31, 2000 to $227.3 million at December 31, 2001 after
increasing by $18.1 million, or 9%, between December 31, 1999 and 2000. The
decline in 2001 came primarily from tax-exempt municipal securities, which
decreased $4.2 million, or 10%, from December 31, 2000 to December 31, 2001.
Southwest's investment in U.S. government and agency securities also decreased
$787,000, or less than 1%, during the same period. These decreases were
partially offset by a $1.5 million, or 21%, increase in Federal Home Loan Bank
stock. The growth during 2000 came primarily from tax-exempt municipal
securities, which increased by $9.9 million, or 32%, from December 31, 1999 to
December 2000. Mortgage-backed securities also increased $6.4 million, or 10%,
during the same period.
Total loans were $931.0 million at December 31, 2001, an increase of $18.5
million, or 2%, compared to December 31, 2000. Southwest experienced increases
in commercial real estate mortgages and government-guaranteed student loans. The
allowance for loan losses decreased by $633,000, or 5%, from December 31, 2000
to December 31, 2001. At December 31, 2001, the allowance for loan losses was
$11.5 million, or 1.23% of total loans, compared to $12.1 million, or $1.33% of
total loans, at December 31, 2000.
Loans were $912.6 million at December 31, 2000, an increase of $59.8
million, or 7%, compared to December 31, 1999. Southwest experienced increases
in all categories of outstanding loans. The allowance for loan losses increased
by $935,000, or 8%, from December 31, 1999 to December 31, 2000. At December 31,
2000, the allowance for loan losses was $12.1 million, or 1.33% of total loans,
compared to $11.2 million, or 1.31% of total loans, at December 31, 1999.
Southwest's deposits decreased by $40.3 million, or 4%, from $945.1 million
at December 31, 2000 to $904.8 million at December 31, 2001 after increasing by
$73.9 million, or 8%, between December 31, 1999 and December 31, 2000. Increases
occurred in noninterest-bearing demand accounts, savings deposits and money
market accounts. These increases were exceeded by reductions in NOW accounts and
time deposits. Total time deposits decreased $100.4 million, or 15%, during
2001. Time deposits of $100,000 or more decreased $44.7 million, or 15%. The
decrease in large time deposits was offset by an increase in short-term
borrowings, which grew by $44.9 million, or 30%, during 2001. The average rate
on short-term borrowings for 2001 was 4.17%, or 120 basis points less than the
average rate on total time deposits.
CAPITAL RESOURCES
At December 31, 2001, total shareholders' equity was $85.1 million compared
to $73.2 million at December 31, 2000. Earnings, net of common dividends,
contributed $9.9 million to shareholders' equity. Sales of common stock through
the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $597,000 to shareholders'
equity in 2001. Net unrealized holding gains (losses) on investment securities
available for sale (net of tax) increased to a gain of $2.4 million at December
31, 2001 compared to $379,000 at December 31, 2000. During 2001, Southwest
repurchased 40,000 shares at an average price of $16.19 per share, which reduced
shareholders' equity by $647,000. Repurchases of an additional 245,000 shares
may be made under the repurchase plan adopted in March 2001. Repurchases may be
made from time to time based on market conditions, projected capital needs, and
other factors.
At December 31, 2000, total shareholders' equity was $73.2 million compared
to $64.3 million at December 31, 1999. Earnings, net of common dividends,
contributed $8.5 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 $148,000 to shareholders'
equity in 2000. Net unrealized holding gains (losses) on investment securities
available for sale (net of tax) increased to a gain of $379,000 at December 31,
2000 compared to a loss of $(1.7) million at December 31, 1999. During 2000,
Southwest repurchased 102,500 shares at an average price of $17.33 per share,
which reduced common shareholders' equity by $1.8 million.
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, 2001,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 12.34%, a Tier 1 risk-based capital ratio of 11.15%,
and a leverage ratio of 8.84%. As of December 31, 2001, Stillwater National also
met the criteria for classification as a "well-capitalized" institution under
the prompt corrective action rules promulgated under the Federal Deposit
Insurance Act. Designation as a well-capitalized institution under these
regulations does not constitute a recommendation or endorsement of Southwest or
Stillwater National by Federal bank regulators.
12
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments.
Southwest's portfolio of government-guaranteed student loans and SBA loans are
also readily salable. Additional sources of liquidity, including cash flow from
the repayment of loans, are also considered in determining whether liquidity is
satisfactory. Liquidity is also achieved through growth of deposits and liquid
assets, and accessibility to the capital and money markets. These funds are used
to meet deposit withdrawals, maintain reserve requirements, fund loans and
operate the organization.
Cash and cash equivalents increased $1.6 million during 2001. This increase
was the result of cash provided from operating activities of $15.3 million and
financing activities (primarily short-term borrowings) of $2.7 million offset by
$16.5 million in cash used in investing activities.
During 2000, cash and cash equivalents increased $4.5 million as compared
to the year ended December 31, 1999. The increase was the result of cash
provided from financing activities (primarily increased deposits) of $69.3
million and operating activities of $10.1 million offset by $74.9 million in
cash used in investing activities.
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Southwest's net income is largely dependent on its net interest income.
Southwest seeks to maximize its net interest margin within an acceptable level
of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities. Net
interest income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by other
sources of funds, such as noninterest-bearing deposits and shareholders' equity.
Southwest attempts to manage interest rate risk while enhancing net
interest margin by adjusting its asset/liability position. At times, depending
on the level of general interest rates, the relationship between long- and
short-term interest rates, market conditions and competitive factors, Southwest
may determine to increase its interest rate risk position somewhat in order to
increase its net interest margin. Southwest monitors interest rate risk and
adjusts the composition of its interest-related assets and liabilities in order
to limit its exposure to changes in interest rates on net interest income over
time. Southwest's asset/liability committee reviews its interest rate risk
position and profitability, and recommends adjustments. The asset/liability
committee also reviews the securities portfolio, formulates investment
strategies, and oversees the timing and implementation of transactions.
Notwithstanding Southwest's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
"Gap analysis" is a measure of interest rate sensitivity traditionally used
in the banking industry. Gap analysis measures the cumulative differences
between the amounts of assets and liabilities maturing or repricing within
various time periods.
13
The following table shows Southwest's interest rate sensitivity gaps for
selected maturity periods at December 31, 2001:
0 to 3 4 to 12 Over 1 to Over
Months Months 5 Years 5 Years Total
------------------------------------------------------------------------
(dollars in thousands)
Interest-bearing assets:
Loans receivable $ 575,930 $ 196,471 $ 125,506 $ 33,139 $ 931,046
Investment securities 18,151 31,402 154,823 22,970 227,346
Federal funds sold -- -- -- -- --
Due from banks -- -- -- -- --
------------------------------------------------------------------------
Total 594,081 227,873 280,329 56,109 1,158,392
Interest-bearing liabilities:
Money market deposit accounts 157,266 -- -- -- 157,266
Time deposits 250,042 256,264 59,473 132 565,911
Savings accounts 5,372 -- -- -- 5,372
NOW accounts 49,051 -- -- -- 49,051
Short-term borrowings 195,367 -- -- -- 195,367
Long-term debt -- -- -- 25,013 25,013
------------------------------------------------------------------------
Total 657,098 256,264 59,473 25,145 997,980
------------------------------------------------------------------------
Interest sensitivity gap $ (63,017) $ (28,391) $ 220,856 $ 30,964 $ 160,412
========================================================================
Cumulative interest sensitivity gap $ (63,017) $ (91,408) $ 129,448 $ 160,412 $ 160,412
========================================================================
Percentage of interest-earning assets
to interest-bearing liabilities 90.41% 88.92% 471.36% 223.14% 116.07%
========================================================================
Percentage of cumulative gap to total assets (5.18)% (7.51)% 10.64% 13.19% 13.19%
========================================================================
It is Southwest's goal to maintain a percentage of rate-sensitive assets to
rate-sensitive liabilities of between 75% and 125%. This 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.
A principal objective of Southwest's asset/liability management effort is
to balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of Southwest within acceptable risk
levels. To measure its interest rate sensitivity position, Southwest utilizes a
simulation model that facilitates the forecasting of net interest income under a
variety of interest rate and growth scenarios. At December 31, 2001, the model
projected net income would decrease by 20.95% if interest rates immediately fell
by 200 basis points. It projects an increase in net income of 8.82% if interest
rates immediately rose by 200 basis points. The model projected net income would
decrease by 10.42% if interest rates gradually fell by 200 basis points over a
one-year time horizon. It projects an increase in net income of 5.95% if
interest rates gradually rose by 200 basis points over a one-year time horizon.
The earnings simulation model uses numerous assumptions regarding the effect of
changes in interest rates on the timing and extent of repricing characteristics,
future cash flows and customer behavior. These assumptions are inherently
uncertain and, as a result, the model cannot precisely estimate net income.
Actual results will differ from simulated results due to timing, cash flows,
magnitude and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
14
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles 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.
CHANGE IN AUDITORS
On August 28, 2000, Southwest dismissed Deloitte & Touche LLP, which had
previously served as independent accountants for Southwest. The reports of
Deloitte & Touche LLP on the consolidated financial statements of Southwest as
of and for the fiscal year ended December 31, 1999, contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. The change in independent accountants was
recommended by Southwest's Audit Committee and approved by Southwest's Board of
Directors. In connection with its audit for the fiscal year ended December 31,
1999, and in the interim period from January 1, 2000 through August 28, 2000,
there were no disagreements with Deloitte and Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference
to such disagreements in its report on the consolidating financial statements
for such years.
On August 31, 2000, Southwest engaged Ernst & Young LLP as its new
independent accountants. The engagement of Ernst & Young LLP was recommended by
Southwest's Audit Committee and approved by Southwest's Board of Directors.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137. SFAS
No. 133 established new accounting and reporting standards for derivative
financial instruments and for hedging activities. SFAS No. 133 required that
Southwest recognize all derivatives at fair value in the statement of financial
condition as an asset or liability, depending on Southwest's rights or
obligations under the applicable derivative contract. Southwest adopted SFAS No.
133 on January 1, 2001, as required. Adoption of the new method of accounting
for derivatives and hedging activities did not have a material impact on
Southwest's consolidated financial condition or results of operations.
15
[PHOTO]
16
REPORT OF MANAGEMENT
January 25, 2002
To the Shareholders of Southwest Bancorp, Inc.:
FINANCIAL STATEMENTS
Southwest Bancorp, Inc. is responsible for the preparation, integrity, and
fair presentation of its published financial statements as of December 31, 2001,
and for the year then ended. The consolidated financial statements of Southwest
Bancorp, Inc. have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts that are based upon informed
judgments and estimates of management.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining effective
internal control over financial reporting, presented in conformity with
generally accepted accounting principles and the instructions to the
Consolidated Financial Statements for Bank Holding Companies with Total
Consolidated Assets of $150 million or More, or with More Than One Subsidiary
Bank (Form FR Y-9C) (FR Y-9C instructions). The internal control system contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
system, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control systems can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control systems may vary over time.
Management assessed Southwest Bancorp, Inc.'s internal control over
financial reporting, presented in conformity with generally accepted accounting
principles and FR Y-9C instructions as of December 31, 2001. This assessment was
based on criteria for effective internal control over financial reporting
described in "Internal Control - Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that Southwest Bancorp, Inc. maintained
effective internal control over financial reporting, presented in conformity
with generally accepted accounting principles and FR Y-9C instructions as of
December 31, 2001.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state
laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders, designated by the Federal Deposit
Insurance Corporation as safety and soundness laws and regulations.
Management has assessed compliance by Southwest Bancorp, Inc. subsidiary
Stillwater National Bank with the designated laws and regulations relating to
safety and soundness. Based on this assessment, management believes that the
subsidiary insured depository institution complied, in all significant respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 2001.
/s/ Rick Green /s/ Kerby Crowell
- ------------------------------------- ----------------------------------
Rick Green Kerby E. Crowell
President and Chief Executive Officer Executive Vice President and Chief
Financial Officer
17
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SOUTHWEST BANCORP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Southwest Bancorp, Inc. as of December 31, 2001 and 2000, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of Southwest's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. Southwest's consolidated statements of operations, comprehensive
income, shareholders' equity, and cash flows for the year ended December 31,
1999, were audited by other auditors whose report dated January 28, 2000,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwest
Bancorp, Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
- -----------------------
Ernst & Young LLP
Tulsa, Oklahoma
January 25, 2002
18
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000(1)
----------- -----------
ASSETS
Cash and cash equivalents $ 32,406 $ 30,851
Investment securities:
Held to maturity, fair value $51,030 (2001) and $64,615 (2000) 49,893 64,406
Available for sale, amortized cost $163,924 (2001) and $156,316 (2000) 167,545 156,947
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 9,908 8,439
Loans held for sale 12,740 7,888
Loans receivable, net of allowance for loan losses
of $11,492 (2001) and $12,125 (2000) 906,814 892,537
Accrued interest receivable 10,157 12,042
Premises and equipment, net 20,418 20,416
Other assets 6,614 10,040
----------- -----------
Total assets $ 1,216,495 $ 1,203,566
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 127,196 $ 119,732
Interest-bearing demand 49,051 51,199
Money market accounts 157,266 103,001
Savings accounts 5,372 4,884
Time deposits of $100,000 or more 260,071 304,814
Other time deposits 305,840 361,472
----------- -----------
Total deposits 904,796 945,102
Accrued interest payable 3,470 7,105
Other liabilities 2,724 2,609
Short-term borrowings 195,367 150,498
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
----------- -----------
Total liabilities 1,131,370 1,130,327
----------- -----------
Shareholders' equity:
Common stock - $1 par value; 20,000,000 shares authorized;
6,121,521 shares issued and outstanding 6,122 6,122
Capital surplus 12,508 12,747
Retained earnings 69,838 59,912
Accumulated other comprehensive gain (loss) 2,389 379
Treasury stock, at cost; 420,764 (2001) and 436,158 (2000) shares (5,732) (5,921)
----------- -----------
Total shareholders' equity 85,125 73,239
----------- -----------
Total liabilities & shareholders' equity $ 1,216,495 $ 1,203,566
=========== ===========
See notes to consolidated financial statements.
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001.
19
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000(1) 1999(1)
------- ------- -------
Interest income:
Interest and fees on loans $76,850 $83,480 $69,373
Investment securities:
U.S. Government and agency obligations 6,329 6,767 7,036
Mortgage-backed securities 4,780 4,576 2,705
State and political subdivisions 1,638 1,499 868
Other securities 762 813 548
Federal funds sold 41 139 65
------- ------- -------
Total interest income 90,400 97,274 80,595
Interest expense:
Interest-bearing demand 809 1,263 876
Money market accounts 4,386 4,690 3,611
Savings accounts 79 94 74
Time deposits of $100,000 or more 15,468 18,797 10,851
Other time deposits 18,029 20,408 18,661
Short-term borrowings 7,770 9,577 6,096
Long-term debt 2,326 2,326 2,326
------- ------- -------
Total interest expense 48,867 57,155 42,495
------- ------- -------
Net interest income 41,533 40,119 38,100
Provision for loan losses 4,000 3,550 2,495
Other income:
Service charges and fees 6,733 6,198 4,833
Other noninterest income 662 538 1,216
Gain on sales of loans receivable 2,979 1,871 2,025
Gain (loss) on sales of investment securities 367 (118) 370
------- ------- -------
Total other income 10,741 8,489 8,444
Other expenses:
Salaries and employee benefits 15,794 14,401 13,601
Occupancy 6,606 6,476 5,917
FDIC and other insurance 280 274 239
Other real estate 57 808 2,446
General and administrative 8,428 7,656 8,223
------- ------- -------
Total other expenses 31,165 29,615 30,426
------- ------- -------
Income before taxes 17,109 15,443 13,623
Taxes on income 5,357 5,238 4,757
------- ------- -------
Net income $11,752 $10,205 $ 8,866
======= ======= =======
Basic earnings per common share $ 2.06 $ 1.78 $ 1.49
======= ======= =======
Diluted earnings per common share $ 2.00 $ 1.76 $ 1.46
======= ======= =======
Cash dividends declared per share $ 0.32 $ 0.29 $ 0.27
======= ======= =======
See notes to consolidated financial statements.
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001.
20
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2001 2000 1999
-------- -------- --------
Net income $ 11,752 $ 10,205 $ 8,866
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for
sale securities 3,357 3,357 (3,330)
Reclassification adjustment for (gains) losses
arising during the period (367) 118 (370)
-------- -------- --------
Other comprehensive income (loss), before tax 2,990 3,475 (3,700)
Tax (expense) benefit related to items
of other comprehensive income (loss) (980) (1,388) 1,479
-------- -------- --------
Other comprehensive income (loss), net of tax 2,010 2,087 (2,221)
-------- -------- --------
Comprehensive income $ 13,762 $ 12,292 $ 6,645
======== ======== ========
See notes to consolidated financial statements.
21
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31,
2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED TOTAL
OTHER SHARE-
COMMON STOCK CAPITAL RETAINED COMPREHENSIVE TREASURY HOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY
-------------------------------------------------------------------------------------
Balance, January 1, 1999(1) 5,698,535 $ 5,699 $ 7,469 $ 44,120 $ 513 -- $ 57,801
Cash dividends:
Common, $0.40 per share -- -- -- (1,601) -- -- (1,601)
Common stock issued:
Employee Stock Option Plan 45,000 45 337 -- -- -- 382
Employee Stock Purchase Plan 1,903 2 28 -- -- $ 29 59
Dividend Reinvestment Plan 1,083 1 17 -- -- 18 36
Public Offering 375,000 375 4,976 -- -- -- 5,351
Other comprehensive income
(loss), net of tax -- -- -- -- (2,221) -- (2,221)
Treasury shares purchased -- -- (13) -- -- (4,406) (4,419)
Net income -- -- -- 8,866 -- -- 8,866
-------------------------------------------------------------------------------------
Balance, December 31, 1999 6,121,521 6,122 12,814 51,385 (1,708) (4,359) 64,254
Cash dividends:
Common, $0.44 per share -- -- -- (1,678) -- -- (1,678)
Common stock issued:
Employee Stock Option Plan -- -- (35) -- -- 89 54
Employee Stock Purchase Plan -- -- (16) -- -- 62 46
Dividend Reinvestment Plan -- -- (16) -- -- 64 48
Other comprehensive income
(loss), net of tax -- -- -- -- 2,087 -- 2,087
Treasury shares purchased -- -- -- -- -- (1,777) (1,777)
Net income -- -- -- 10,205 -- -- 10,205
-------------------------------------------------------------------------------------
Balance, December 31, 2000 6,121,521 6,122 12,747 59,912 379 (5,921) 73,239
Cash dividends:
Common, $0.32 per share, and
other dividends -- -- -- (1,826) -- -- (1,826)
Common stock issued:
Employee Stock Option Plan -- -- (234) -- -- 739 505
Employee Stock Purchase Plan -- -- -- -- -- 39 39
Dividend Reinvestment Plan -- -- (5) -- -- 58 53
Other comprehensive income
(loss), net of tax -- -- -- -- 2,010 -- 2,010
Treasury shares purchased -- -- -- -- -- (647) (647)
Net income -- -- -- 11,752 -- -- 11,752
-------------------------------------------------------------------------------------
Balance, December 31, 2001 6,121,521 $ 6,122 $ 12,508 $ 69,838 $ 2,389 $ (5,732) $ 85,125
=====================================================================================
See notes to consolidated financial statements.
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001.
22
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2001 2000 1999
--------- --------- ---------
Operating activities:
Net income $ 11,752 $ 10,205 $ 8,866
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 4,000 3,550 2,495
Depreciation and amortization expense 2,434 2,493 2,284
Amortization of premiums and accretion of
discounts on securities, net 15 (13) 278
Amortization of intangibles 178 182 273
(Gain) Loss on sales/calls of securities (367) 118 (370)
(Gain) Loss on sales of loans receivable (2,979) (1,871) (2,025)
(Gain) Loss on sales of premises/equipment 137 48 (851)
(Gain) Loss on other real estate owned, net (16) 424 1,950
Proceeds from sales of residential mortgage loans 118,899 56,986 86,845
Residential mortgage loans originated for resale (118,717) (59,370) (86,203)
Changes in assets and liabilities:
Accrued interest receivable 1,885 (2,629) (755)
Other assets 1,685 (1,550) (1,205)
Income taxes payable (170) 365 (151)
Accrued interest payable (3,635) 1,101 420
Other liabilities 246 121 21
--------- --------- ---------
Net cash (used in) provided from operating activities 15,347 10,160 11,872
--------- --------- ---------
Investing activities:
Proceeds from sales of available for sale securities 1,993 3,998 283
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 14,475 23,290 24,291
Available for sale securities 69,475 15,129 28,136
Proceeds from redemptions of Federal Home Loan Bank stock 718 146 --
Purchases of held to maturity securities -- (15,930) (21,141)
Purchases of available for sale securities (78,688) (41,274) (67,837)
Purchases of Federal Home Loan Bank Stock (2,187) (96) (4,353)
Loans originated and principal repayments, net (105,352) (115,631) (99,106)
Proceeds from sales of guaranteed student loans 84,658 54,440 39,265
Purchases of premises and equipment (2,640) (2,247) (4,186)
Proceeds from sales of premises and equipment 67 90 1,157
Proceeds from sales of other real estate owned 963 3,169 --
--------- --------- ---------
Net cash (used in) provided from investing activities (16,518) (74,916) (103,491)
--------- --------- ---------
Financing activities:
Net increase (decrease) in deposits (40,306) 73,867 28,518
Net increase (decrease) in short-term borrowings 44,869 (1,322) 57,248
Net proceeds from issuance of common stock 597 148 5,828
Purchases of treasury stock (647) (1,777) (4,419)
Common stock dividends paid (1,787) (1,649) (1,555)
--------- --------- ---------
Net cash (used in) provided from financing activities 2,726 69,267 85,620
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,555 4,511 (5,999)
Cash and cash equivalents,
Beginning of period 30,851 26,340 32,339
--------- --------- ---------
End of period $ 32,406 $ 30,851 $ 26,340
========= ========= =========
See notes to consolidated financial statements.
23
SOUTHWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc.
("Southwest") was incorporated in 1981 as a bank holding company headquartered
in Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the State of Oklahoma. The accompanying consolidated financial
statements include the accounts of Stillwater National Bank and Trust Company
("Stillwater National"), a national bank established in 1894, and SBI Capital
Trust, a Delaware business trust established in 1997. Stillwater National and
SBI Capital Trust are wholly owned, direct subsidiaries of Southwest. All
significant intercompany balances and transactions have been eliminated.
MANAGEMENT ESTIMATES - In preparing its financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities as
of the dates shown on the consolidated statements of financial condition and
revenues and expenses during the periods reported. Actual results could differ
significantly from those estimates. Changes in economic conditions could impact
the determination of material estimates such as the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
and federal funds sold. Federal funds sold are sold for one-to-four day periods.
INVESTMENT SECURITIES - Investments in debt and equity securities are
identified as held to maturity and available for sale based on management
considerations of asset/liability strategy, changes in interest rates and
prepayment risk, the need to increase capital and other factors. Southwest has
the ability and intent to hold to maturity its investment securities classified
as held to maturity. Southwest had no investments held for trading purposes for
any period presented. Under certain circumstances (including the deterioration
of the issuer's creditworthiness, a change in tax law, or statutory or
regulatory requirements), Southwest may change the investment security
classification. The classifications Southwest utilizes determines the related
accounting treatment for each category of investments. Available for sale
securities are accounted for at fair value with unrealized gains or losses, net
of taxes, excluded from operations and reported as accumulated other
comprehensive income or loss. Held to maturity securities are accounted for at
amortized cost.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to operations over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
Southwest's investments in state and political subdivisions generally is not
subject to ordinary Federal income tax.
Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are
not readily marketable, therefore these investments are carried at cost, which
approximates fair value.
LOANS RECEIVABLE - Interest on loans is accrued and credited to operations
based upon the principal amount outstanding. In general, accrued interest income
on impaired loans is written off after the loan is 90 days past due; subsequent
interest income is recorded when cash receipts are received from the borrower.
Southwest originates real estate mortgage loans and government-guaranteed
student loans for portfolio investment or sale in the secondary market. During
the period of origination, real estate mortgage loans are designated as held
either for investment purposes or sale. Mortgage loans held for sale are
generally sold within a one-month period from loan closing at amounts
approximating par value of the loans. Government-guaranteed student loans are
generally sold after Southwest has been notified of the borrower's change from
deferment status, which can range from one to five years, or longer. Real estate
mortgage loans held for sale and government-guaranteed student loans are carried
at the lower of cost or market, which does not exceed market. Gains or losses
recognized upon the sales of loans are determined on a specific identification
basis.
24
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to operations. Loan amounts which
are determined to be uncollectible are charged against this allowance, and
recoveries, if any, are added to the allowance. A loan is considered to be
impaired when, based on current information and events, it is probable that
Southwest will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The allowance for loan losses related to loans that
are identified for evaluation of impairment is based either on the discounted
cash flows using the loan's initial effective interest rate or on the fair value
of the collateral for certain collateral dependent loans. Smaller balance,
homogeneous loans, including mortgage, student and consumer, are collectively
evaluated for impairment. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change. All of Southwest's nonaccrual loans have been defined as
impaired loans.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful life of each asset,
which ranges from three to forty years. Southwest reviews the carrying value of
long-lived assets used in operations when changes in events or circumstances
indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated
to be generated by those assets. If this review indicates that an asset is
impaired, Southwest records a charge to operations to reduce the asset's
carrying value to fair value, which is based on estimated discounted cash flows.
Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less cost to sell.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at
the lesser of the fair value less the estimated costs to sell the asset or the
recorded amount of the related loan. Write-downs of carrying value required at
the time of foreclosure are recorded as a charge to the allowance for loan
losses. Costs related to the development of such real estate are capitalized
whereas 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.
Profit from sales of foreclosed property by Southwest is recognized in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 66, Accounting for Sales of Real Estate. Losses are recognized as
incurred.
INTANGIBLES - Intangibles consist of goodwill and mortgage servicing rights
and are included in other assets in the consolidated statements of financial
condition. Goodwill is amortized using the straight-line method over 15 years.
Loan servicing rights are capitalized based on estimated fair market value at
the point of origination. The servicing rights are amortized on an individual
loan by loan basis over the period of estimated net servicing income. Impairment
of loan servicing rights is assessed based on the fair value of those rights.
The capitalized amounts and amortization of the loan servicing rights is not
material. Southwest reviews the carrying value of intangible assets annually for
impairment. Assets are considered impaired when the balances are not recoverable
from estimated future cash flows. At December 31, 2001 and 2000, Southwest had
recorded cumulative amortization of $2.2 million and $2.0 million, respectively.
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $260.1 million and $304.8 million at December 31,
2001 and 2000, respectively. The total amount of overdrawn deposit accounts that
were reclassified as loans at December 31, 2001 and 2000 was $575,000 and $1.5
million, respectively. Time deposit maturities are as follows: $506.3 million in
2002, $24.1 million in 2003, $32.6 million in 2004, $1.6 million in 2005 and
$1.4 million thereafter.
LONG-TERM DEBT - The long-term debt consists of the Guaranteed Preferred
Beneficial Interests in Southwest's Subordinated Debentures purchased from SBI
Capital Trust.
LOAN SERVICING INCOME - Southwest earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
TAXES ON INCOME - Southwest and its subsidiaries file consolidated income
tax returns. Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities. A valuation allowance
will be established if it is more likely than not that some portion of the
deferred tax asset will not be realized.
25
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, 2001, 2000, and 1999, Southwest had 150,000, 405,000, and 255,000
antidilutive options to purchase common shares, respectively. The following is a
reconciliation of the common shares used in the calculations of basic and
diluted earnings per common share:
2001 2000 1999
-------------- --------------- --------------
Weighted average common shares outstanding:
Basic earnings per share 5,693,129 5,733,624 5,960,817
Effect of dilutive securities:
Stock options 171,293 59,228 121,185
-------------- --------------- --------------
Weighted average common shares outstanding:
Diluted earnings per share 5,864,422 5,792,852 6,082,002
============== =============== ==============
COMPREHENSIVE INCOME - During 1998, Southwest adopted the provisions of
SFAS No. 130, Reporting Comprehensive Income. This statement requires
presentation of comprehensive income (net income plus all other changes in
shareholders' equity from non-equity sources). The Company's comprehensive
income 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 $116,000 and
zero at December 31, 2001 and 2000, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts to conform to the current year presentation.
26
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
At December 31, 2001
-----------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 17,723 $ 539 $ 1 $ 18,261
Obligations of state and political subdivisions 32,170 599 -- 32,769
-------- -------- -------- --------
Total $ 49,893 $ 1,138 $ 1 $ 51,030
======== ======== ======== ========
Available for Sale:
U.S. Government and agency obligations $ 85,499 $ 2,210 $ 9 $ 87,700
Obligations of state and political subdivisions 4,560 112 -- 4,672
Mortgage-backed securities 69,303 1,385 31 70,657
Equity securities 4,562 66 112 4,516
-------- -------- -------- --------
Total $163,924 $ 3,773 $ 152 $167,545
======== ======== ======== ========
At December 31, 2000
-----------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 28,198 $ 241 $ 6 $ 28,433
Obligations of state and political subdivisions 36,208 163 189 36,182
-------- -------- -------- --------
Total $ 64,406 $ 404 $ 195 $ 64,615
======== ======== ======== ========
Available for Sale:
U.S. Government and agency obligations $ 77,404 $ 795 $ 187 $ 78,012
Obligations of state and political subdivisions 4,787 38 7 4,818
Mortgage-backed securities 70,533 531 497 70,567
Equity securities 3,592 34 76 3,550
-------- -------- -------- --------
Total $156,316 $1,398 $ 767 $156,947
======== ======== ======== ========
As required by law, investment securities are pledged to secure public and
trust deposits, as well as the Sweep Repurchase Agreement Product and borrowings
from the FHLB. Securities with an amortized cost of $193.4 million and $203.4
million were pledged to meet such requirements of $117.1 million and $105.8
million at December 31, 2001 and 2000, respectively. Any amount overpledged can
be released at any time.
27
A comparison of the amortized cost and approximate fair value of
Southwest's debt securities by maturity date at December 31, 2001 follows.
Mortgage-backed securities are included in the period in which they are
estimated to prepay.
Available for Sale Held to Maturity
--------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------
(dollars in thousands)
One year or less $ 16,035 $ 16,215 $ 20,802 $ 21,141
Two years through five years 122,588 125,732 29,091 29,889
Five years through ten years 20,739 21,082 -- --
More than ten years 0 0 -- --
-------- -------- -------- --------
Total $159,362 $163,029 $ 49,893 $ 51,030
======== ======== ======== ========
Gross realized gains (losses) on sales of investment securities were
$367,000, $(118,000), and $370,000 during 2001, 2000, and 1999, respectively.
The gross proceeds from such sales of investment securities totaled
approximately $2.0 million, $4.0 million, and $283,000 during 2001, 2000, and
1999, respectively. A portion of the gain on sales of investment securities
during 2001 and 1999 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 RECEIVABLE
Major classifications of loans are as follows:
At December 31,
----------------------------------
2001 2000
----------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $301,578 $276,525
One-to-four family residential 106,206 107,360
Real estate construction 91,897 103,951
Commercial 312,577 311,953
Installment and consumer:
Government-guaranteed student loans 91,841 77,846
Other 26,947 34,915
------------- -------------
931,046 912,550
Allowance for loan losses (11,492) (12,125)
------------- -------------
Loans receivable, net $919,554 $900,425
============= =============
Southwest extends commercial and consumer credit primarily to customers in
the State of Oklahoma, which subjects the loan portfolio to the general economic
conditions within this area. At December 31, 2001 and 2000, substantially all of
Southwest's loans are collateralized with real estate, inventory, accounts
receivable and/or other assets or guaranteed by agencies of the United States
Government.
Loans to individuals and businesses in the healthcare industry totaled
$134.7 million, or 14% of total loans. Southwest does not have any other
concentrations of loans to individuals or businesses involved in a single
industry of more than 5% of total loans. In the event of total nonperformance by
the borrowers, Southwest's accounting loss would be limited to the recorded
investment in the loans receivable reduced by proceeds received from disposition
of the related collateral.
28
Southwest had loans which were held for sale of $12.7 million and $7.9
million at December 31, 2001 and 2000, respectively. These loans are carried at
cost, which does not exceed market. Government-guaranteed student loans are
generally sold to a single servicer. A substantial portion of the one-to-four
family residential loans and loan servicing rights are sold to five servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $7.3 million and $3.1 million at December 31,
2001 and 2000, 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 $543,000, $155,000, and
$549,000, for 2001, 2000, and 1999, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $91.1 million and $94.5 million at December 31, 2001 and 2000,
respectively. Southwest maintained escrow accounts totaling $370,000 and
$379,000 for real estate mortgage loans serviced for others at December 31, 2001
and 2000, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 2001. Student loans that do not have stated
maturities are treated as due in one year or less.
One year One to Over
or less five years five years Total
-------- ---------- ---------- --------
(dollars in thousands)
Real estate mortgage:
Commercial $ 26,400 $ 57,950 $217,228 $301,578
One-to-four family residential 17,375 38,692 50,139 106,206
Real estate construction 67,106 10,204 14,587 91,897
Commercial 152,831 115,649 44,097 312,577
Installment and consumer:
Government-guaranteed student loans 91,841 -- -- 91,841
Other 10,442 14,939 1,566 26,947
-------- -------- -------- --------
Total $365,995 $237,434 $327,617 $931,046
======== ======== ======== ========
The following table sets forth at December 31, 2001 the dollar amount of
all loans due more than one year after December 31, 2001.
Fixed Variable Total
-------- -------- --------
(dollars in thousands)
Real estate mortgage:
Commercial $ 16,967 $258,211 $275,178
One-to-four family residential 31,412 57,419 88,831
4,557 20,234 24,791
20,432 139,314 159,746
Real estate construction
Commercial
Installment and consumer:
Government-guaranteed student loans -- -- --
Other 11,752 4,753 16,505
-------- -------- --------
Total $ 85,120 $479,931 $565,051
======== ======== ========
29
The allowance for loan losses is summarized as follows:
For the Years Ended December 31,
--------------------------------------------------------
2001 2000 1999
--------------------------------------------------------
(dollars in thousands)
Beginning balance $ 12,125 $ 11,190 $ 10,401
Provision for loan losses 4,000 3,550 2,495
Loans charged off (5,529) (3,290) (2,348)
Recoveries 896 675 642
-------- -------- --------
Total $ 11,492 $ 12,125 $ 11,190
======== ======== ========
As of December 31, 2001 and 2000, impaired loans totaled $7.3 million and
$3.2 million and had a related allowance for loan loss of $2.4 million and
$847,000, respectively. The average balance of impaired loans totaled $6.3
million and $10.8 million for the years ended December 31, 2001 and 2000.
Interest income recognized on impaired loans totaled $392,000, $142,000, and
$330,000, respectively, for the years ended December 31, 2001, 2000, and 1999.
Directors and officers of Southwest and Stillwater National were customers
of, and had transactions with, Southwest in the ordinary course of business, and
similar transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of loss or present other
unfavorable features. Certain officers, directors, employees, and companies in
which they have partial ownership had indebtedness to Southwest totaling $1.5
million, $1.4 million and $1.4 million at December 31, 2001, 2000 and 1999,
respectively. During 2001, $9.3 million of new loans were made to these persons
and repayments totaled $9.2 million.
4. PREMISES AND EQUIPMENT
These consist of the following:
At December 31,
----------------------------
2001 2000
----------------------------
(dollars in thousands)
Land $ 4,558 $ 4,558
Buildings and improvements 10,972 10,981
Furniture, fixtures, and equipment 19,599 17,714
Construction/Remodeling in progress 48 277
-------- --------
35,177 33,530
Accumulated depreciation and amortization (14,759) (13,114)
-------- --------
Premises and equipment, net $ 20,418 $ 20,416
======== ========
30
5. OTHER BORROWED FUNDS
During 2001, the only categories of short-term borrowings whose averages
exceeded 30% of ending shareholders' equity were repurchase agreements and funds
borrowed from the FHLB.
At December 31,
------------------------------------------
2001 2000 1999
------------------------------------------
(dollars in thousands)
Amounts outstanding at end of period:
Treasury, tax and loan note option $ 1,493 $ 1,944 $ 2,500
Federal funds purchased and securities sold
under repurchase agreements 51,579 55,758 40,270
Borrowed from the Federal Home Loan Bank 142,295 92,574 109,050
Other short-term borrowings -- 222 --
Weighted average rate outstanding:
Treasury, tax and loan note option 1.40% 5.72% 4.52%
Federal funds purchased and securities sold
under repurchase agreements 1.61 5.72 5.08
Borrowed from the Federal Home Loan Bank 3.27 6.43 5.64
Other short-term borrowings -- 9.50 --
Maximum amounts of borrowings outstanding at any month-end:
Treasury, tax and loan note option $ 2,500 $ 2,500 $ 2,715
Federal funds purchased and securities sold
under repurchase agreements 58,274 59,766 52,588
Borrowed from the Federal Home Loan Bank 168,590 127,850 124,150
Other short-term borrowings 500 222 --
Approximate average short-term borrowings outstanding for the year:
Treasury, tax and loan note option $ 1,596 $ 1,658 $ 1,568
Federal funds purchased and securities sold
under repurchase agreements 53,128 51,718 41,087
Borrowed from the Federal Home Loan Bank 131,220 104,032 78,701
Other short-term borrowings 165 109 11
Approximate weighted average rate for the year:
Treasury, tax and loan note option 3.55% 6.33% 4.85%
Federal funds purchased and securities sold
under repurchase agreements 3.39 5.59 4.56
Borrowed from the Federal Home Loan Bank 4.50 6.32 5.27
Other short-term borrowings 6.76 9.00 4.50
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, 2001 and
2000, loans pledged under the Agreement were $312.1 million and $355.2 million
and investment securities (at carrying value) were $42.8 million and $53.7
million, respectively.
31
Southwest has available various forms of short-term borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchases, securities sold under agreements to repurchase, and borrowings
from the Federal Reserve Bank ("FRB"), the Student Loan Marketing Association
("SLMA"), the F&M Bank of Tulsa ("F&M") and the Federal Home Loan Bank of Topeka
("FHLB"). Southwest has available a $5.0 million line of credit from F&M, none
of which was outstanding at December 31, 2001. 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
$1.5 million at December 31, 2001. Southwest has approved federal funds purchase
lines totaling $20.0 million with three other banks; no amounts were outstanding
on these lines at December 31, 2001. In addition, Southwest has available a
$35.0 million line of credit from the SLMA and a $244.4 million line of credit
from the FHLB. Borrowings under the SLMA line would be secured by student loans.
Borrowings under the FHLB line are secured by all unpledged securities and other
loans. The SLMA line expires April 20, 2007; no amount was outstanding on this
line at December 31, 2001. The FHLB line of credit had an outstanding balance of
$142.3 million at December 31, 2001. Southwest also has available unsecured
brokered certificate of deposit lines of credit in connection with its retail
certificate of deposit program from Merrill Lynch & Co., Morgan Stanley Dean
Witter, Salomon Smith Barney, Prudential Securities, Inc., PaineWebber, Inc.,
and CountryWide Securities that total $545.0 million. At December 31, 2001,
$103.6 million in retail certificates of deposit were included in total
deposits.
Southwest sells securities under agreements to repurchase with Southwest
retaining custody of the collateral. Collateral consists of direct obligations
of the U.S. Government or U.S. Government Agency issues, which are designated as
pledged with Southwest's safekeeping agent. The type of collateral required, and
the retention of the collateral and the security sold minimize Southwest's risk
of exposure to loss. These transactions are for one-to-four day periods. At
December 31, 2001, one repurchase agreement for $10.2 million exceeded 10% of
equity capital.
6. LONG-TERM DEBT
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the "Trust
Preferred") in an underwritten public offering for an aggregate price of
$25,012,500. Proceeds of the Trust Preferred were invested in the 9.30%
Subordinated Debentures (the "Subordinated Debentures") of Southwest. After
deducting underwriter's compensation and other expenses of the offering, the net
proceeds were available to Southwest to increase capital and for general
corporate purposes, including use in investment and lending activities, and the
redemption, in whole, of Southwest's 9.20% Redeemable Cumulative Preferred
Stock, Series A (the "Series A Preferred Stock"). Interest payments on the
Subordinated Debentures are deductible for federal income tax purposes.
The Trust Preferred and the Subordinated Debentures each mature on July 31,
2027. If certain conditions are met, the maturity dates of the Trust Preferred
and the Subordinated Debentures may be shortened to a date not earlier than July
31, 2002, or extended to a date not later than July 31, 2036. The Trust
Preferred and the Subordinated Debentures also may be redeemed prior to maturity
if certain events occur. The Trust Preferred is subject to mandatory redemption,
in whole or in part, upon repayment of the Subordinated Debentures at maturity
or their earlier redemption. Southwest also has the right, if certain conditions
are met, to defer payment of interest on the Subordinated Debentures, which
would result in a deferral of dividend payments on the Trust Preferred, at any
time or from time to time for a period not to exceed 20 consecutive quarters in
a deferral period.
Southwest and SBI Capital Trust believe that, taken together, the
obligations of Southwest under the Trust Preferred Guarantee Agreement, the
Amended and Restated Trust Agreement, the Subordinated Debentures, the Indenture
and the Agreement as to Expenses and Liabilities, entered into in connection
with the offering of the Trust Preferred and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by Southwest of the
obligations of SBI Capital Trust under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Trust Preferred and purchasing the Subordinated Debentures, which
are its sole assets. Southwest owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of SBI
Capital Trust.
The Trust Preferred meets the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Trust
Preferred and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 2001, all of the Trust Preferred was included in
Tier I capital.
For accounting purposes, the Trust Preferred is presented on the
Consolidated Statements of Financial Condition as a separate category of
long-term debt entitled "Guaranteed Preferred Beneficial Interests in
Southwest's Subordinated Debentures."
32
7. INCOME TAXES
The components of taxes on income follow:
For the Years Ended December 31,
---------------------------------------------------
2001 2000 1999
---------------------------------------------------
(dollars in thousands)
Current tax expense:
Federal $ 4,707 $ 3,776 $ 4,959
State 205 542 711
Deferred tax expense (benefit):
Federal 399 786 (766)
State 46 134 (147)
------- ------- -------
Taxes on income $ 5,357 $ 5,238 $ 4,757
======= ======= =======
The taxes on income reflected in the accompanying consolidated
statements of operations differs from the expected U.S. Federal income tax rates
for the following reasons:
For the Years Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
(dollars in thousands)
Computed tax expense at statutory rates $ 5,817 $ 5,253 $ 4,768
Increase (decrease) in income
taxes resulting from:
Benefit of income not subject to U.S. Federal
income tax (653) (565) (403)
State income taxes, net of Federal income
tax benefit 165 446 377
Other 28 104 15
------- ------- -------
Taxes on income $ 5,357 $ 5,238 $ 4,757
======= ======= =======
Deferred tax expense (benefit) relating to temporary differences
includes the following components:
For the Years Ended December 31,
---------------------------------------
2001 2000 1999
---------------------------------------
(dollars in thousands)
Provision for loan losses $ 344 $(318) $(305)
Accumulated depreciation 16 401 193
Intangibles 21 21 18
Write-downs on other real estate owned (22) 649 (754)
Deferred compensation accrual 42 39 --
Other 44 128 (65)
----- ----- -----
Total $ 445 $ 920 $(913)
===== ===== =====
33
Net deferred tax assets of $2.2 million and $3.6 million at December 31,
2001 and 2000, respectively, are reflected in the accompanying consolidated
statements of financial condition in other assets. There were no valuation
allowances at December 31, 2001 or 2000. Temporary differences that give rise to
the deferred tax assets (liabilities) include the following:
At December 31,
------------------------
2001 2000
------------------------
(dollars in thousands)
Provision for loan losses $ 4,301 $ 4,645
Accumulated depreciation (1,659) (1,643)
Intangibles 122 143
Write-downs on other real estate owned 140 118
Deferred compensation accrual 179 221
Other 329 373
------- -------
3,412 3,857
Deferred taxes (payable) receivable on
investment securities available for sale (1,230) (250)
------- -------
Net deferred tax asset $ 2,182 $ 3,607
======= =======
8. SHAREHOLDERS' EQUITY
On August 29, 2001, Southwest effected a 3:2 stock split of its common
stock in the form of a dividend of 2,040,465 shares. Share and per share amounts
in this report have been retroactively restated to reflect this stock split.
On March 19, 1999, Southwest completed a public offering of common stock.
The offering included 811,231 shares sold by the Estate of Paul C. Wise and Dr.
James B. Wise and 250,000 newly issued shares sold by Southwest. Southwest
received proceeds of $5.4 million, after offering expenses and underwriting
discount. The net proceeds were invested in Stillwater National, where the funds
were used for general corporate purposes and lending and investment activities.
Southwest recorded $303,000 in offering expenses paid on behalf of the selling
shareholders.
In April 1999, Southwest's Board of Directors (the "Board") authorized the
repurchase of up to 5%, or 306,000 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. In December 1999, Southwest had completed the
repurchase of shares under the program and the Board authorized the repurchase
of up to an additional 5%, or approximately 292,500 shares. In April 2001, that
program expired and the Board authorized the repurchase of another 5%, or
approximately 285,000 shares. The additional repurchases will also be made in
connection with shares expected to be issued under Southwest's dividend
reinvestment, stock option, and employee benefit plans and for other corporate
purposes. The share repurchases are expected to be made primarily on the open
market from time to time until March 31, 2002, or earlier termination of the
repurchase program by the Board. Repurchases under the program will be made at
the discretion of management based upon market, business, legal, accounting and
other factors.
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board believes are unfair or
otherwise not in the best interests of Southwest and its shareholders. Under the
Rights Plan, each holder of record of Southwest's common stock, as of the close
of business on April 22, 1999, received one right per common share. The rights
generally become exercisable if an acquiring party accumulates, or announces an
offer to acquire, 10% or more of Southwest's voting stock. The rights will
expire on April 22, 2009. Each right will entitle the holder (other than the
acquiring party) to buy, at the right's then current exercise price, Southwest's
common stock or equivalent securities having a value of twice the right's
exercise price. The exercise price of each right was initially set at $73.34. In
addition, upon the occurrence of certain events, holders of the rights would be
entitled to purchase, at the then current exercise price, common stock or
equivalent securities of an acquiring entity worth twice the exercise price.
Under the Rights Plan, Southwest also may exchange each right, other than rights
owned by an acquiring party, for a share of its common stock or equivalent
securities.
34
Southwest has reserved for issuance 300,000 shares of common stock pursuant
to the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The
Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Company employees to acquire additional
common shares through payroll deductions. Since July 1999, shares issued out of
these plans have come from treasury shares. At December 31, 2001, 40,243 new
shares had been issued and 17,935 treasury shares had been reissued by these
plans.
9. CAPITAL REQUIREMENTS
Southwest and Stillwater National are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Southwest's and Stillwater National's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Southwest and Stillwater National must meet specific
capital guidelines that involve quantitative measures of Southwest's and
Stillwater National's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. Southwest's and Stillwater
National's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Southwest and Stillwater National to maintain minimum amounts and ratios
(set forth in the table on the following page) 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, 2001 and 2000, that Southwest and Stillwater National met all
capital adequacy requirements to which they are subject.
As of December 31, 2001 and 2000, the most recent notification from the
Office of the Comptroller of the Currency ("OCC") categorized Stillwater
National as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, Stillwater National
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed Stillwater National's
category.
35
Southwest's and Stillwater National's actual capital amounts and ratios are
presented below.
To Be Well Capitalized
Under Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------
(dollars in thousands)
AS OF DECEMBER 31, 2001:
Total Capital (to risk-weighted assets)
Southwest $119,013 12.34% N/A N/A $77,129 8.00%
Stillwater National 115,866 12.05 $96,184 10.00% 76,947 8.00
Tier I Capital (to risk-weighted assets)
Southwest 107,521 11.15 N/A N/A 38,565 4.00
Stillwater National 104,374 10.85 57,711 6.00 38,474 4.00
Tier I Leverage (to average assets)
Southwest 107,521 8.84 N/A N/A 48,651 4.00
Stillwater National 104,374 8.60 60,665 5.00 48,532 4.00
AS OF DECEMBER 31, 2000:
Total Capital (to risk-weighted assets)
Southwest $109,317 11.68% N/A N/A $74,847 8.00%
Stillwater National 105,961 11.35 $93,394 10.00% 74,715 8.00
Tier I Capital (to risk-weighted assets)
Southwest 96,910 10.36 N/A N/A 37,424 4.00
Stillwater National 94,281 10.09 56,036 6.00 37,358 4.00
Tier I Leverage (to average assets)
Southwest 96,910 8.08 N/A N/A 47,968 4.00
Stillwater National 94,281 7.88 59,836 5.00 47,869 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 $19.0 million at December 31, 2001. Dividends declared by
Stillwater National for the years ended December 31, 2001, 2000, and 1999 did
not exceed the threshold requiring regulatory approval.
10. STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999 Stock Option
Plan (the "Stock Plans") provide selected key employees with the opportunity to
acquire common stock. The exercise price of all options granted under the Stock
Plans is the fair market value on the grant date. Depending upon terms of the
stock option agreements, stock options generally become exercisable on either a
quarterly or annual basis and expire either 30 days after becoming exercisable
or from five to ten years after the date of grant. Southwest applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the Stock Plans; accordingly, no compensation expense has been recorded in the
accompanying consolidated statements of operations. Had compensation cost for
the Stock Plans been determined based upon the fair value of the options at
their grant date as prescribed in SFAS No. 123, Accounting for Stock-Based
Compensation, Southwest's proforma data would have been as follows:
36
For the Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
(dollars in thousands,except per share data)
Proforma net income $ 11,313 $ 9,707 $ 8,438
Basic earnings per common share $ 1.99 $ 1.69 $ 1.42
Diluted earnings per common share $ 1.93 $ 1.68 $ 1.39
Weighted average fair value at grant date $ 4.83 $ 5.04 $ 5.42
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its proforma effect is not necessarily indicative of its
impact on future years. The compensation cost is calculated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
For the Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
Expected dividend yield 1.71% 1.77% 1.56%
Expected volatility 25.67% 26.87% 26.65%
Risk-free interest rate 5.82% 6.20% 6.42%
Expected option term (in years) 9.17 9.69 10.00
The Stock Plan's activity follows:
Weighted
Number of Average
Options Exercise Price
------------------------------
Outstanding at January 1, 1999 528,750 $12.07
Granted 237,000 15.20
Exercised (45,000) 8.50
Canceled/expired (39,000) 16.89
--------------------------
Outstanding at December 31, 1999 681,750 13.12
Granted 168,001 10.65
Exercised (6,000) 8.92
Canceled/expired (79,350) 14.93
--------------------------
Outstanding at December 31, 2000 764,401 12.42
Granted 25,000 14.90
Exercised (49,051) 10.30
Canceled/expired (78,949) 14.76
--------------------------
Outstanding at December 31, 2001 661,401 $12.39
==========================
Total exercisable at December 31, 1999 261,300 $10.61
Total exercisable at December 31, 2000 322,426 $11.03
Total exercisable at December 31, 2001 324,050 $11.29
37
At December 31, 2001, Southwest had reserved 1,193,283 shares under the
Stock Plans, and had 661,401 shares under option. The following summarizes the
information concerning options outstanding and exercisable at December 31, 2001.
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------
214,350 $ 8.50 - $ 8.92 1.8 $ 8.52 170,850 $ 8.52
129,551 $10.42 - $11.21 7.2 $10.55 46,500 $10.54
7,500 $12.83 - $12.96 8.1 $12.96 1,500 $12.96
160,000 $14.21 - $15.32 6.7 $14.33 44,450 $14.32
150,000 $16.50 - $18.15 6.7 $17.40 60,750 $17.40
11. EMPLOYEE BENEFITS
Southwest sponsors a noncontributory, defined contribution profit sharing
plan intended to provide retirement benefits for employees of Southwest. The
plan covers all employees who have completed one year of service and have
attained the age of 21. The plan is subject to the Employee Retirement Income
Security Act of 1974, as amended. Company contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not
exceed 15% of the total annual compensation of all participants. Southwest made
contributions of $1.0 million, $990,000, and $650,000 in 2001, 2000, and 1999,
respectively.
12. 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, 2001 follow:
2002 $ 859,818
2003 795,889
2004 676,800
2005 655,782
Thereafter 3,230,294
The total rental expense was $1.0 million, $1.0 million, and $1.1 million
in 2001, 2000, and 1999, respectively.
13. 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 RECEIVABLE - 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.
38
SHORT-TERM BORROWINGS - The fair values of short-term borrowings are the
amounts payable at the statement of financial condition date, as the carrying
amount is a reasonable estimate of fair value. Included in short-term borrowings
are federal funds purchased, securities sold under agreements to repurchase, and
treasury tax and loan demand notes.
LONG-TERM DEBT - The fair value of long-term debt, which consists of the
Subordinated Debentures, is estimated based on quoted market prices or dealer
quotes.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
The carrying values and estimated fair values of Southwest's financial
instruments follow:
At December 31, 2001 At December 31, 2000
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Values Values Values Values
--------------------------------------------------------------------
(dollars in thousands)
Cash and cash equivalents $ 32,406 $ 32,406 $ 30,851 $ 30,851
Investment securities:
Held to maturity 49,893 51,030 64,406 64,615
Available for sale 167,545 167,545 156,947 156,947
FRB and FHLB stock 9,908 9,908 8,439 8,439
Loans receivable 919,554 925,997 900,425 908,735
Accrued interest receivable 10,157 10,157 12,042 12,042
Deposits 904,796 909,631 945,102 948,802
Accrued interest payable 3,470 3,470 7,105 7,105
Other liabilities 2,724 2,724 2,609 2,609
Short-term borrowings 195,367 195,367 150,498 150,498
Long-term debt 25,013 25,663 25,013 23,637
Commitments -- -- -- --
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Southwest makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with generally accepted accounting principles, these
transactions are not presented in the accompanying consolidated financial
statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial
and real estate mortgage credit, standby and commercial letters of credit and
available credit card lines of credit.
39
The following table provides a summary of Southwest's off-balance sheet
financial instruments:
At December 31,
--------------------------
2001 2000
--------------------------
(dollars in thousands)
Commitments to extend commercial and real estate mortgage credit $256,655 $182,900
Standby and commercial letters of credit 2,551 6,537
Credit card lines of credit 492,388 423,194
-------- --------
Total $751,594 $612,631
======== ========
A loan commitment is a binding contract to lend up to a maximum amount for
a specified period of time provided there is no violation of any financial,
economic or other terms of the contract. A standby letter of credit obligates
Southwest to honor a financial commitment by issuing a guarantee to a third
party should Southwest's customer fail to perform. Many loan commitments and
most standby letters of credit expire unfunded, and, therefore, total
commitments do not represent future funding obligations of Southwest. Loan
commitments and letters of credit are made under normal credit terms, including
interest rates and collateral prevailing at the time, and usually require the
payment of a fee by the customer. Commercial letters of credit are commitments
generally issued to finance the movement of goods between buyers and sellers.
Southwest's exposure to credit loss, assuming commitments are funded, in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual amount of those instruments. Southwest has
agreements for the purchase of $492.4 million and $423.2 million of unadvanced
credit card lines of credit at December 31, 2001 and 2000, respectively, if such
credit card lines of credit are funded, and for the sale of 100% participations
in such funded lines. Such commitments are made with the same terms as similarly
funded extensions of credit including collateral, rates and maturities.
Southwest does not anticipate any material losses as a result of the
commitments.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Southwest is at all times subject to
various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and threatened
actions with counsel, management considers that the outcome of such actions will
not have a material adverse effect on Southwest's financial position; however,
Southwest is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular
future period as the timing and amount of any resolution of such actions and
relationship to the future results of operations are not known.
At periodic intervals, the Federal Reserve Bank and the Office of the
Comptroller of the Currency routinely examine Southwest's and Stillwater
National's financial statements as part of their legally prescribed oversight of
the banking industry. Based on these examinations, the regulators can direct
that Southwest's and Stillwater National's financial statements be adjusted in
accordance with their findings.
Southwest has adopted a Severance Compensation Plan (the "Plan") for the
benefit of certain officers and key members of management. The Plan's purpose is
to protect and retain certain qualified employees in the event of a change in
control (as defined) and to reward those qualified employees for loyal service
to Southwest by providing severance compensation to them upon their involuntary
termination of employment after a change in control of Southwest. At December
31, 2001, Southwest has not recorded any amounts in the consolidated financial
statements relating to the Plan. If a change of control were to occur, the
maximum amount payable to certain officers and key members of management would
approximate $1.1 million.
40
16. SUPPLEMENTAL CASH FLOWS INFORMATION
For the years ended December 31,
----------------------------------------------------------
2001 2000 1999
----------------------------------------------------------
(dollars in thousands)
Cash paid for interest $52,502 $56,054 $42,075
Cash paid for taxes on income 4,650 3,722 5,431
Loans transferred to other real estate owned 362 3,089 29
17. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS 141
required that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 also includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. SFAS 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. SFAS 142 requires that these assets be reviewed for impairment at
least annually. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives. Additionally, SFAS 142 requires
that goodwill included in the carrying value of equity method investments no
longer be amortized. Southwest will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002.
Application of the nonamortization and impairment provisions of the Statements
is expected to have an immaterial impact on net income. In the first quarter of
2002, Southwest will perform the first of the required impairment tests of
goodwill and indefinite-lived intangible assets as of January 1, 2002. Southwest
has not yet determined what the effect of these tests will be on its earnings
and financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of; however, it retains the fundamental provisions of the Statement
related to the recognition and measurement of the impairment of long-lived
assets to be "held and used." In addition, SFAS No. 144 provides more guidance
on estimating cash flows when performing a recoverability test, required that a
long-lived asset to be disposed of other than by sale (e.g. abandoned) be
classified as "held and used" until it is disposed of, and established more
restrictive criteria to classify an asset as "held for sale." Southwest is
required to adopt SFAS No. 144 in fiscal year 2002. Adoption of SFAS No. 144 is
not expected to have a material impact on Southwest's results of operations or
financial position.
41
18. 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,
---------------------------------
2001 2000
---------------------------------
STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
Assets:
Cash and due from banks $ 983 $ 1,747
Investment in subsidiary bank 106,991 94,935
Investment securities, available for sale 912 906
Other assets 2,120 1,721
-------- --------
Total $111,006 $ 99,309
======== ========
Liabilities:
Subordinated debentures $ 25,013 $ 25,013
Other liabilities 868 1,057
Shareholders' Equity:
Common 85,125 73,239
-------- --------
Total $111,006 $ 99,309
======== ========
For the Years Ended December 31,
----------------------------------------------
2001 2000 1999
----------------------------------------------
STATEMENTS OF OPERATIONS (dollars in thousands)
Income:
Cash dividends from subsidiary bank $ 3,800 $ 6,450 $ 6,989
Investment income 51 55 53
Security gains/(losses) 6 (107) --
-------- -------- --------
Total income 3,857 6,398 7,042
Expense:
Interest on subordinated debentures 2,326 2,326 2,326
Other expense 456 350 632
-------- -------- --------
Total expense 2,782 2,676 2,958
-------- -------- --------
Total income before taxes and equity in
undistributed income of subsidiary bank 1,075 3,722 4,084
Taxes on income (1,030) (1,031) (1,098)
-------- -------- --------
Income before equity in undistributed
income of subsidiary bank 2,105 4,753 5,182
Equity in undistributed income of subsidiary bank 9,647 5,452 3,684
-------- -------- --------
Net income $ 11,752 $ 10,205 $ 8,866
======== ======== ========
42
For the Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
(dollars in thousands)
STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 11,752 $ 10,205 $ 8,866
Equity in undistributed income of subsidiary bank (9,647) (5,452) (3,684)
Other, net 72 (23) (42)
-------- -------- --------
Net cash provided by operating activities 2,177 4,730 5,140
-------- -------- --------
Investing activities:
Available for sale securities:
Purchases (1,774) (623) (400)
Sales 399 25 --
Maturities 893 500 400
-------- -------- --------
Net cash provided by (used in) investing activities (482) (98) 0
-------- -------- --------
Financing activities:
Proceeds from issuance of common stock -- -- 5,768
Net increase (decrease) in short-term borrowings (223) 223 --
Purchases of treasury stock, net (50) (1,629) (4,359)
Capital contribution to Bank (399) -- (5,000)
Cash dividends paid on common stock (1,787) (1,649) (1,555)
-------- -------- --------
Net cash provided by (used in) financing activities (2,459) (3,055) (5,146)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (764) 1,577 (6)
Cash and cash equivalents,
Beginning of year 1,747 170 176
-------- -------- --------
End of year $ 983 $ 1,747 $ 170
======== ======== ========
43
BOARD OF DIRECTORS OF SOUTHWEST
BANCORP, INC. AND STILLWATER
NATIONAL BANK & Trust Company
Robert B. Rodgers
Chairman of the Board
President, Bob Rodgers
Ford-Lincoln-Mercury
Rick Green
President and Chief Executive Officer,
Vice Chairman of the Board
James E. Berry II
President, Shading Concepts,
Drapery Manufacturing/Sales
Tom D. Berry
Investments
Joe Berry Cannon
Professor of Management,
Oral Roberts University School of Business
J. Berry Harrison
Rancher
Erd M. Johnson
Petroleum Engineer &
Operating Partner, Johnson
Oil Partnership
Betty Kerns
Owner, Betty Kerns &
Associates, Government
Relations Consulting
David P. Lambert
President, Lambert
Construction Company
Linford R. Pitts
President, Stillwater Transfer & Storage Co.
Russell W. Teubner
Founder and Director, Esker S.A., Software
Stanley R. White
President and Managing Director,
Tulsa and Eastern Region,
Stillwater National Bank
& Trust Co.
OFFICERS OF SOUTHWEST BANCORP, INC.
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and
Chief Financial Officer
Kay W. Smith
Senior Vice President and
Comptroller
SENIOR MANAGEMENT OF STILLWATER NATIONAL BANK & TRUST COMPANY
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and
Chief Financial Officer
Jerry Lanier
Executive Vice President and
Chief Lending Officer
Kimberly G. Sinclair
Executive Vice President and Chief Administrative Officer
Chuck Westerheide
Executive Vice President
and Treasurer
Steve Gobel
Executive Vice President
Stanley R. White
President and Managing Director,
Tulsa and Eastern Region
Rex Horning
President, Stillwater Division
Joseph P. Root
President, Central Oklahoma Division
Jackie Randle
Senior Vice President, Small
Business Lending
Connie Saldivar
Senior Vice President,
Retail Sales
CORPORATE INFORMATION
INDEPENDENT AUDITORS
Ernst & Young LLP
3900 One Williams Center
Tulsa, OK 74172
SPECIAL COUNSEL
Kennedy, Baris & Lundy, L.L.P.
4701 Sangamore Road
Suite P-15
Bethesda, MD 20816
GENERAL COUNSEL
Hert & Baker
222 E. 7th Avenue
Stillwater, OK 74074
TRANSFER AGENTS AND REGISTRARS
Common Stock:
Computershare Investor Services, LLC
2 North LaSalle St.
Chicago, IL 60602
Trust Preferred Securities:
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
ANNUAL MEETING
The 2002 Annual Meeting of
Shareholders will be held on
April 25, 2002 at 11:00 a.m. in the
Auditorium (Room 215) at the
Stillwater Public Library,
1107 S. Duck, Stillwater, Oklahoma.
ANNUAL REPORT ON FORM 10-K:
Copies of Southwest's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, as filed with the
Securities and Exchange Commission, may be obtained by
shareholders as of the record date for the Annual Meeting at
no charge by writing to Kerby E. Crowell, Chief Financial
Officer, Southwest Bancorp, Inc., P.O. Box 1988, Stillwater,
Oklahoma 74076.
44
SOUTHWEST BANCORP, INC.
Corporate Headquarters
P.O. Box 1988
608 S. Main Street
Stillwater, Oklahoma 74076
405-372-2230
STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS
CORPORATE HEADQUARTERS DRIVE-IN & Mortgage Lending WATERFORD BRANCH
P.O. Box 1988 P.O. Box 1988 6301 Waterford Blvd.,
608 S. Main Street 308 S. Main St. Suite 101
Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 Oklahoma City,
405-372-2230 405-372-2230 Oklahoma 73118
405-427-4000
CHICKASHA BRANCH TULSA UTICA BRANCH TULSA 61ST BRANCH
500 W. Grand Avenue P.O. Box 521500 P.O. Box 521500
Chickasha, Oklahoma 73018 1500 S. Utica Ave. 2431 E. 61st, Suite 170
405-427-4800 Tulsa, Oklahoma 74152 Tulsa, Oklahoma 74152
918-523-3600 918-523-3600
OPERATIONS CENTER OSU-TULSA LOAN OFFICE OUHSC LOAN OFFICE
P.O. Box 1988 North Hall 1106 N. Stonewall
1624 Cimarron Plaza 700 N. Greenwood Ave. Oklahoma City,
Stillwater, Oklahoma 74076 Tulsa, Oklahoma 74106 Oklahoma 73190
405-372-2230 918-594-8581 405-271-3113
OSU-STILLWATER MARKETING OFFICE WEBSITE ADDRESSES
P.O. Box 1988 Stillwater National Bank & Trust Company: www.banksnb.com
Student Union, Room 179 Southwest Bancorp, Inc.: www.oksb.com
Stillwater, Oklahoma 74076
405-744-5961
STOCK INFORMATION
NASDAQ National Market Symbols: Common Stock - OKSB Trust Preferred Securities - OKSBO
Number of common shareholders of record at February 14, 2002: 2,000
The following table sets forth the common stock dividends paid for each quarter
during 2001 and 2000 and the range of high and low closing trade prices for the
common stock for those periods.
2001 2000
----------------------------------------------------------------------------------
Dividend Dividend
High Low Declared High Low Declared
--------------------------------------- ---------------------------------------
For the Quarter Ending:
March 31 $15.33 $11.00 $0.08 $14.00 $11.33 $0.07
June 30 16.37 14.25 0.08 12.33 9.58 0.07
September 30 19.13 14.83 0.08 11.17 9.88 0.07
December 31 17.99 14.38 0.08 11.08 8.88 0.07
45