EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2003
Southwest Bancorp, Inc. ("Southwest") is the financial holding company for
Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of
Wichita ("SNB Wichita"), Business Consulting Group, Inc. ("BCG"), and Healthcare
Strategic Support, Inc. ("HSSI"). Southwest is an independent company, not
controlled by other organizations or individuals. Southwest pursues an
established strategy of independent operation for the benefit of all of its
shareholders.
A substantial portion of Southwest's current business and focus for the
future are services for local businesses, their primary employees, and other
managers and professionals. Southwest seeks to be the premier financial services
company for its selected markets. Information regarding Southwest can be
retrieved via the Internet, at www.oksb.com. Southwest, Stillwater National, and
SNB Wichita offer commercial and consumer lending, deposit, and investment
services, and specialized cash management, consulting and other financial
services from offices in Stillwater, Tulsa, Oklahoma City, and Chickasha,
Oklahoma, Wichita, Kansas, and metropolitan Dallas, Texas; loan production
offices on the campuses of Oklahoma State University-Tulsa and the University of
Oklahoma Health Sciences Center-Oklahoma City; a marketing presence in the
Student Union at Oklahoma State University-Stillwater; and on the Internet.
Information regarding products and services of Stillwater National and SNB
Wichita, including SNB DirectBanker(R), Southwest's online banking product, can
be retrieved via the Internet, at www.banksnb.com and www.snbwichita.com. The
Stillwater National and SNB Wichita websites and online banking technology are
frequently updated in response to the changing needs of the large base of
Internet banking customers.
Southwest was organized in 1981 as the holding company for Stillwater
National, which was chartered in 1894. At December 31, 2003, Southwest had total
assets of $1.6 billion, deposits of $1.2 billion and shareholders' equity of
$109.9 million.
LETTER TO SHAREHOLDERS FROM THE C.E.O.
February 27, 2003
GOAL FOCUSED PERFORMANCE. At Southwest, we maintain an intense focus on
specific performance goals designed to increase shareholder value. These goals
include annual growth in diluted EPS and assets of at least 10% and geographic
market share growth and expansion. In 2003, Southwest continued to focus on
producing consistent current performance and building a basis for long-term
growth.
o Net Income: $14.9 million, up 11%
o Diluted earnings per share: $1.22, up 10%
o Book value per share: $9.20, up 10%
o Dividends per share: $0.25, up 14%
o Return on average equity of 14.59%, down slightly from 2002
o Efficiency ratio of 54.95%, an improvement of approximately 2 basis points
o Total loans of $1.31 billion, up $207.7 million, or 19%
o Allowance for loan losses of 1.21% of total loans, up from 1.08% at
year-end 2002
PERFORMANCE CONSISTENCY. We also focus on building a record of consistent
performance. Our 2003 results are consistent with our overall historic trends,
and built upon our 2002 performance, which included loan growth of 19% and
efficiency improvements. Southwest became a public company in late 1993. Since
year-end 1993, we have increased our net income and market value per share at
compound rates of 13.50% and 15.97% per year, respectively; book value per share
at 11.60% per year; diluted earnings per share at 26.26% per year; assets at
13.80% per year, and loans at 15.15% per year.
MARKET AREA EXPANSION AND CORE GROWTH. During 2003, we continued a focus on
two important markets--Dallas, Texas and Wichita, Kansas, where we established
offices in 2002. These offices, SNB-DALLAS and SNB BANK OF WICHITA, are
capitalizing on our strengths in serving medical, professional, and small
business customers. We believe the early effectiveness of these offices
demonstrates our ability to successfully expand and compete in carefully
selected markets outside of Oklahoma, however, the majority of our operations
and income continue to be Oklahoma based.
STRATEGIC INITIATIVES. In 2003, we continued the development of other
important strategic initiatives, including our DOWNSTREAM LOAN PARTICIPATIONS
PROGRAM, our new HEALTHCARE LENDING GROUP, and HEALTHCARE STRATEGIC SUPPORT,
INC., our new healthcare consulting firm. The loan participation program
strategy was initiated in 2002, and has developed into a mechanism to serve our
customers with large loan needs, manage concentration risk, provide liquidity,
enhance net interest margin, and generate fee income. The healthcare industry is
one of the top growth industries in our economy. Southwest has developed a
specialty in serving the needs of the healthcare industry over a period of many
years. The "Healthcare Lending Group" is a new strategy developed to concentrate
resources on providing lending and other financial services for healthcare
projects and providers in our primary market areas and other mid-west states.
The experienced consultants of Healthcare Strategic Support, Inc. provide
services to healthcare providers and facilities across our market areas.
COMMITMENT TO OUR CUSTOMERS. We are strongly committed to delivery of
services that "make our customers money." These services include BUSINESS MAIL
PROCESSING, DOCUMENT IMAGING, and CASH MANAGEMENT/TREASURY
2
SERVICES. All these services are designed for the healthcare industry and other
document-intensive businesses for use in providing measurable office management
and cash management benefits, while allowing our customers to improve the
quality of service to their patients, clients, and customers. They contribute to
Southwest's ability to gain new noninterest-bearing deposits and to
differentiate Southwest from its competitors.
COMMITMENT TO OUR COMMUNITIES. We also remain committed to the communities
we serve. Southwest supports local, state and national service organizations and
the arts financially, by donating many hours of voluntary assistance, and by
providing leadership in each of our geographic markets.
The Board of Directors joins me in thanking you for your investment and
support. We look forward to the future with high energy, a vision for success
and dedication to achieve consistent performance and growth to increase the
value of your investment in Southwest.
Sincerely,
/s/ Rick Green
-------------------------------------
Rick Green
President and Chief Executive Officer
3
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents Southwest's selected consolidated financial
information for each of the five years in the period ended December 31, 2003.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of Southwest, including the accompanying
Notes, presented elsewhere in this report.
For the Year Ended December 31,
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2003 2002 2001 2000 1999
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(dollars in thousands, except per share data)
OPERATIONS DATA
Interest income $ 84,079 $ 76,495 $ 90,400 $ 97,274 $ 80,595
Interest expense 28,611 30,678 48,939 57,227 42,567
- ------------------------------------------------------------------------------------------------------------------
Net interest income 55,468 45,817 41,461 40,047 38,028
Provision for loan losses 8,522 5,443 4,000 3,550 2,495
Gain on sales of loans and securities 4,139 3,498 3,346 1,753 2,395
Other income 10,361 9,220 7,467 6,808 6,121
Other expenses 38,448 33,319 31,165 29,615 30,426
- ------------------------------------------------------------------------------------------------------------------
Income before taxes 22,998 19,773 17,109 15,443 13,623
Taxes on income 8,106 6,354 5,357 5,238 4,757
- ------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 14,892 $ 13,419 $ 11,752 $ 10,205 $ 8,866
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED
Common stock $ 2,959 $ 2,533 $ 1,826 $ 1,678 $ 1,601
Ratio of total dividends declared to net income 19.87% 18.87% 15.52% 16.44% 18.06%
PER SHARE DATA (1)
Basic earnings per common share $ 1.26 $ 1.17 $ 1.03 $ 0.89 $ 0.74
Diluted earnings per common share 1.22 1.11 1.00 0.88 0.73
Common stock cash dividends 0.25 0.22 0.16 0.15 0.13
Book value per common share (2) 9.20 8.35 7.47 6.44 5.52
Weighted average common shares outstanding:
Basic 11,798,810 11,490,166 11,386,258 11,467,248 11,921,634
Diluted 12,159,620 12,052,118 11,728,844 11,585,704 12,164,004
FINANCIAL CONDITION DATA (2)
Investment securities $204,266 $188,689 $227,346 $229,792 $211,682
Total loans (3) 1,308,836 1,101,112 931,046 912,550 852,808
Interest-earning assets 1,514,314 1,292,232 1,160,478 1,142,945 1,064,496
Total assets 1,580,725 1,350,554 1,217,281 1,204,352 1,121,206
Interest-bearing deposits 1,036,793 885,812 777,600 825,370 761,481
Total deposits 1,204,125 1,021,757 904,796 945,102 871,235
Other borrowings 183,850 199,282 195,367 150,498 151,820
Subordinated debentures 72,180 25,787 25,787 25,787 25,787
Total shareholders' equity (4) 109,935 96,372 85,125 73,239 64,254
Mortgage servicing portfolio 124,366 107,733 91,120 94,545 109,297
SELECTED RATIOS
Return on average assets 0.99% 1.05% 0.96% 0.87% 0.84%
Return on average equity 14.59 14.94 14.87 14.89 13.83
Net interest margin 3.80 3.75 3.53 3.57 3.82
Efficiency ratio (5) 54.95 56.92 59.62 60.93 65.37
Average assets per employee (6) $ 4,382 $ 3,938 $ 3,919 $ 3,783 $ 3,478
4
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31,
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2003 2002 2001 2000 1999
-------------------------------------------------------------------
(dollars in thousands, except per share data)
ASSET QUALITY RATIOS
Allowance for loan losses to total loans (2) 1.21% 1.08% 1.23% 1.33% 1.31%
Nonperforming loans to total loans (2)(7) 1.22 1.17 0.99 1.32 0.63
Allowance for loan losses to nonperforming loans 99.59 92.11 124.56 100.71 207.26
(2)(7)
Nonperforming assets to total loans and other real
estate owned (2)(8) 1.34 1.24 1.06 1.45 0.83
Net loan charge-offs to average total loans 0.36 0.50 0.49 0.29 0.21
CAPITAL RATIOS
Average total shareholders' equity to average assets 6.75 7.04 6.44 5.81 6.10
Tier I capital to risk-weighted assets (2) 11.13 10.38 11.15 10.36 9.76
Total capital to risk-weighted assets (2) 14.90 11.42 12.34 11.68 11.34
Leverage ratio (2) 9.32 8.99 8.84 8.08 8.06
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001 and the two-for-one stock split effected in the form of a
stock dividend paid August 29, 2003.
(2) At period end.
(3) Net of unearned discounts but before deduction of allowance for loan
losses.
(4) Reflects the public offering of 250,000 shares of common stock in May 1999,
and repurchases of common shares in 1999, 2000, 2001 and 2002. Please see
note 8 to the consolidated financial statements.
(5) The efficiency ratio = other expenses/(net interest income + total other
income) as shown on the consolidated statements of operations. This ratio
has not been adjusted to remove any income or expense recorded under
accounting principles generally accepted in the United States.
(6) Ratio = year-to-date average assets divided by the number of FTE employees
at year-end.
(7) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms. (8) Nonperforming
assets consist of nonperforming loans and foreclosed assets.
FORWARD-LOOKING STATEMENTS
The Letter from the President and Chief Executive Officer, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
other portions of this annual report include forward-looking statements such as:
statements of Southwest's goals, intentions, and expectations; estimates of
risks and of future costs and benefits; assessments of loan quality, probable
loan losses, liquidity, off-balance sheet arrangements, contractual obligations,
and market or interest rate risk; and statements of Southwest's ability to
achieve financial and other goals. These forward-looking statements are subject
to significant uncertainties because they are based upon: the amount and timing
of future changes in interest rates and other economic conditions; future laws,
regulations and accounting principles; and a variety of other matters. Because
of these uncertainties, the actual future results may be materially different
from the results indicated by these forward-looking statements. In addition,
Southwest's past growth and performance do not necessarily indicate its future
results.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Southwest Bancorp, Inc.'s ("Southwest") net income, diluted earnings per
share, loans, deposits, and assets reached their highest levels in our history.
The earnings growth was driven by a substantial (19%) increase in total loans,
which led to an improved margin, and to an increase in other income (up 14%) due
mainly to greater service charges and fees and gains on sales of loans, offset
in part by a 57% higher provision for loan losses and greater operating expenses
(up 15%) and income taxes (up 28%).
o Net income for 2003 was $14.9 million, up from $13.4 million in 2002 and
$11.8 million in 2001.
o Diluted earnings per common share increased to $1.22 in 2003, compared to
$1.11 in 2002 and $1.00 in 2001.
o Total assets at year-end 2003 increased 17%, ending the year at $1.58 billion
compared to $1.35 billion at year-end 2002 and $1.22 billion for 2001.
o Total loans grew to $1.31 billion at December 31, 2003, compared to $1.10
billion for 2002, and $931.0 million for 2001.
o Total shareholders' equity at year-end increased 14% to $109.9 million for
2003 compared to $96.4 million for 2002 and $85.1 million for 2001.
On August 29, 2001, Southwest effected a 3:2 stock split of its common
stock in the form of a dividend of 2,040,465 shares. On August 29, 2003,
Southwest effected a 2:1 stock split of its common stock in the form of a
dividend of 6,121,521 shares. All share and per share amounts in this annual
report have been retroactively restated to reflect these stock splits.
Although Southwest had a share repurchase program in effect during 2003, no
shares were repurchased.
RESULTS OF OPERATIONS
For the year ended December 31, 2003, Southwest reported net income of
$14.9 million, a $1.5 million, or 11%, increase over the $13.4 million earned in
2002. Basic earnings per common share increased by 8% to $1.26 per share for
2003 from $1.17 per share for 2002. Diluted earnings per common share increased
by 10% to $1.22 per share for 2003 from $1.11 per share for 2002.
Significant growth in loans, which was funded by growth in deposits, other
borrowings and two new issuances of subordinated debentures, was the primary
factor contributing to Southwest's performance in 2003. The low and relatively
flat interest rate environment was also a factor as higher rate deposits matured
and were renewed or replaced by lower rate deposits, which reduced interest
expense for 2003 as compared to 2002. However, new loans and refinancings were
added at the lower rates prevailing in the market, reducing interest income so
that the net effect of rate changes on net interest margin was slightly
negative.
For the year ended December 31, 2002, Southwest reported net income of
$13.4 million, a $1.7 million, or 14%, increase over the $11.8 million earned in
2001. Basic earnings per common share increased by 14% to $1.17 per share for
2002 from $1.03 per share for 2001. Diluted earnings per common share increased
by 11% to $1.11 per share for 2002 from $1.00 per share for 2001.
These factors are discussed in more detail in the sections that follow.
6
COMPARISON SUMMARY 2003 Change 2002 Change
NET INTEREST MARGIN 2003 From 2002 2002 From 2001 2001
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
OPERATIONS DATA
Interest income $ 84,079 $ 7,584 $ 76,495 $ (13,905) $ 90,400
Interest expense 28,611 (2,067) 30,678 (18,261) 48,939
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 55,468 9,651 45,817 4,356 41,461
Provision for loan losses 8,522 3,079 5,443 1,443 4,000
Gain on sales of loans and securities 4,139 641 3,498 152 3,346
Other income 10,361 1,141 9,220 1,753 7,467
Other expenses 38,448 5,129 33,319 2,154 31,165
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 22,998 3,225 19,773 2,664 17,109
Taxes on income 8,106 1,752 6,354 997 5,357
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 14,892 $ 1,473 $ 13,419 $ 1,667 $ 11,752
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings per common share $ 1.26 $ 0.09 $ 1.17 $ 0.14 $ 1.03
Diluted earnings per common share 1.22 0.11 1.11 0.11 1.00
FINANCIAL CONDITION DATA - AVERAGES
Investment securities $191,276 $ (16,739) $208,015 $ (25,671) $233,686
Total loans 1,269,216 256,729 1,012,487 74,209 938,278
Interest-earning assets 1,461,584 238,418 1,223,166 49,990 1,173,176
Total assets 1,511,739 235,795 1,275,944 49,408 1,226,536
Interest-bearing deposits 1,021,315 159,156 862,159 52,455 809,704
Total deposits 1,160,376 179,816 980,560 60,418 920,142
Other borrowings 200,473 34,728 165,745 (20,364) 186,109
Subordinated debentures 42,042 16,255 25,787 - 25,787
Total shareholders' equity 102,046 12,201 89,845 10,799 79,046
SELECTED RATIOS
Return on average assets 0.99% -0.06% 1.05% 0.09% 0.96%
Return on average total shareholders' equity 14.59 (0.35) 14.94 0.07 14.87
Net interest margin 3.80 0.05 3.75 0.22 3.53
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.21% 0.13% 1.08% -0.15% 1.23%
Nonperforming loans to total loans 1.22 0.05 1.17 0.18 0.99
Allowance for loan losses to nonperforming loans 99.59 7.48 92.11 (32.45) 124.56
Nonperforming assets to total loans and other real 1.34 0.10 1.24 0.18 1.06
estate
Net loan charge-offs to average total loans 0.36 (0.14) 0.50 0.01 0.49
NET INTEREST INCOME
Net interest income is the difference between interest income on earning
assets, such as loans and investment securities, and interest expense on
liabilities, such as deposits and borrowings, which are used to fund those
assets. Net interest income is Southwest's largest source of revenue,
representing 79% of total revenue in 2003. Net interest margin is net interest
income as a percentage of average earning assets for the period. This measure is
followed closely by the analyst community. Net interest income and net interest
margin increase or decrease as a result of changes in the levels of interest
rates, the volume and the mix of earning assets and interest-bearing
liabilities, and the percentage of interest-earning assets funded by
noninterest-bearing funding sources.
Net interest income for 2003 was $55.5 million, an increase of $9.7
million, or 21%, from the $45.8 million earned in 2002. The net interest margin
was 3.80% for the year ended December 31, 2003, an increase of five basis points
from 2002.
The 2003 increase in net interest income and net interest margin from 2002
is the result of the significant increase in interest-earning assets, the
reduction in interest expense due to the lower and relatively flat interest rate
environment experienced during 2003, and a slightly higher use of
noninterest-bearing funds.
Net interest income for 2002 increased by $4.4 million, or 11%, from the
$41.5 million for 2001, while 2002 net
7
interest margin improved by 22 basis points from the 2001 level of 3.53%. These
increases resulted from the 2002 loan growth and an improved interest rate
spread.
Interest rate spread, which represents the difference between the rate
earned on interest-earning assets and the rates paid out on interest-bearing
liabilities, was 3.49% for 2003 compared to 3.34% for 2002 and 2.92% for 2001.
Southwest has also seen significant growth in money market deposit accounts
which are a low rate funding source compared to time deposits and other
borrowings. The average balance of money market deposit accounts increased to
$336.3 million in 2003 from $211.9 million in 2002 and $130.8 million in 2001.
THREE YEAR COMPARISON OF CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST, YIELDS,
AND RATES
The table on the following page provides certain information relating to
Southwest's average consolidated statements of financial condition and reflects
the interest income on interest-earning assets, interest expense of
interest-bearing liabilities, and the average yields earned and rates paid for
the periods indicated. Yields and rates are derived by dividing income or
expense reflected in the Consolidated Statements of Operations by the average
daily balance of the related assets or liabilities, respectively, for the
periods presented. Nonaccrual loans have been included in the average balances
of total loans.
This table shows a shift in the composition of Southwest's interest-earning
assets over the periods toward a higher level of loans and a lower level of
investment securities while the composition of interest-bearing liabilities
changed as Southwest increased noninterest-bearing and money market deposits.
The changes in the composition of interest-earning assets and their funding
sources reflect market demand and management's efforts to maximize net interest
margin while controlling interest rate, credit and other risks.
8
For the Year Ended December 31,
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2003 2002 2001
----------------------------- -------------------------- ----------------------------
Interest (1) Interest (1) Interest (1)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------- -------------------------- ----------------------------
(dollars in thousands)
ASSETS
INTEREST-EARNING ASSETS:
Total loans $1,269,216 $76,115 6.00% $1,012,487 $65,503 6.47% $ 938,278 $76,850 8.19%
Investment securities 191,276 7,954 4.16 208,015 10,948 5.26 233,686 13,509 5.78
Other interest-earning assets 1,092 10 0.92 2,664 44 1.65 1,212 41 3.38
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,461,584 84,079 5.75 1,223,166 76,495 6.25 1,173,176 90,400 7.71
NONINTEREST-EARNING ASSETS:
Other assets 50,155 52,778 53,360
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $1,511,739 $1,275,944 $1,226,536
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Interest-bearing demand $ 56,011 $ 355 0.63% $ 52,096 $ 372 0.71% $ 49,156 $ 809 1.65%
Money market accounts 336,274 5,237 1.56 211,883 4,305 2.03 130,828 4,386 3.35
Savings accounts 6,608 17 0.26 5,702 25 0.44 5,361 79 1.47
Time deposits 622,422 15,036 2.42 592,478 18,749 3.16 624,359 33,497 5.37
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,021,315 20,645 2.02 862,159 23,451 2.72 809,704 38,771 4.79
Other borrowings (2) 200,473 4,887 2.44 165,745 4,829 2.91 186,109 7,770 4.17
Subordinated debentures 42,042 3,079 7.32 25,787 2,398 9.30 25,787 2,398 9.30
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,263,830 28,611 2.26 1,053,691 30,678 2.91 1,021,600 48,939 4.79
----------------- ---------------- ------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing demand 139,061 118,401 110,438
Other noninterest-bearing liabilities 6,802 14,007 15,452
Shareholders' equity 102,046 89,845 79,046
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and $1,511,739 $1,275,944 $1,226,536
shareholders' equity
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $55,468 $45,817 $41,461
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.49% 3.34% 2.92%
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin (3) 3.80% 3.75% 3.53%
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of average interest-earning
assets to average interest-bearing 115.65% 116.08% 114.84%
liabilities
- --------------------------------------------------------------------------------------------------------------------------------
(1) Yields, net interest spreads, and net interest margins are calculated using
income recorded in accordance with accounting principals generally accepted
in the United States ("GAAP"), and are not shown on the higher, non-GAAP
tax-equivalent basis.
(2) The fluctuation in other borrowings resulted mainly from changes in Federal
Home Loan Bank borrowings.
(3) Net interest margin = net interest income / total interest-earning assets.
9
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain
the allowance for loan losses at the level Southwest determines is appropriate
based on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and a general allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual. The use of
these loss factors is intended to reduce the differences between estimated
losses inherent in the portfolio and observed losses. Formula allowances also
are established by loan grade for loans that do not have specific allowances
according to the application of credit risk factors. These factors are set by
management to reflect its assessment of the relative level of risk inherent in
each grade. Specific allowances are established in cases where management has
identified significant conditions or circumstances related to individual loans
that management believes indicate the probability that losses may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment, which is based on discounted cash flows
using each loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The general allowance is based upon
management's evaluation of various factors that are not directly measured in the
determination of the formula and specific allowances. These factors may include
general economic and business conditions affecting lending areas, credit quality
trends (including trends in delinquencies and nonperforming loans expected to
result from existing conditions), loan volumes and concentrations, specific
industry conditions within portfolio categories, recent loss experience in
particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. Based upon this review,
management established an allowance of $15.8 million, or 1.21% of total loans,
at December 31, 2003 compared to an allowance of $11.9 million, or 1.08% of
total loans, at December 31, 2002. This represents an annual increase in the
allowance of $4.0 million, or 33%, from year-end 2002. At December 31, 2003,
total nonperforming loans were $15.9 million, or 1.22% of total loans, compared
to $12.9 million, or 1.17% of total loans, at December 31, 2002. The
government-guaranteed portions of year-end nonperforming loans were $2.7 million
for 2003 and $1.0 million for 2002. The allowance for loan losses equaled 99.59%
of nonperforming loans at December 31, 2003 compared to 92.11% at December 31,
2002. During 2003, 2002, and 2001, the provisions for loan losses were $8.5
million, $5.4 million, and $4.0 million, respectively, while net charge-offs
were $4.6 million, $5.0 million, and $4.6 million, respectively.
From time to time, Southwest has incurred losses on commercial loans due to
fraud by borrowers. In a number of these instances, the loans have not been
recognized as problem or potential problem loans until a short time before the
probable loss has been discovered. During the fourth quarter of 2003, Southwest
established a fraud by borrowers allocation applicable to commercial loans based
upon an analysis of the historical amount and frequency of such losses, and
adjusted the twelve and eighteen month loss experience ratios to remove the
effect of fraud losses. There were no other changes in estimation methods or
assumptions that affected the methodology for assessing the appropriateness of
the allowance during the year 2003. Southwest determined the level of the
allowance for loan losses at December 31, 2003, was appropriate, based on that
methodology.
Both the dollar amount and the percentage of the allowance to loans
increased during 2003. The increase was primarily the result of increases in
nonperforming loans, increased allocations on impaired loans, and increases in
loan categories with relatively higher historical loss experience. The allowance
allocations for commercial business, commercial mortgage, and commercial
construction loans showed the largest increases, due primarily to the fraud
allocation relating to commercial loans and volume increases in other
categories. The allocation for residential mortgage loans declined as a result
of lower volume. At December 31, 2003, the general allowance of $1.3 million was
approximately the same as at year-end 2002, but accounted for 8% of the total
allowance, down from 11% from the prior year.
Management strives to carefully monitor credit quality and to identify
loans that may become nonperforming. At any time, however, there are loans
included in the portfolio that will result in losses to Southwest, but that have
not been identified as nonperforming or potential problem loans. Because the
loan portfolio contains a significant number of
10
commercial and commercial real estate loans with relatively large balances, the
unexpected deterioration of one or a few of such loans may cause a significant
increase in nonperforming assets, and may lead to a material increase in
charge-offs and the provision for loan losses in future periods.
The following table shows the amounts of nonperforming assets at the end of
the periods indicated.
At December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------
(dollars in thousands)
Total nonaccrual $14,530 $11,455 $7,291 $3,138 $5,205
Total past due 90 days or more 1,384 1,452 1,935 208 194
Total restructured -- -- -- 8,694 -
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 15,914 12,907 9,226 12,040 5,399
Other real estate owned 1,699 747 640 1,225 1,729
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $17,613 $13,654 $9,866 $13,265 $7,128
- ----------------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 1.22% 1.17% 0.99% 1.32% 0.63%
Allowance for loan losses to nonperforming loans 99.59% 92.11% 124.56% 100.71% 207.26%
Government-guaranteed portion of nonperforming loans $ 2,694 $ 1,017 $ 905 $ 200 $ 585
The following table analyzes Southwest's allowance for loan losses for the
periods indicated.
For the Year Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------
(dollars in thousands)
Balance at beginning of period $11,888 $11,492 $12,125 $11,190 $10,401
LOANS CHARGED-OFF:
Real estate mortgage 717 777 445 563 307
Real estate construction 3 -- 99 1,083 10
Commercial 3,915 4,248 4,364 1,170 1,229
Installment and consumer 442 371 621 474 802
- ---------------------------------------------------------------------------------------------------------
Total charge-offs 5,077 5,396 5,529 3,290 2,348
- ---------------------------------------------------------------------------------------------------------
RECOVERIES:
Real estate mortgage 173 93 54 155 30
Real estate construction -- -- 22 -- --
Commercial 230 107 574 360 382
Installment and consumer 112 149 246 160 230
- ---------------------------------------------------------------------------------------------------------
Total recoveries 515 349 896 675 642
- ---------------------------------------------------------------------------------------------------------
Net loans charged-off 4,562 5,047 4,633 2,615 1,706
Provision for loan losses 8,522 5,443 4,000 3,550 2,495
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $15,848 $11,888 $11,492 $12,125 $11,190
- ---------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to total loans:
Average 1.25% 1.17% 1.22% 1.35% 1.38%
End of period 1.21 1.08 1.23 1.33 1.31
Ratio of net charge-offs to average total loans
during the period 0.36 0.50 0.49 0.29 0.21
11
OTHER INCOME
Other income was $14.5 million for 2003, up 14% when compared with 2002.
Other income increased by 18% in 2002. Growth in other income for the periods
presented in the table below occurred primarily in two areas: service charges
and fees on deposit accounts and gain on sales of loans.
COMPARISON SUMMARY 2003 Change 2002 Change
OTHER INCOME 2003 From 2002 2002 From 2001 2001
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Service charges and fees on deposit accounts $ 9,293 $ 1,077 $ 8,216 $ 1,483 $ 6,733
Other noninterest income 1,068 64 1,004 270 734
Gain on sales of loans 4,111 941 3,170 191 2,979
Gain on sales of investment securities 28 (300) 328 (39) 367
- --------------------------------------------------------------------------------------------------------------
Total other income $14,500 $ 1,782 $12,718 $ 1,905 $10,813
- --------------------------------------------------------------------------------------------------------------
Service charges and fees on deposit accounts increased $1.1 million, or
13%, compared to the prior year due to increased volumes in consumer deposit
accounts and higher revenues on commercial deposit accounts. The higher revenues
resulted primarily from a lower earnings credit rate. The earnings credit rate
is the value given to deposits maintained by commercial customers. In a lower
rate environment, deposit balances are not as valuable because of a lower
earnings credit rate. This results in customers paying for most of their
services through fees rather than through the use of deposit balances. In 2002,
service charges and fees on deposit accounts increased $1.5 million, or 22%,
from 2001, also due to increased consumer deposit volume and a lower earnings
credit rate compared to the prior year. Service charges and fees also benefited
from increases in revenue from Southwest's multi-state ATM network. Non-customer
ATM fees and interchange fees received based on the transactions of these ATM
machines increased $322,000 in 2003 and $498,000 in 2002. At December 31, 2003,
Southwest operated 262 ATM machines in 24 states.
Other noninterest income increased $64,000 in 2003. This was due primarily
to additional consulting fee income generated by Southwest's subsidiary, HSSI,
which was established during the first quarter of 2003. Consulting fee income
increased from $371,000 in 2002 to $456,000 in 2003. During the second quarter
of 2003, SNB Insurance Agency, Inc., a subsidiary of Stillwater National, was
established to provide the ability to market annuity products. Sales of these
annuity products generated $106,000 in other income that did not exist in prior
years. These increases in other noninterest income were partially offset by a
$53,000 reduction in credit card income.
Gain on sale of loans increased $941,000, or 30%, in 2003. Proceeds from
sales of government-guaranteed student loans increased to $278.1 million in 2003
from $117.7 million in 2002 and $84.7 million in 2001. This dramatic increase in
student loan volumes can be attributed to the escalation of loans produced
through agreements with the Student Loan Marketing Association ("SLMA"). These
loans have typically been sold at the time the student withdraws from school,
however, an increasing number of student loans are now being sold at the time
the loan becomes fully disbursed, which could be within 90 to 180 days of
origination. Proceeds from sales of residential mortgage loans increased from
$118.9 million in 2001 to $133.2 million in 2002 and to $177.4 million in 2003.
Sales of residential mortgages increased in 2002 and 2003 as a result of reduced
interest rates, which increased refinancings and overall originations. Southwest
typically sells residential mortgages within thirty days of origination.
OTHER EXPENSE
Other expense was $38.4 million for 2003, which was an increase of $5.1
million, or 15%, from 2002. Other expense increased $2.2 million, or 7%, from
2001.
COMPARISON SUMMARY 2003 Change 2002 Change
OTHER EXPENSE 2003 From 2002 2002 From 2001 2001
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
Salaries and employee benefits $19,792 $ 2,624 $17,168 $ 1,374 $15,794
Occupancy 8,107 988 7,119 513 6,606
FDIC and other insurance 340 54 286 6 280
Other real estate 215 213 2 (55) 57
General and administrative 9,994 1,250 8,744 316 8,428
- -------------------------------------------------------------------------------------------------
Total other expense $38,448 $ 5,129 $33,319 $ 2,154 $31,165
- -------------------------------------------------------------------------------------------------
12
Salaries and employee benefits increased $2.6 million, or 15%, in 2003 and
$1.4 million, or 9%, in 2002 primarily as a result of employees hired to staff
the offices opened in the Dallas, Texas metropolitan area and Wichita, Kansas,
and the hiring of employees for HSSI, as well as normal increases in salaries
and benefits of existing staff.
Occupancy expense increased $988,000, or 14%, in 2003 and $513,000, or 8%,
in 2002 due to the expenses related to opening the new offices in Texas and
Kansas, and the furniture and equipment costs related to those offices. Data
processing costs related to government-guaranteed student loans increased
$456,000 in 2003 and $183,000 in 2002, which also contributed to the increase in
occupancy expense.
General and administrative expense increased $1.3 million, or 14%, in 2003
and $316,000, or 4%, in 2002. Amortization costs related to originated mortgage
service rights increased $251,000 in 2003 and $24,000 in 2002; this increase is
related to the increase in residential mortgage loan originations discussed
earlier. Postage and freight expense increased $228,000 in 2003 and $115,000 in
2002 due to additional courier costs required to transport documents between
offices and items to be processed to their respective processing centers. Loan
costs incurred in the origination of loans that are not paid by the customer
increased $142,000 in 2003 after declining $42,000 in 2002. Fees paid to SLMA
for the origination of government-guaranteed student loans increased $268,000 in
2003 and $23,000 in 2002.
CONTRIBUTION OF OPERATING SEGMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Oklahoma banking $10,691 $10,608 $ 8,034
Other states banking 1,816 (157) --
Secondary market 5,560 2,984 2,344
Other operations (3,175) (16) 1,374
- --------------------------------------------------------------------------------------------------
Consolidated net income $14,892 $13,419 $11,752
OPERATING SEGMENTS
Southwest has three reportable operating segments: Oklahoma banking
operations; other states banking operations; and loans originated for sale in
the secondary market ("secondary market"). These business units were identified
through the products and services that are offered within each unit and the
geographic area they serve.
The segment disclosures above and in Note 16 to the Consolidated Financial
Statements show that, although the Oklahoma banking and secondary market
segments provide the significant majority of consolidated interest income and
net income, the new, other states banking segment, consisting of the Texas and
Kansas operations, began to contribute a significant percentage of consolidated
interest income and net income in 2003, and by year-end 2003 accounted for
approximately $231.0 million, or 15%, of total assets.
The segment disclosures are based upon a number of assumptions and
allocations of expense. Southwest allocates resources and evaluates performance
of its segments after allocation of funds, indirect expenses, taxes and capital
costs. The funds management unit is included in the other operations segment.
The cost of funds borrowed from the funds management unit by the operating
segments is transfer priced at Southwest's incremental borrowing rates.
The value of funds provided by the operating segments to the funds
management unit is based on blended borrowing rates which include core deposits
and borrowings from the Federal Home Loan Bank and other wholesale sources.
Deposit accounts with indeterminate maturities, such as demand deposit accounts
and interest-bearing transaction accounts, are transfer priced based on the
expected duration of the accounts. The expected duration ranges from two to
three years.
Please also see "Note 16. Operating Segments" to the Consolidated Financial
Statements on page 45 of this report.
TAXES ON INCOME
Southwest's income tax expense for fiscal years 2003, 2002, and 2001 was
$8.1 million, $6.4 million, and $5.4 million, respectively. Southwest's
effective tax rates have been lower than statutory federal and state statutory
rates primarily because of tax-exempt income on municipal obligations and loans
and the organization in July 2001 of a real estate investment trust as well as
tax credits generated by certain lending and investment activities.
13
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended
------------------------------------------------------
12-31-03 09-30-03 06-30-03 03-31-03
------------------------------------------------------
(dollars in thousands, except per share data)
OPERATIONS DATA
Interest income $21,791 $21,176 $21,313 $19,799
Interest expense 7,107 6,974 7,308 7,222
- -------------------------------------------------------------------------------------------------------
Net interest income 14,684 14,202 14,005 12,577
Provision for loan losses 2,074 2,726 2,000 1,722
Gain on sales of securities and loans 954 1,159 1,087 939
Other income 2,675 2,632 2,511 2,543
Other expenses 10,360 9,901 9,293 8,894
- -------------------------------------------------------------------------------------------------------
Income before taxes 5,879 5,366 6,310 5,443
Taxes on income 1,956 1,943 2,277 1,930
- -------------------------------------------------------------------------------------------------------
Net income $ 3,923 $ 3,423 $ 4,033 $ 3,513
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA (1)
Basic earnings per common share $0.33 $0.30 $0.33 $0.30
Diluted earnings per common share 0.32 0.28 0.33 0.29
Dividends declared per common share 0.06 0.06 0.06 0.06
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 11,905,084 11,839,891 11,792,068 11,654,998
Diluted 12,329,963 12,398,000 12,199,100 12,124,972
For the Quarter Ended
------------------------------------------------------
12-31-02 09-30-02 06-30-02 03-31-02
------------------------------------------------------
(dollars in thousands, except per share data)
OPERATIONS DATA
Interest income $19,023 $19,138 $19,371 $18,963
Interest expense 7,377 7,695 7,687 7,919
- -------------------------------------------------------------------------------------------------------
Net interest income 11,646 11,443 11,684 11,044
Provision for loan losses 1,348 1,570 1,275 1,250
Gain on sales of securities and loans 1,141 1,155 556 646
Other income 2,561 2,371 2,268 2,020
Other expenses 8,973 8,389 8,146 7,811
- -------------------------------------------------------------------------------------------------------
Income before taxes 5,027 5,010 5,087 4,649
Taxes on income 1,538 1,561 1,684 1,571
- -------------------------------------------------------------------------------------------------------
Net income $ 3,489 $ 3,449 $ 3,403 $ 3,078
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA (1)
Basic earnings per common share $0.30 $0.30 $0.30 $0.27
Diluted earnings per common share 0.29 0.28 0.28 0.26
Dividends declared per common share 0.06 0.06 0.06 0.06
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 11,540,294 11,548,214 11,465,178 11,404,852
Diluted 12,094,604 12,157,716 12,059,904 11,865,028
(1) All share and per share information has been restated to reflect the
two-for-one stock split effected in the form of a stock dividend paid
August 29, 2003.
14
FINANCIAL CONDITION
Southwest's total assets increased by $230.2 million, or 17%, from $1.35
billion at December 31, 2002 to $1.58 billion at December 31, 2003 after
increasing by $133.3 million, or 11%, between December 31, 2001 and 2002. The
growth in assets in 2003 was primarily attributable to the $207.7 million, or
19%, increase in total loans.
Southwest's investment securities increased by $15.6 million, or 8%, to
$204.3 million at December 31, 2003, from $188.7 million at December 31, 2002
after decreasing by $38.6 million, or 17%, in 2002. The increase in 2003 came
primarily from U.S. government and federal agency securities, which increased
$48.9 million, or 47%, in 2003. Southwest's investments in Federal Reserve Bank
and Federal Home Loan Bank stock also increased during 2003. Decreases occurred
during the same period in Southwest's investment in mortgage-backed securities,
which decreased $22.1 million, or 53%, tax-exempt municipal securities, which
decreased $12.7 million, or 46%, and other investment securities, which
decreased $825,000, or 14%.
Total loans were $1.31 billion at December 31, 2003, an increase of $207.7
million, or 19%, compared to December 31, 2002. All categories of loans
increased, except one-to-four family residential mortgages and consumer loans.
The allowance for loan losses increased by $4.0 million, or 33%, from December
31, 2002 to December 31, 2003. At December 31, 2003, the allowance for loan
losses was $15.8 million, or 1.21% of total loans, compared to $11.9 million, or
1.08% of total loans, at December 31, 2002. (See "Provision for Loan Losses" on
page 10.)
Southwest's total assets increased by $133.3 million, or 11%, to $1.35
billion at December 31, 2002 from $1.22 billion at December 31, 2001. The growth
in assets in 2002 was primarily attributable to the $170.1 million, or 18%,
increase in total loans.
Southwest's investment securities decreased by $38.6 million, or 17%, to
$188.7 million at December 31, 2002 from $227.3 million at December 31, 2001.
The decline in 2002 came primarily from mortgage-backed securities, which
decreased $28.9 million, or 41%. Decreases also occurred during the same period
in Southwest's investment in U.S. government and agency securities, which
decreased $1.0 million, or 1%, tax-exempt municipal securities, which decreased
$9.2 million, or 25%, and the investment in Federal Home Loan Bank stock, which
decreased $861,000, or 10%. These reductions in investment securities were
partially offset by a $1.3 million, or 28%, increase in other investment
securities.
Total loans were $1.10 billion at December 31, 2002, an increase of $170.1
million, or 18%, compared to December 31, 2001. All categories of loans
increased, except one-to-four family residential mortgages and consumer loans.
The allowance for loan losses increased by $396,000, or 3%, during 2002. At
December 31, 2002, the allowance for loan losses was $11.9 million, or 1.08% of
total loans, compared to $11.5 million, or 1.23% of total loans, at December 31,
2001. (See "Provision for Loan Losses" on page 10.)
CAPITAL RESOURCES
At December 31, 2003, total shareholders' equity was $109.9 million
compared to $96.4 million at December 31, 2002. Earnings, net of common
dividends, contributed $11.9 million to shareholders' equity. Sales of common
stock through the dividend reinvestment plan, the employee stock purchase plan
and the employee stock option plan contributed an additional $3.5 million to
shareholders' equity in 2003, including tax benefits realized by Southwest
relating to option exercises. Under accounting principles generally accepted in
the United States, these tax benefits increase shareholders' equity, but do not
affect net income. Net unrealized holding gains (losses) on investment
securities available for sale (net of tax) decreased to a gain of $360,000 at
December 31, 2003 compared to $2.2 million at December 31, 2002. Although
Southwest had share repurchase plans in place during 2003, no shares were
repurchased during the year. Repurchases of an additional 592,000 shares may be
made under the repurchase plan adopted in March 2003. Repurchases may be made
from time to time based on market conditions, projected capital needs, and other
factors.
At December 31, 2002, total shareholders' equity was $96.4 million compared
to $85.1 million at December 31, 2001. Earnings, net of common dividends,
contributed $10.9 million to shareholders' equity. Sales of common stock through
the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $1.8 million to
shareholders' equity in 2002, including tax benefits realized by Southwest
relating to option exercises. Under accounting principles generally accepted in
the United States and applied by Southwest, these tax benefits increase
shareholders' equity, but do not affect net income. Net unrealized holding gains
(losses) on investment securities available for sale (net of tax) decreased to a
gain of $2.2 million at December 31, 2002 compared to $2.4 million at December
31, 2001. During 2002, Southwest repurchased 123,740 shares at an average price
of $10.06 per share, which reduced shareholders' equity by $1.2 million.
15
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board. The guidelines
are commonly known as Risk-Based Capital Guidelines. On December 31, 2003,
Southwest exceeded all applicable capital requirements, having a total
risk-based capital ratio of 14.90%, a Tier 1 risk-based capital ratio of 11.13%,
and a leverage ratio of 9.32%. As of December 31, 2003, Stillwater National and
SNB Wichita also met the criteria for classification as a "well-capitalized"
institution under the prompt corrective action rules promulgated under the
Federal Deposit Insurance Act. Designation as a well-capitalized institution
under these regulations does not constitute a recommendation or endorsement of
Southwest or Stillwater National by Federal bank regulators.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments in
order to meet current and future cash flow needs as they become due. Southwest's
portfolio of government-guaranteed student loans and Small Business
Administration ("SBA") loans are also readily salable. Additional sources of
liquidity, including cash flow from the repayment of loans, are also considered
in determining whether liquidity is satisfactory. Liquidity is also achieved
through growth of deposits and liquid assets, and accessibility to the capital
and money markets. These funds are used to meet deposit withdrawals, maintain
reserve requirements, fund loans and operate the organization.
Deposits remain the primary source of funding for Southwest.
Interest-bearing demand accounts in particular have shown positive growth trend
over the three year period, which has been a key factor in Southwest's ability
to maintain a low cost of funds. For 2003, average interest-bearing demand
deposits were 33.8% of total average deposits, up from 26.9% in 2002 and 19.6%
in 2001.
Loans continue to be the largest component of the earning assets mix and
have shown a positive trend over the three year period.
Percentage of Total Average Assets
------------------------------------------------
Sources and uses of funds 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Sources of Funds:
Deposits:
Noninterest-bearing demand 9.20% 9.28% 9.00%
Interest-bearing demand and money market accounts 25.95 20.69 14.67
Time and savings deposits 41.61 46.88 51.36
Other borrowings 13.26 12.99 15.17
Subordinated debentures 2.78 2.02 2.10
Other liabilities 0.45 1.10 1.26
Equity capital 6.75 7.04 6.44
- --------------------------------------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
- --------------------------------------------------------------------------------------------------------------
Uses of Funds:
Loans 83.96% 79.35% 76.50%
Investment securities 12.65 16.30 19.05
Other interest-earning assets 0.07 0.21 0.10
Noninterest-earning assets 3.32 4.14 4.35
- --------------------------------------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
- --------------------------------------------------------------------------------------------------------------
16
Sources and uses of cash are presented in the Consolidated Statements of
Cash Flows. Total cash decreased by $866,000, or less than 3%, to $34.0 million
in 2003 from $34.8 million at year-end 2002, as a result of the net effects of a
$76.1 million increase in cash used in operating activities (primarily from the
increase in originations of government-guaranteed student loans, net of sales
proceeds); a $21.2 million increase in cash used in investing activities
(primarily from the increase in purchases of available for sale securities net
of the reduction in loan originations); and a $94.0 million increase in cash
provided by financing activities (primarily from a $65.4 million increase in
deposits and the $46.4 million net proceeds from issuance of subordinated
debentures).
Total cash increased by $2.4 million, or less than 8%, during 2002 from
$32.4 million at year-end 2001, as a result of the net effects of a $12.0
million increase in cash used in operating activities, a $103.2 million increase
in cash used in investing activities (primarily from the increase in loan
originations); and a $116.1 million increase in cash provided by financing
activities (primarily from a $157.3 million increase in deposits net of a $41.0
million decrease in other borrowings.)
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Southwest's net income is largely dependent on its net interest income.
Southwest seeks to maximize its net interest margin within an acceptable level
of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities. Net
interest income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by other
sources of funds, such as noninterest-bearing deposits and shareholders' equity.
Southwest attempts to manage interest rate risk while enhancing net
interest margin by adjusting its asset/liability position. At times, depending
on the level of general interest rates, the relationship between long-term and
other interest rates, market conditions and competitive factors, Southwest may
determine to increase its interest rate risk position in order to increase its
net interest margin. Southwest monitors interest rate risk and adjusts the
composition of its rate-sensitive assets and liabilities in order to limit its
exposure to changes in interest rates on net interest income over time.
Southwest's asset/liability committee reviews its interest rate risk position
and profitability, and recommends adjustments. The asset/liability committee
also reviews the securities portfolio, formulates investment strategies, and
oversees the timing and implementation of transactions. Notwithstanding
Southwest's interest rate risk management activities, the potential for changing
interest rates is an uncertainty that can have an adverse effect on net income
and liquidity.
Interest rate sensitivity analysis measures the cumulative differences
between the amounts of assets and liabilities maturing or repricing within
various time periods.
The following table shows Southwest's interest rate sensitivity gaps for
selected maturity periods at December 31, 2003:
17
0 to 3 4 to 12 Over 1 to Over
Months Months 5 Years 5 Years Total
-------------- --------------- -------------- -------------- ---------------
(dollars in thousands)
RATE-SENSITIVE ASSETS:
Total loans $1,021,138 $ 161,348 $ 94,001 $ 32,349 $1,308,836
Investment securities 26,364 24,659 152,987 256 204,266
Due from banks 1,212 -- -- -- 1,212
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,048,714 186,007 246,988 32,605 1,514,314
RATE-SENSITIVE LIABILITIES:
Money market deposit accounts 376,016 -- -- -- 376,016
Time deposits 170,906 335,340 92,910 763 599,919
Savings accounts 6,903 -- -- -- 6,903
NOW accounts 53,955 -- -- -- 53,955
Other borrowings 67,350 10,000 60,000 46,500 183,850
Subordinated debentures -- -- -- 72,180 72,180
- ---------------------------------------------------------------------------------------------------------------------------
Total 675,130 345,340 152,910 119,443 1,292,823
- ---------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 373,584 $(159,333) $ 94,078 $ (86,838) $ 221,491
===========================================================================================================================
Cumulative interest sensitivity gap $ 373,584 $ 214,251 $ 308,329 $ 221,491 $ 221,491
===========================================================================================================================
Percentage of rate-sensitive assets
to rate-sensitive liabilities 155.34 % 53.86 % 161.53 % 27.30 % 117.13 %
===========================================================================================================================
Percentage of cumulative gap to total assets 23.63 % 13.55 % 19.51 % 14.01 % 14.01 %
===========================================================================================================================
The percentage of rate-sensitive assets to rate-sensitive liabilities
presents a static position as of a single day and is not necessarily indicative
of Southwest's position at any other point in time and does not take into
account the sensitivity of yields and costs of specific assets and liabilities
to changes in market rates. The foregoing analysis assumes that Southwest's
mortgage-backed securities mature during the period in which they are estimated
to prepay. No other prepayment or repricing assumptions have been applied to
Southwest's interest-earning assets for this analysis.
A principal objective of Southwest's asset/liability management effort is
to balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of Southwest within acceptable risk
levels. To measure its interest rate sensitivity position, Southwest utilizes a
simulation model that facilitates the forecasting of net interest income over
the next twelve month period under a variety of interest rate and growth
scenarios. At December 31, 2003, the model projected net income would decrease
by 8.11% if interest rates immediately fell by 100 basis points. It projected an
increase in net income of 0.125% if interest rates immediately rose by 100 basis
points. The model projected net income would decrease by 4.44% if interest rates
gradually fell by 100 basis points over a one-year time horizon. It projected an
increase in net income of 0.599% if interest rates gradually rose by 100 basis
points over a one-year time horizon. The earnings simulation model uses numerous
assumptions regarding the effect of changes in interest rates on the timing and
extent of repricing characteristics, future cash flows and customer behavior.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net income. Actual results will differ from simulated results
due to timing, cash flows, magnitude and frequency of interest rate changes and
changes in market conditions and management strategies, among other factors.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, Southwest makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with accounting principles generally accepted in the
United States, the full notional amount of these transactions are not recorded
in the accompanying consolidated financial statements and are referred to as
off-balance sheet instruments. These transactions and activities include
commitments to extend lines of commercial and real estate mortgage credit, and
standby and commercial letters of
18
credit and are discussed further in footnote 13 on page 44 of this report.
Off-balance sheet arrangements also include the Trust Preferred Securities,
which have been de-consolidated in this report as required by Financial
Accounting Standards Board Interpretation 46, "Consolidation of Variable
Interest Entities." Further information regarding the Trust Preferred Securities
can be found in footnote 6 on page 38 of this report.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial
data in this report have been prepared in accordance with accounting principles
generally accepted in the United States and practices within the banking
industry that require the measurement of financial position and operating
results in terms of historical dollars without considering fluctuations in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 24." FIN 45 elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 were effective for
financial statements of interim or annual periods ending after December 15,
2002. Implementation of the provisions of FIN 45 did not have a significant
impact on Southwest's financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." The objective of this interpretation was to provide guidance
on how to identify a variable interest entity ("VIE") and determine when the
assets, liabilities, noncontrolling interests, and results of operations of a
VIE need to be included in a company's consolidated financial statements. A
company that holds variable interests in an entity will need to consolidate the
entity if the company's interest in the VIE is such that the company will absorb
a majority of the VIE's expected losses and/or receive a majority of the
entity's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. The provisions of this interpretation became effective upon
issuance for all subsequent transactions involving variable interest entities
and are required to be adopted no later than the first interim or annual
reporting period beginning after December 15, 2003 for all VIE transactions that
existed as of the issuance date. On December 24, 2003, the FASB issued a
revision of the Interpretation (the "Revised Interpretation 46"). Revised
Interpretation 46 codifies both the proposed modifications and other decisions
previously issued through certain FASB Staff Positions ("FSPs") and supercedes
the original FIN 46 to include: (1) deferring the effective date of the
Interpretation's provisions for certain variable interests, (2) providing
additional scope exceptions for certain other variable interests, (3) clarifying
the impact of troubled debt restructurings on the requirement to reconsider (a)
whether an entity is a VIE or (b) which party is the primary beneficiary of a
VIE, and (4) revising Appendix B of the Interpretation to provide additional
guidance on what constitutes a variable interest. FIN 46 and Revised
Interpretation 46 required Southwest to de-consolidate its investments in SBI
Capital Trust, OKSB Statutory Trust I, and SBI Capital Trust II (the "Trusts")
in this Annual Report and all future reports. This de-consolidation has resulted
in the replacement of the Trust Preferred Securities, which were reported as
long-term debt in the statement of financial condition, with the subordinated
debentures issued by the Trusts to Southwest. In spite of this change in
reporting, the adoption of FIN 46 did not have a material impact on Southwest's
results of operations or financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. Statement 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and to all other instruments that exist as of the beginning of the first
interim period after June 15, 2003. The adoption of Statement 150 did not have a
material impact on Southwest's results of operations or financial position.
19
CRITICAL ACCOUNTING POLICIES
Southwest's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") and follow general practices within the industry in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements may reflect
different estimates, assumptions, and judgments. Certain policies inherently
rely more on the use of estimates, assumptions, and judgments and as such have a
greater possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are necessary when
assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair value
warrants an impairment write-down or valuation allowance to be established, or
when an asset or liability must be recorded contingent upon a future event.
Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by other third-party sources, when
available.
The allowance for credit losses is an estimate of the losses that may be
sustained in the loan portfolio. The allowance is based on two basic principles
of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable, and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that Southwest will not collect all principal and interest
payments according to the loan's contractual terms.
Management believes that the allowance is adequate. However, its
determination requires significant judgment, and estimates of probable losses
inherent in the credit portfolio can vary significantly from the amounts
actually observed. While management uses available information to recognize
probable losses, future additions to the allowance may be necessary based on
changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, and independent consultants engaged by Southwest,
periodically review the credit portfolio and the allowance. Such review may
result in additional provisions based on their judgments of information
available at the time of each examination. Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the unexpected deterioration of one or a few of such
loans may cause a significant increase in nonperforming assets, and may lead to
a material increase in charge-offs and the provision for loan losses in future
periods.
Southwest's systematic methodology for assessing the appropriateness of the
allowance includes determination of a formula allowance, specific allowances,
and a general allowance, as presented in "Provision for Loan Losses" on page 10
and in Note 1 to the Consolidated Financial Statements on page 29. The formula
and specific allowances comprised 92.25% of the total allowance at December 31,
2003. At that date, a 10% decrease or increase in all categories of risk rated
credits for which specific allowances had not been recorded would have resulted
in a corresponding decrease or increase of approximately $511,000 in the
recommended allowance, assuming no change in other elements considered in the
methodology.
CONTRACTUAL OBLIGATIONS
Southwest has various contractual obligations that require future cash
payment. The following table presents, as of December 31, 2003, significant
fixed and determinable contractual obligations to third parties by payment date.
20
CONTRACTUAL OBLIGATIONS Payments due by period
- ------------------------------------------------------------------------------------------------------------------
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
--------------------------------------------------------------------------
(Dollars in thousands)
Deposits without stated maturity: (1)
Noninterest bearing $ 167,332 $ -- $ -- $ -- $ 167,332
Interest bearing 436,874 -- -- -- 436,874
Time Deposits (2) 484,834 65,610 58,624 6,447 615,515
Other borrowings (2) 81,001 46,616 24,467 50,455 202,539
Subordinated debentures 4,379 8,758 8,758 167,952 189,847
Operating leases 1,255 2,276 1,529 1,751 6,811
- ------------------------------------------------------------------------------------------------------------------
Total $1,175,675 $123,260 $ 93,378 $226,605 $1,618,918
- ------------------------------------------------------------------------------------------------------------------
(1) Excludes interest.
(2) Includes interest. Interest on variable rate obligations is shown at
rates in effect at December 31, 2003. The contractual amounts to be paid
on variable rate obligations are affected by changes in market interest
rates. Future changes in market interest rates could materially affect
the contractual amounts to be paid.
At December 31, 2003, Southwest's purchase obligations not reflected on the
Consolidated Statement of Condition, and its other long-term liabilities
(consisting primarily of benefits under deferred compensation arrangements) are
not considered material.
For additional information regarding contractual obligations, please also
see "Asset/Liability Management and Quantitative and Qualitative Disclosures
about Market Risk" on page 17, "Off-Balance Sheet Arrangements" on page 18, and
"Note 5. Other Borrowed Funds" on page 37, "Note 6. Subordinated Debentures" on
page 38, "Note 11. Operating Leases" on page 43, and "Note 14. Commitments and
Contingencies" on page 45, to the Consolidated Financial Statements.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt earning
assets. Readers of this report should be aware that non-GAAP ratios and other
measures presented by some banking organizations or financial analysts may not
be directly comparable to similarly named ratios or other measures used by
Southwest or other banking organizations.
21
REPORT OF MANAGEMENT
February 2, 2004
To the Shareholders of Southwest Bancorp, Inc.:
FINANCIAL STATEMENTS
The management of Southwest Bancorp, Inc. ("Southwest") is responsible for
the preparation, integrity, and fair presentation of its published financial
statements as of December 31, 2003, and for the year then ended. The
consolidated financial statements of Southwest Bancorp, Inc. have been prepared
in accordance with accounting principles generally accepted in the United States
and, as such, include some amounts that are based upon informed judgments and
estimates of management.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We, as management of Southwest, are responsible for establishing and
maintaining effective internal control over financial reporting, presented in
conformity with accounting principles generally accepted in the United States
and the instructions to the Consolidated Financial Statements for Bank Holding
Companies with Total Consolidated Assets of $150 million or More, or with More
Than One Subsidiary Bank (Form FR Y-9C) (FR Y-9C instructions). Internal control
is designed to provide reasonable assurance to Southwest's management and board
of directors regarding the preparation of reliable published financial
statements. Internal control over financial reporting includes self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are
identified.
Because of inherent limitations in any internal control system, no matter
how well designed, misstatements due to error or fraud may occur and not be
detected, and controls may be overridden or circumvented. Accordingly, even
effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, internal control effectiveness may vary over time.
Management assessed Southwest's internal control over financial reporting,
as it relates to its financial statements, presented in conformity with
accounting principles generally accepted in the United States and FR Y-9C
instructions as of December 31, 2003. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 2003, its system of internal control over
financial reporting as it relates to its financial statements presented in
conformity with accounting principles generally accepted in the United States
and FR Y-9C instructions met those criteria.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders, designated by the Federal Deposit
Insurance Corporation as safety and soundness laws and regulations.
Management has assessed compliance by Southwest Bancorp, Inc. subsidiary
Stillwater National Bank with the designated laws and regulations relating to
safety and soundness. Based on this assessment, management believes that this
subsidiary insured depository institution complied, in all significant respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 2003.
/s/ Rick Green /s/ Kerby E. Crowell
- ------------------------------------- ---------------------------
Rick Green Kerby E. Crowell
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer
22
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SOUTHWEST BANCORP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Southwest Bancorp, Inc. as of December 31, 2003 and 2002, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwest
Bancorp, Inc. at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States.
Dallas, Texas
February 2, 2004
23
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SOUTHWEST BANCORP, INC.
AT DECEMBER 31, 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
ASSETS
Cash and cash equivalents $ 33,981 $ 34,847
Investment securities:
Held to maturity, fair value $16,144 (2003) and $32,000 (2002) 15,916 31,154
Available for sale, amortized cost $176,470 (2003) and $145,141 (2002) 177,074 148,476
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 11,276 9,059
Loans held for sale 218,422 129,702
Loans receivable, net of allowance for loan losses
of $15,848 (2003) and $11,888 (2002) 1,074,566 959,522
Accrued interest receivable 11,321 9,283
Premises and equipment, net 19,818 20,202
Other assets 18,351 8,309
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,580,725 $1,350,554
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 167,332 $ 135,945
Interest-bearing demand 53,955 50,162
Money market accounts 376,016 258,712
Savings accounts 6,903 5,700
Time deposits of $100,000 or more 358,130 309,205
Other time deposits 241,789 262,033
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,204,125 1,021,757
Accrued interest payable 3,375 4,498
Income tax payable 2,850 --
Other liabilities 4,410 2,858
Other borrowings 183,850 199,282
Subordinated debentures 72,180 25,787
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,470,790 1,254,182
SHAREHOLDERS' EQUITY: (1)
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Paid in capital 6,997 6,196
Retained earnings 92,657 80,724
Accumulated other comprehensive gain (loss) 360 2,201
Treasury stock, at cost; 287,410 (2003) and 696,284 (2002) (2,322) (4,992)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 109,935 96,372
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $1,580,725 $1,350,554
===========================================================================================================================
The accompanying notes are an integral part of this statement.
(1) All share information has been restated to reflect the two-for-one stock
split effected in the form of a stock dividend paid August 29, 2003.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans $76,115 $65,503 $76,850
Investment securities:
U.S. Government and agency obligations 5,485 5,913 6,329
Mortgage-backed securities 1,036 3,126 4,780
State and political subdivisions 856 1,355 1,638
Other securities 577 554 762
Federal funds sold 10 44 41
- -------------------------------------------------------------------------------------------------------------
Total interest income 84,079 76,495 90,400
INTEREST EXPENSE:
Interest-bearing demand 355 372 809
Money market accounts 5,237 4,305 4,386
Savings accounts 17 25 79
Time deposits of $100,000 or more 8,520 9,320 15,468
Other time deposits 6,516 9,429 18,029
Other borrowings 4,887 4,829 7,770
Subordinated Debentures 3,079 2,398 2,398
- -------------------------------------------------------------------------------------------------------------
Total interest expense 28,611 30,678 48,939
- -------------------------------------------------------------------------------------------------------------
Net interest income 55,468 45,817 41,461
Provision for loan losses 8,522 5,443 4,000
OTHER INCOME:
Service charges and fees 9,293 8,216 6,733
Other noninterest income 1,068 1,004 734
Gain on sales of loans 4,111 3,170 2,979
Gain (loss) on sales of investment securities 28 328 367
- -------------------------------------------------------------------------------------------------------------
Total other income 14,500 12,718 10,813
OTHER EXPENSE:
Salaries and employee benefits 19,792 17,168 15,794
Occupancy 8,107 7,119 6,606
FDIC and other insurance 340 286 280
Other real estate 215 2 57
General and administrative 9,994 8,744 8,428
- -------------------------------------------------------------------------------------------------------------
Total other expense 38,448 33,319 31,165
- -------------------------------------------------------------------------------------------------------------
Income before taxes 22,998 19,773 17,109
Taxes on income 8,106 6,354 5,357
- -------------------------------------------------------------------------------------------------------------
Net income $14,892 $13,419 $11,752
- -------------------------------------------------------------------------------------------------------------
Basic earnings per common share (1) $1.26 $1.17 $1.03
Diluted earnings per common share (1) 1.22 1.11 1.00
Cash dividends declared per share (1) 0.25 0.22 0.16
The accompanying notes are an integral part of this statement.
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001 and the two-for-one stock split effected in the form of a
stock dividend paid August 29, 2003.
25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net income $14,892 $13,419 $11,752
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gain (loss) on available for
sale securities (2,703) 42 3,357
Reclassification adjustment for (gains) losses
arising during the period (28) (328) (367)
- ------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (2,731) (286) 2,990
Tax (expense) benefit related to items
of other comprehensive income (loss) 890 98 (980)
- ------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (1,841) (188) 2,010
- ------------------------------------------------------------------------------------------------------------
Comprehensive income $13,051 $13,231 $13,762
============================================================================================================
The accompanying notes are an integral part of this statement.
26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SOUTHWEST BANCORP, INC.
Accumulated Total
Other Share-
Common Stock Paid in Retained Comprehensive Treasury holders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) (1)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 12,243,042 $12,243 $6,626 $59,912 $ 379 $ (5,921) $ 73,239
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Common, $0.16 per share, and
other dividends -- -- -- (1,826) -- -- (1,826)
Common stock issued:
Employee Stock Option Plan -- -- (234) -- -- 739 505
Employee Stock Purchase Plan -- -- -- -- -- 39 39
Dividend Reinvestment Plan -- -- (5) -- -- 58 53
Other comprehensive income
(loss), net of tax -- -- -- -- 2,010 -- 2,010
Treasury shares purchased -- -- -- -- -- (647) (647)
Net income -- -- -- 11,752 -- -- 11,752
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 12,243,042 12,243 6,387 69,838 2,389 (5,732) 85,125
- ------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Common, $0.22 per share, and
other dividends -- -- -- (2,533) -- -- (2,533)
Common stock issued:
Employee Stock Option Plan -- -- (515) -- -- 1,913 1,398
Employee Stock Purchase Plan -- -- 24 -- -- 37 61
Dividend Reinvestment Plan -- -- 15 -- -- 35 50
Tax benefit related to exercise
of stock options -- -- 285 -- -- -- 285
Other comprehensive income
(loss), net of tax -- -- -- -- (188) -- (188)
Treasury shares purchased -- -- -- -- (1,245) (1,245)
Net income -- -- -- 13,419 -- -- 13,419
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 12,243,042 12,243 6,196 80,724 2,201 (4,992) 96,372
- ------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Common, $0.25 per share,
and other dividends -- -- -- (2,959) -- -- (2,959)
Common stock issued:
Employee Stock Option Plan -- -- (424) -- -- 2,603 2,179
Employee Stock Purchase Plan -- -- 31 -- -- 28 59
Dividend Reinvestment Plan -- -- 41 -- -- 39 80
Tax benefit related to exercise
of stock options -- -- 1,153 -- -- -- 1,153
Other comprehensive income
(loss), net of tax -- -- -- -- (1,841) -- (1,841)
Net income -- -- -- 14,892 -- -- 14,892
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 12,243,042 $12,243 $6,997 $92,657 $ 360 $ (2,322) $109,935
===============================================================================================================================
The accompanying notes are an integral part of this statement.
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001 and the two-for-one stock split effected in the form of a
stock dividend paid August 29, 2003.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHWEST BANCORP, INC.
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income $14,892 $13,419 $11,752
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 8,522 5,443 4,000
Deferred taxes (4,465) (292) 443
Depreciation and amortization expense 2,745 2,510 2,434
Amortization of premiums and accretion of
discounts on securities, net 227 (59) 15
Amortization of intangibles 398 202 178
Tax benefit from exercise of stock options 1,153 285 --
(Gain) Loss on sales/calls of securities (28) (328) (367)
(Gain) Loss on sales of loans (4,111) (3,170) (2,979)
(Gain) Loss on sales of premises/equipment (53) -- 137
(Gain) Loss on other real estate owned, net 108 (92) (16)
Proceeds from sales of residential mortgage loans 177,396 133,207 118,899
Residential mortgage loans originated for resale (169,694) (134,705) (118,717)
Proceeds from sales of government-guaranteed student 278,119 117,703 84,658
loans
Government-guaranteed student loans originated for (396,920) (153,938) (106,603)
resale
Changes in assets and liabilities:
Accrued interest receivable (2,038) 874 1,885
Other assets (4,133) (613) 1,242
Income taxes payable 2,850 (195) (170)
Accrued interest payable (1,123) 1,016 (3,635)
Other liabilities 1,440 150 246
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from operating activities (94,715) (18,583) (6,598)
===========================================================================================================================
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities 6,951 18,769 1,993
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 15,210 19,533 14,475
Available for sale securities 86,332 71,707 69,475
Proceeds from redemptions of Federal Home Loan Bank stock -- 2,378 718
Purchases of Federal Home Loan Bank stock and Federal Reserve
Bank stock (2,217) (1,529) (2,187)
Purchases of held to maturity securities -- (2,093) --
Purchases of available for sale securities (124,783) (70,008) (78,688)
Loans originated and principal repayments, net (99,996) (135,147) 1,251
Purchases of premises and equipment (3,523) (2,361) (2,640)
Proceeds from sales of premises and equipment 1,215 67 67
Proceeds from sales of other real estate owned 1,860 922 963
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from investing activities (118,951) (97,762) 5,427
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 182,368 116,961 (40,306)
Net increase (decrease) in other borrowings (15,432) 3,915 44,869
Net proceeds from issuance of common stock 2,318 1,509 597
Net proceeds from issuance of subordinated debentures 46,393 -- --
Purchases of treasury stock -- (1,245) (647)
Common stock dividends paid (2,847) (2,354) (1,787)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from financing activities 212,800 118,786 2,726
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (866) 2,441 1,555
CASH AND CASH EQUIVALENTS,
Beginning of period 34,847 32,406 30,851
- ---------------------------------------------------------------------------------------------------------------------------
End of period $33,981 $34,847 $32,406
===========================================================================================================================
The accompanying notes are an integral part of this statement.
28
SOUTHWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc.
("Southwest"), incorporated in 1981, is a financial holding company
headquartered in Stillwater, Oklahoma engaged primarily in commercial and
consumer banking services in the state of Oklahoma as well as Wichita, Kansas
and the Dallas, Texas area. The accompanying consolidated financial statements
include the accounts of Stillwater National Bank and Trust Company ("Stillwater
National"), a national bank established in 1894, Business Consulting Group, Inc.
("BCG"), a business consulting company established in 2002, Healthcare Strategic
Services, Inc. ("HSSI"), a healthcare consulting company established in 2003,
SNB Bank of Wichita ("SNB Wichita"), a federal savings bank established in 2003,
and consolidated subsidiaries of Stillwater National, including SNB Real Estate
Holdings, Inc. and SNB REIT, Inc. Stillwater National, BCG, HSSI and SNB Wichita
are wholly owned, direct subsidiaries of Southwest. All significant intercompany
balances and transactions have been eliminated in consolidation.
MANAGEMENT ESTIMATES - In preparing Southwest's financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of the dates shown on the consolidated statements of
financial condition and revenues and expenses during the periods reported.
Actual results could differ significantly from those estimates. Changes in
economic conditions could affect the determination of material estimates such as
the allowance for loan losses, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, income taxes, and the
fair value of financial instruments.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
and federal funds sold. Interest-bearing balances held at depository
institutions were $1.2 million at December 31, 2003 and $2.4 million at December
31, 2002. Federal funds sold are sold for one-to-four day periods.
INVESTMENT SECURITIES - Investments in debt and equity securities are
identified as held to maturity and available for sale based on management
considerations of asset/liability strategy, changes in interest rates and
prepayment risk, the need to increase capital and other factors. Southwest has
the ability and intent to hold to maturity its investment securities classified
as held to maturity. Southwest had no investments held for trading purposes for
any period presented. Under certain circumstances (including the deterioration
of the issuer's creditworthiness, a change in tax law, or statutory or
regulatory requirements), Southwest may change the investment security
classification. The classifications Southwest utilizes determine the related
accounting treatment for each category of investments. Available for sale
securities are accounted for at fair value with unrealized gains or losses, net
of taxes, excluded from operations and reported as accumulated other
comprehensive income or loss. Held to maturity securities are accounted for at
amortized cost.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to operations over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
Southwest's investments in state and political subdivisions generally is not
subject to ordinary Federal income tax.
Southwest reviews all individual securities of which the fair values are
below the book values on a regular basis. If it is determined that Southwest
does not have the ability and intent to hold these securities for a period of
time sufficient for a forecasted market price recovery up to (or beyond) the
cost of the investment, or to maturity when the full cost will be recovered,
then, an other than temporary loss is recognized in the statement of operations.
Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are
not readily marketable, therefore these investments are carried at cost, which
approximates fair value.
LOANS - Interest on loans is accrued and credited to operations based upon
the principal amount outstanding. Loan origination fees and certain costs of
originated loans are amortized as an adjustment to the yield over the term of
the loan. At December 31, 2003, net unamortized deferred loan fees were $1.6
million; no deferred loan fees or costs
29
were recorded prior to 2003 as these amounts were not material. In general,
accrued interest income on impaired loans is written off after the loan is 90
days past due; subsequent interest income is recorded when cash receipts are
received from the borrower. Southwest identifies past due loans based on
contractual terms on a loan by loan basis. Southwest originates real estate
mortgage loans and government-guaranteed student loans for portfolio investment
or sale in the secondary market. During the period of origination, real estate
mortgage loans are designated as held either for investment purposes or sale.
Mortgage loans held for sale are generally sold within a one-month period from
loan closing at amounts approximating par value of the loans.
Government-guaranteed student loans are generally sold within ninety to one
hundred eighty days of closing. Real estate mortgage loans held for sale and
government-guaranteed student loans are carried at the lower of cost or market.
Gains or losses recognized upon the sale of loans are determined on a specific
identification basis.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to operations. Loan amounts which
are determined to be uncollectible are charged against this allowance, and
recoveries, if any, are added to the allowance. A loan is considered to be
impaired when, based on current information and events, it is probable that
Southwest will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The allowance for loan losses related to loans that
are evaluated for impairment is based either on the discounted cash flows using
the loan's initial effective interest rate or on the fair value of the
collateral for certain collateral dependent loans. Smaller balance, homogeneous
loans, including mortgage, student and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. All of
Southwest's nonaccrual loans are considered to be impaired loans.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful life of each asset,
which ranges from three to forty years. Southwest reviews the carrying value of
long-lived assets used in operations when changes in events or circumstances
indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated
to be generated by those assets. If this review indicates that an asset is
impaired, Southwest records a charge to operations to reduce the asset's
carrying value to fair value, which is based on estimated discounted cash flows.
Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less costs to sell.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at
the lesser of the fair value less the estimated costs to sell the asset.
Write-downs of carrying value required at the time of foreclosure are recorded
as a charge to the allowance for loan losses. Costs related to the development
of such real estate are capitalized, and costs related to holding the property
are expensed. Foreclosed property is subject to periodic revaluation based upon
estimates of fair value. In determining the valuation of other real estate
owned, management obtains independent appraisals for significant properties.
Valuation adjustments are provided, as necessary, by charges to operations.
Profits and losses from sales of foreclosed property by Southwest are recognized
as incurred.
INTANGIBLES - Intangibles consist of goodwill and mortgage servicing rights
and are included in other assets in the consolidated statements of financial
condition. Statement of Financial Accounting Standard ("SFAS") No. 142, adopted
on January 1, 2002, requires that goodwill no longer be amortized, but must be
reviewed for impairment at least annually. Southwest's tests have indicated no
impairment exists. The remaining capitalized amount of goodwill is not material.
The cessation of amortization of goodwill did not have a material impact on the
Statement of Operations. Loan servicing rights are capitalized based on
estimated fair market value at the point of origination. The servicing rights
are amortized on an individual loan by loan basis over the period of estimated
net servicing income. Impairment of loan servicing rights is assessed based on
the fair value of those rights. The capitalized amounts and amortization of the
loan servicing rights is not material. Southwest reviews the carrying value of
intangible assets annually for impairment. Assets are considered impaired when
the balances are not recoverable from estimated future cash flows. At December
31, 2003 and 2002, Southwest had recorded cumulative amortization of $2.8
million and $2.4 million, respectively.
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $358.1 million and $309.2 million at December 31,
2003 and 2002, respectively. The total amount of overdrawn deposit accounts that
were reclassified as loans at December 31, 2003 and 2002 was $1.9 million and
$529,000, respectively. Time deposit maturities are as follows: $506.2 million
in 2004, $32.2 million in 2005, $6.4 million in 2006, $15.6 million in 2007 and
$39.5 million thereafter.
30
LOAN SERVICING INCOME - Southwest earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
TAXES ON INCOME - Southwest and its subsidiaries file consolidated income
tax returns. Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities. A valuation allowance
will be established if it is more likely than not that some portion of the
deferred tax asset will not be realized.
EARNINGS PER COMMON SHARE - Basic earnings per common share is computed
based upon net income divided by the weighted average number of common shares
outstanding during each period. Diluted earnings per common share is computed
based upon net income divided by the weighted average number of common shares
outstanding during each period adjusted for the effect of dilutive potential
common shares calculated using the treasury stock method. For the years ended
December 31, 2003, 2002, and 2001, Southwest had zero, 28,000, and 300,000
antidilutive options to purchase common shares, respectively. The following is a
reconciliation of the common shares used in the calculations of basic and
diluted earnings per common share:
2003 2002 2001
---------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic earnings per share 11,798,810 11,490,166 11,386,258
EFFECT OF DILUTIVE SECURITIES:
Stock options 360,810 561,952 342,586
---------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Diluted earnings per share 12,159,620 12,052,118 11,728,844
- --------------------------------------------------------------------------------------
STOCK OPTION PLAN - The Southwest Bancorp, Inc. 1994 Stock Option Plan and
1999 Stock Option Plan (the "Stock Plans") provide selected key employees with
the opportunity to acquire common stock. The exercise price of all options
granted under the Stock Plans is the fair market value on the grant date.
Depending upon terms of the stock option agreements, stock options generally
become exercisable on either a quarterly or annual basis and expire either 30
days after becoming exercisable or from five to ten years after the date of
grant. Southwest applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the Stock Plans; accordingly, no compensation
expense has been recorded in the accompanying consolidated statements of
operations. Had compensation cost for the Stock Plans been determined based upon
the fair value of the options at their grant date as prescribed in SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, Southwest's proforma
data would have been as follows:
For the Years Ended December 31,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
(dollars in thousands, except per share data)
Net income, as reported $14,892 $13,419 $11,752
Less: Proforma compensation expense related to options
net of tax effects 375 452 439
- -----------------------------------------------------------------------------------------------------------
Net income, proforma $14,517 $12,967 $11,313
- -----------------------------------------------------------------------------------------------------------
Earnings per common share
Basic, as presented $1.26 $1.17 $1.03
Basic, proforma $1.23 $1.13 $0.99
Diluted, as presented $1.22 $1.11 $1.00
Diluted, proforma $1.19 $1.08 $0.96
Weighted average fair value at grant date $2.34 $2.41 $2.42
31
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its proforma effect is not necessarily indicative of its
impact on future years. The compensation cost is calculated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
Expected dividend yield 1.78% 1.73% 1.71%
Expected volatility 24.71% 25.40% 25.67%
Risk-free interest rate 5.45% 5.70% 5.82%
Expected option term (in years) 8.49 8.87 9.17
The Stock Plan's activity follows:
Weighted
Number of Average
Options Exercise Price
--------------------------------
- -------------------------------------------------------------------------------
Outstanding at December 31, 2000 1,528,802 $ 6.21
- -------------------------------------------------------------------------------
Granted 50,000 7.45
Exercised (98,102) 5.15
Canceled/expired (157,898) 7.38
- -------------------------------------------------------------------------------
Outstanding at December 31, 2001 1,322,802 6.20
- -------------------------------------------------------------------------------
Granted 243,080 10.34
Exercised (259,234) 5.39
Canceled/expired (8,890) 7.64
- -------------------------------------------------------------------------------
Outstanding at December 31, 2002 1,297,758 7.12
- -------------------------------------------------------------------------------
Granted 153,588 11.72
Exercised (398,713) 5.46
Canceled/expired (18,150) 8.07
- -------------------------------------------------------------------------------
Outstanding at December 31, 2003 1,034,483 $ 8.43
- -------------------------------------------------------------------------------
Total exercisable at December 31, 2001 648,100 $ 5.64
Total exercisable at December 31, 2002 610,159 $ 6.58
Total exercisable at December 31, 2003 502,612 $ 8.40
At December 31, 2003, Southwest had reserved 2,163,752 shares under the
Stock Plans, and had 1,034,483 shares under option. The following summarizes the
information concerning options outstanding and exercisable at December 31, 2003.
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------
30,000 $ 4.25 - $ 4.46 0.6 $ 4.29 27,000 $ 4.27
184,670 $ 5.21 - $ 6.48 5.9 $ 5.36 78,470 $ 5.32
239,300 $ 7.11 - $ 7.66 5.4 $ 7.14 102,300 $ 7.12
351,544 $ 8.25 - $ 9.37 4.0 $ 8.97 194,259 $ 8.99
160,969 $10.12 - $11.72 4.1 $11.62 55,250 $11.53
40,000 $12.33 - $12.50 3.4 $12.41 26,666 $12.41
28,000 $13.16 - $13.31 3.9 $13.21 18,667 $13.21
32
COMPREHENSIVE INCOME - The Company's comprehensive income (net income plus
all other changes in shareholders' equity from non-equity sources) consists of
its net income and unrealized holding gains (losses) in its available for sale
securities.
TRUST - Southwest offers trust services to customers through its
relationship with the Heritage Trust Company, a trust services company. Property
(other than cash on deposit) held by Southwest in a fiduciary or agency capacity
for its customers is not included in the consolidated statements of financial
condition as it is not an asset or liability of Southwest.
LIQUIDITY - Stillwater National is required by the Federal Reserve Bank to
maintain average reserve balances. Cash and due from banks in the consolidated
statements of financial condition include restricted amounts of $413,000 and
$535,000 at December 31, 2003 and 2002, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts to conform to the current year presentation.
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
At December 31, 2003
-------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 5,047 $ 57 $ - $ 5,104
Obligations of state and political subdivisions 10,869 171 - 11,040
- ----------------------------------------------------------------------------------------------------------------
Total $15,916 $ 228 $ - $16,144
- -----------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Government and agency obligations $148,002 $ 904 $ 609 $148,297
Obligations of state and political subdivisions 3,930 198 - 4,128
Mortgage-backed securities 19,581 183 83 19,681
Equity securities 4,957 117 106 4,968
- ----------------------------------------------------------------------------------------------------------------
Total $176,470 $ 1,402 $ 798 $177,074
- -----------------------------------------------------------------------------------------------------------------
At December 31, 2002
-------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 8,068 $ 267 $ - 8,335
Obligations of state and political subdivisions 23,086 579 - 23,665
- -----------------------------------------------------------------------------------------------------------------
Total $31,154 $ 846 $ - $32,000
- -----------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Government and agency obligations $94,046 $ 2,295 $ - 96,341
Obligations of state and political subdivisions 4,340 253 - 4,593
Mortgage-backed securities 40,916 852 17 41,751
Equity securities 5,839 45 93 5,791
- -----------------------------------------------------------------------------------------------------------------
Total $145,141 $ 3,445 $ 110 $148,476
- -----------------------------------------------------------------------------------------------------------------
33
At December 31, 2003, Southwest had securities with unrealized losses
totaling $798,000. Of that total, $106,000 in losses had been outstanding for
more than one year; the remaining $692,000 in losses had arisen within the last
twelve months. Southwest has reviewed all these securities on an individual
basis. Southwest has the ability and intent to hold these securities for a
period of time sufficient for a forecasted market price recovery up to (or
beyond) the cost of the investment, or to maturity when the full cost will be
recovered and, therefore, has determined that none of the losses are other than
temporary.
As required by law, investment securities are pledged to secure public and
trust deposits, as well as the Sweep Repurchase Agreement Product and borrowings
from the FHLB. Securities with an amortized cost of $170.8 million and $134.9
million were pledged to meet such requirements of $80.1 million and $80.9
million at December 31, 2003 and 2002, respectively. Any amount overpledged can
be released at any time.
A comparison of the amortized cost and approximate fair value of
Southwest's debt securities by maturity date at December 31, 2003 follows in the
next table.
Available for Sale Held to Maturity
-------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------------------
(dollars in thousands)
One year or less $21,090 $21,380 $13,399 $13,545
Two years through five years 153,094 153,444 2,517 2,599
Five years through ten years - - - -
More than ten years 2,286 2,250 - -
- --------------------------------------------------------------------------------------------------
Total $176,470 $177,074 $15,916 $16,144
- --------------------------------------------------------------------------------------------------
Gross realized gains (losses) on sales of investment securities were
$28,000, $328,000, and $367,000 during 2003, 2002, and 2001, respectively. The
gross proceeds from such sales of investment securities totaled approximately
$7.0 million, $18.8 million, and $2.0 million during 2003, 2002, and 2001,
respectively. A portion of the gain on sales of investment securities during
2003, 2002 and 2001 occurred when securities classified as "held to maturity"
and "available for sale", originally purchased at a discount, were called prior
to their stated maturity dates.
3. LOANS
Major classifications of loans are as follows:
At December 31,
--------------------------------
2003 2002
--------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $ 402,596 $ 374,999
One-to-four family residential 83,250 102,423
Real estate construction 230,292 130,001
Commercial 355,965 348,879
Installment and consumer:
Government-guaranteed student loans 211,546 119,064
Other 25,187 25,746
- ----- -------------------------------------------------------------------------
1,308,836 1,101,112
Allowance for loan losses (15,848) (11,888)
- -------------------------------------------------------------------------------
Total loans, net $1,292,988 $1,089,224
- -------------------------------------------------------------------------------
Southwest extends commercial and consumer credit primarily to customers in
the states of Oklahoma, Texas, and Kansas which subjects the loan portfolio to
the general economic conditions within these areas. At December 31, 2003 and
2002, substantially all of Southwest's loans were collateralized with real
estate, inventory, accounts
34
receivable and/or other assets or are guaranteed by agencies of the United
States Government.
Loans to individuals and businesses in the healthcare industry totaled
$290.2 million, or 22% of total loans. Southwest does not have any other
concentrations of loans to individuals or businesses involved in a single
industry of more than 5% of total loans. In the event of total nonperformance by
the borrowers or guarantors, Southwest's accounting loss would be limited to the
recorded investment in the loans reduced by proceeds received from disposition
of the related collateral.
Southwest had loans which were held for sale of $218.4 million and $129.7
million at December 31, 2003 and 2002, respectively. These loans are carried at
the lower of cost or market. Government-guaranteed student loans are generally
sold to a single servicer. A substantial portion of the one-to-four family
residential loans and loan servicing rights are sold to five servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $14.5 million and $11.5 million at December
31, 2003 and 2002, respectively. If interest on those loans had been accrued,
the interest income as reported in the accompanying consolidated statements of
operations would have increased by approximately $802,000, $749,000, and
$543,000, for 2003, 2002, and 2001, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $124.4 million and $107.7 million at December 31, 2003 and 2002,
respectively. Southwest maintained escrow accounts totaling $468,000 and
$321,000 for real estate mortgage loans serviced for others at December 31, 2003
and 2002, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 2003. Student loans that do not have stated
maturities are treated as due in one year or less. Real estate construction
includes certain loans which will convert to permanent financing at the point
when construction is completed; these loans are reported according to their
final maturity.
One year One to Over
or less five years five years Total
-------------------------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $ 39,701 $ 202,315 $ 160,580 $ 402,596
One-to-four family residential 11,745 34,356 37,149 83,250
Real estate construction 77,666 79,535 73,091 230,292
Commercial 151,459 124,415 80,091 355,965
Installment and consumer:
Government-guaranteed student loans 211,546 -- -- 211,546
Other 8,825 15,379 983 25,187
-------------------------------------------------
Total $ 500,942 $ 456,000 $ 351,894 $1,308,836
-------------------------------------------------
The following table sets forth at December 31, 2003 the dollar amount of
all loans due more than one year after December 31, 2003.
Fixed Variable Total
-------------------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $ 26,427 $336,468 $362,895
One-to-four family residential 24,283 47,222 71,505
Real estate construction 4,687 147,939 152,626
Commercial 31,295 173,211 204,506
Installment and consumer 7,829 8,533 16,362
- -----------------------------------------------------------------------------------
Total $ 94,521 $713,373 $807,894
- -----------------------------------------------------------------------------------
35
The allowance for loan losses is summarized as follows:
For the Years Ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
(dollars in thousands)
Beginning balance $11,888 $11,492 $12,125
Provision for loan losses 8,522 5,443 4,000
Loans charged off (5,077) (5,396) (5,529)
Recoveries 515 349 896
- ----------------------------------------------------------------------------
Total $15,848 $11,888 $11,492
- ----------------------------------------------------------------------------
As of December 31, 2003 and 2002, impaired loans totaled $14.5 million and
$11.5 million and had a related allowance for loan loss of $2.2 million and
$930,000, respectively. The average balance of impaired loans totaled $12.9
million and $7.5 million for the years ended December 31, 2003 and 2002,
respectively. Interest income recognized on impaired loans totaled $11,000,
$241,000, and $392,000, respectively, for the years ended December 31, 2003,
2002, and 2001.
Directors and officers of Southwest and Stillwater National were customers
of, and had transactions with, Southwest in the ordinary course of business, and
similar transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of loss or present other
unfavorable features. Certain directors, and companies in which they have
ownership interests, had indebtedness to Southwest totaling $1.8 million, $2.6
million and $1.5 million at December 31, 2003, 2002 and 2001, respectively.
During 2003, $5.3 million of new loans and advances on existing loans were made
to these persons and repayments totaled $6.1 million.
4. PREMISES AND EQUIPMENT
These consist of the following:
At December 31,
------------------------------
2003 2002
------------------------------
(dollars in thousands)
Land $4,530 $4,558
Buildings and improvements 11,188 11,218
Furniture, fixtures, and equipment 22,594 21,153
Construction/Remodeling in progress 214 444
- -----------------------------------------------------------------------------
38,526 37,373
Accumulated depreciation and amortization (18,708) (17,171)
- -----------------------------------------------------------------------------
Premises and equipment, net $ 19,818 $ 20,202
- -----------------------------------------------------------------------------
36
5. OTHER BORROWED FUNDS
During 2003, the only categories of other borrowings whose averages
exceeded 30% of ending shareholders' equity were repurchase agreements and funds
borrowed from the FHLB.
At December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
(dollars in thousands)
AMOUNTS OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option $ 2,490 $ 2,500 $ 1,493
Federal funds purchased and securities sold
under repurchase agreements 61,335 67,895 51,579
Borrowed from the Federal Home Loan Bank 120,025 128,887 142,295
Other - - -
WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option 0.73% 0.99% 1.40%
Federal funds purchased and securities sold
under repurchase agreements 0.71 1.25 1.61
Borrowed from the Federal Home Loan Bank 3.36 3.28 3.27
Other - - -
MAXIMUM AMOUNTS OF BORROWINGS OUTSTANDING
AT ANY MONTH-END:
Treasury, tax and loan note option $ 2,500 $ 2,500 $ 2,500
Federal funds purchased and securities sold
under repurchase agreements 97,893 77,994 58,274
Borrowed from the Federal Home Loan Bank 166,500 141,500 168,590
Other - 250 500
APPROXIMATE AVERAGE SHORT-TERM BORROWINGS
OUTSTANDING FOR THE YEAR:
Treasury, tax and loan note option $ 752 $ 1,415 $ 1,596
Federal funds purchased and securities sold
under repurchase agreements 64,927 48,608 53,128
Borrowed from the Federal Home Loan Bank 134,794 115,684 131,220
Other - 38 165
APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR:
Treasury, tax and loan note option 0.91% 1.46% 3.55%
Federal funds purchased and securities sold
under repurchase agreements 0.84 1.22 3.39
Borrowed from the Federal Home Loan Bank 3.22 3.64 4.50
Other - 4.38 6.76
Southwest has entered into an agreement with the FHLB to obtain advances
from the FHLB from time to time. The terms of the agreement are set forth in the
Advance, Pledge and Security Agreement (the "Agreement"). The FHLB requires that
Southwest pledge collateral on such advances. Under the terms of the Agreement,
the discounted value of the collateral, as defined by the FHLB, should at all
times be at least equal to the amount borrowed by Southwest. Such advances
outstanding are subject to a blanket collateral arrangement, which requires the
pledging of eligible collateral to secure such advances. Such collateral
principally includes certain loans and securities. At December 31, 2003 and
2002, loans pledged under the Agreement were $454.1 million and $385.5 million
and investment securities (at carrying value) were $48.3 million and $25.9
million, respectively.
Southwest has available various forms of other borrowings for cash
management and liquidity purposes. These forms of borrowings include federal
funds purchases,
37
securities sold under agreements to repurchase, and borrowings from the FRB, the
Student Loan Marketing Association ("SLMA"), the F&M Bank of Tulsa ("F&M") and
the FHLB. Southwest has available a $5.0 million line of credit from F&M, none
of which was outstanding at December 31, 2003. Southwest also carries
interest-bearing demand notes issued by the U.S. Treasury in connection with the
Treasury Tax and Loan note program; the outstanding balance of those notes was
$2.5 million at December 31, 2003. Southwest has approved federal funds purchase
lines totaling $169.5 million with seven financial entities; the outstanding
balance on these lines totaled $16.8 million at December 31, 2003. In addition,
Southwest has available a $35.0 million line of credit from the SLMA and a
$320.4 million line of credit from the FHLB. Borrowings under the SLMA line
would be secured by student loans. Borrowings under the FHLB line are secured by
all unpledged securities and other loans. The SLMA line expires April 20, 2007;
no amount was outstanding on this line at December 31, 2003. The FHLB line of
credit had an outstanding balance of $120.0 million at December 31, 2003 and
maturities as follows: $13.5 million in 2004, $20.0 million in 2005, $20.0
million in 2006, $20.0 million in 2007, $0 in 2008 and $46.5 million after 2008.
Southwest also has available unsecured brokered certificate of deposit lines of
credit in connection with its retail certificate of deposit program from Merrill
Lynch & Co., Morgan Stanley Dean Witter, Citigroup Global Markets, Inc.
(previously Salomon Smith Barney), Wachovia Securities, LLC (formerly Prudential
Securities, Inc.), UBS Financial Services, Inc. (previously PaineWebber, Inc.),
RBC Dain Rauscher, Inc., and CountryWide Securities that total $675.0 million.
In conjunction with these lines of credit, $225.9 million in retail certificates
of deposit were included in total deposits at December 31, 2003.
Southwest sells securities under agreements to repurchase with Southwest
retaining custody of the collateral. Collateral consists of direct obligations
of U.S. Government Agency issues, which are designated as pledged with
Southwest's safekeeping agent. The type of collateral required, and the
retention of the collateral and the security sold minimize Southwest's risk of
exposure to loss. These transactions are for one-to-four day periods. At
December 31, 2003, no repurchase agreements to any one entity totaled more than
10% of equity capital.
6. SUBORDINATED DEBENTURES
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the "SBI
Capital Trust Preferred") in an underwritten public offering for an aggregate
price of $25,012,500. Proceeds of the SBI Capital Trust Preferred were invested
in the 9.30% Subordinated Debentures (the "SBI Capital Subordinated Debentures")
of Southwest. After deducting underwriter's compensation and other expenses of
the offering, the net proceeds were available to Southwest to increase capital
and for general corporate purposes, including use in investment and lending
activities, and the redemption of Southwest's 9.20% Redeemable Cumulative
Preferred Stock, Series A (the "Series A Preferred Stock"). Interest payments on
the SBI Capital Subordinated Debentures are deductible for federal income tax
purposes.
The SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures
each mature on July 31, 2027. If certain conditions are met, the maturity dates
of the SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures
may be shortened to a date as early as within 2004, or extended to a date not
later than July 31, 2036. The SBI Capital Trust Preferred and the SBI Capital
Subordinated Debentures also may be redeemed prior to maturity if certain events
occur. The SBI Capital Trust Preferred is subject to mandatory redemption, in
whole or in part, upon repayment of the SBI Capital Subordinated Debentures at
maturity or their earlier redemption. Southwest also has the right, if certain
conditions are met, to defer payment of interest on the SBI Capital Subordinated
Debentures, which would result in a deferral of dividend payments on the SBI
Capital Trust Preferred, at any time or from time to time for a period not to
exceed 20 consecutive quarters in a deferral period.
On June 26, 2003, OKSB Statutory Trust I, a newly-formed subsidiary of
Southwest, issued 20,000 of its Floating Rate Capital Securities (the "OKSB
Trust Preferred") in a private placement for an aggregate price of $20,000,000.
Proceeds of the OKSB Trust Preferred were invested in the Floating Rate Junior
Subordinated Deferrable Interest Debentures (the "OKSB Subordinated Debentures")
of Southwest. After deducting underwriter's compensation and other expenses of
the offering, the net proceeds were available to Southwest to increase capital
and for general corporate purposes. Interest payments on the OKSB Subordinated
Debentures are deductible for federal income tax purposes.
The OKSB Trust Preferred and the OKSB Subordinated Debentures each mature
on June 26, 2033. If certain conditions are met, the maturity dates of the OKSB
Trust Preferred and the OKSB Subordinated Debentures may be shortened to a date
not earlier than June 26, 2008. The OKSB Trust Preferred and the OKSB
Subordinated Debentures also may be redeemed prior to maturity if certain events
occur. The OKSB Trust Preferred is subject to mandatory redemption, in whole or
in part, upon repayment of the OKSB Subordinated Debentures at
38
maturity or their earlier redemption. Southwest also has the right, if certain
conditions are met, to defer payment of interest on the OKSB Subordinated
Debentures, which would result in a deferral of dividend payments on the OKSB
Trust Preferred, at any time or from time to time for a period not to exceed 20
consecutive quarters in a deferral period.
On October 14, 2003, SBI Capital Trust II, a newly-formed subsidiary of
Southwest, issued 25,000 of its Floating Rate Trust Preferred Securities (the
"SBI II Trust Preferred") in a private placement for an aggregate price of
$25,000,000. Proceeds of the SBI II Trust Preferred were invested in the
Floating Rate Junior Subordinated Deferrable Interest Debentures (the "SBI II
Subordinated Debentures") of Southwest. The proceeds were available to Southwest
to increase capital and for general corporate purposes. Interest payments on the
SBI II Subordinated Debentures are deductible for federal income tax purposes.
The SBI II Trust Preferred and the SBI II Subordinated Debentures each
mature on October 7, 2033. If certain conditions are met, the maturity dates of
the SBI II Trust Preferred and the SBI II Subordinated Debentures may be
shortened to a date not earlier than October 7, 2008. The SBI II Trust Preferred
and the SBI II Subordinated Debentures also may be redeemed prior to maturity if
certain events occur. The SBI II Trust Preferred is subject to mandatory
redemption, in whole or in part, upon repayment of the SBI II Subordinated
Debentures at maturity or their earlier redemption. Southwest also has the
right, if certain conditions are met, to defer payment of interest on the SBI II
Subordinated Debentures, which would result in a deferral of dividend payments
on the OKSB Trust Preferred, at any time or from time to time for a period not
to exceed 20 consecutive quarters in a deferral period.
Proceeds from the October trust preferred issuance are expected to be used
to retire the $25.0 million in fixed rate trust preferred securities issued in
1997, which became subject to redemption by Southwest in the third quarter of
2002. As of December 31, 2003, the redemption would result in a charge to
expense of approximately $630,000, net of tax benefit, upon retirement, however,
management estimates that the redemption would have a net positive effect on net
income within twelve months from redemption and thereafter. Whether or not
Southwest redeems the 1997 trust preferred securities during 2004 depends upon a
number of factors, including the currently unsettled regulatory capital rules
relating to trust preferred securities as a result of recent changes in
accounting standards.
Southwest, SBI Capital Trust, OKSB Statutory Trust I and SBI Capital Trust
II believe that, taken together, the obligations of Southwest under the Trust
Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the
Subordinated Debentures, the Indentures and the Agreements as to Expenses and
Liabilities, entered into in connection with the offering of the Trust Preferred
and the Subordinated Debentures, in the aggregate constitute a full and
unconditional guarantee by Southwest of the obligations of SBI Capital Trust,
OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the SBI Trust Preferred and purchasing the SBI Subordinated Debentures,
which are its sole assets. Southwest owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, of SBI Capital Trust.
OKSB Statutory Trust I is a Connecticut statutory trust created for the
purpose of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated
Debentures, which are its sole assets. Southwest owns all of the 619 outstanding
common securities, liquidation value $1,000 per share, of OKSB Statutory Trust
I.
SBI Capital Trust II is a Delaware statutory trust created for the purpose
of issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated
Debentures, which are its sole assets. Southwest owns all of the 774 outstanding
common securities, liquidation value $1,000 per share, of SBI Capital Trust II.
Each of the Trust Preferred meets the regulatory criteria for Tier I
capital, subject to Federal Reserve guidelines that limit the amount of the
Trust Preferred and cumulative perpetual preferred stock to an aggregate of 25%
of Tier I capital. At December 31, 2003, $36.5 million of the Trust Preferred
was included in Tier I capital.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." The objective of this interpretation was to provide guidance
on how to identify a variable interest entity ("VIE") and determine when the
assets, liabilities, noncontrolling interests, and results of operations of a
VIE need to be included in a company's consolidated financial statements. FIN 46
has required Southwest to de-consolidate its investments in SBI Capital Trust,
OKSB Statutory Trust I, and SBI Capital Trust II (the "Trusts") in this Annual
Report and all future reports. Due to this required de-consolidation, the Trust
Preferred Securities are not presented on the Consolidated Statements of
Financial Condition and the Subordinated Debentures are presented on the
Consolidated Statements of Financial Condition as a separate liability category.
39
7. INCOME TAXES
The components of taxes on income follow:
For the Years Ended December 31,
-------------------------------------
2003 2002 2001
-------------------------------------
(dollars in thousands)
CURRENT TAX EXPENSE:
Federal $11,598 $6,642 $4,707
State 960 6 205
DEFERRED TAX EXPENSE (BENEFIT):
Federal (4,295) (307) 399
State (157) 13 46
------------------------------------------------------------------------
Taxes on income $8,106 $6,354 $5,357
------------------------------------------------------------------------
The taxes on income reflected in the accompanying consolidated statements
of operations differs from the expected U.S. Federal income tax rates for the
following reasons:
For the Years Ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
(dollars in thousands)
Computed tax expense at statutory rates $8,044 $6,921 $5,817
INCREASE (DECREASE) IN INCOME
TAXES RESULTING FROM:
Benefit of income not subject to U.S. Federal
income tax (583) (675) (653)
State income taxes, net of Federal income
tax benefit 522 12 165
Other 123 96 28
-----------------------------------------------------------------------------
Taxes on income $8,106 $6,354 $5,357
-----------------------------------------------------------------------------
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
For the Years Ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
(dollars in thousands)
Provision for loan losses $(3,589) $(138) $ 344
Accumulated depreciation (1,169) (37) 16
Intangibles 37 36 21
Write-downs on other real estate owned 17 10 (22)
Deferred compensation accrual (83) 28 42
Other 334 (193) 44
------------------------------------------------------------------------
Total $(4,453) $(294) $ 445
------------------------------------------------------------------------
40
Net deferred tax assets of $7.9 million and $2.6 million at December 31,
2003 and 2002, respectively, are reflected in the accompanying Consolidated
Statements of Financial Condition in other assets. There were no valuation
allowances at December 31, 2003 or 2002. Temporary differences that give rise to
the deferred tax assets (liabilities) include the following:
At December 31,
--------------------
2003 2002
--------------------
(dollars in thousands)
Provision for loan losses $ 8,028 $ 4,439
Accumulated depreciation (453) (1,622)
Intangibles 49 86
Writedowns on other real estate owned 113 130
Deferred compensation accrual 234 151
Other 188 522
- -------------------------------------------------------------------
8,159 3,706
Deferred taxes (payable) receivable on
investment securities available for sale (244) (1,133)
- -------------------------------------------------------------------
Net deferred tax asset $ 7,915 $ 2,573
===================================================================
8. SHAREHOLDERS' EQUITY
On August 29, 2003, Southwest effected a two-for-one stock split of its
common stock in the from of a dividend of 6,121,521 shares. On August 29, 2001,
Southwest effected a 3:2 stock split of its common stock in the form of a
dividend of 2,040,465 shares. Share and per share amounts in this report have
been retroactively restated to reflect these stock splits.
In April 2001, Southwest's Board of Directors (the "Board") authorized the
repurchase of up to 5%, or 585,000 shares, of its outstanding common stock, par
value $1.00 per share, in connection with shares expected to be issued under
Southwest's dividend reinvestment, stock option, and employee benefit plans and
for other corporate purposes. Additional one year programs were authorized by
the Board in April 2002 and March 2003 with the Board authorizing the repurchase
of another 5%, or approximately 572,000 and 560,000 shares, respectively. The
additional repurchases were also to be made in connection with shares expected
to be issued under Southwest's dividend reinvestment, stock option, and employee
benefit plans and for other corporate purposes. The share repurchases are
expected to be made primarily on the open market from time to time until March
31, 2004, or earlier termination of the repurchase program by the Board.
Repurchases under the program will be made at the discretion of management based
upon market, business, legal, accounting and other factors.
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board believes are unfair or
otherwise not in the best interests of Southwest and its shareholders. Under the
Rights Plan, each holder of record of Southwest's common stock, as of the close
of business on April 22, 1999, received one right per common share. The rights
generally become exercisable if an acquiring party accumulates, or announces an
offer to acquire, 10% or more of Southwest's voting stock. The rights will
expire on April 22, 2009. Each right will entitle the holder (other than the
acquiring party) to buy, at the right's then current exercise price, Southwest's
common stock or equivalent securities having a value of twice the right's
exercise price. The exercise price of each right was initially set at $36.67. In
addition, upon the occurrence of certain events, holders of the rights would be
entitled to purchase, at the then current exercise price, common stock or
equivalent securities of an acquiring entity worth twice the exercise price.
Under the Rights Plan, Southwest also may exchange each right, other than rights
owned by an acquiring party, for a share of its common stock or equivalent
securities.
Southwest has reserved for issuance 600,000 shares of common stock pursuant
to the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The
Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Company employees to acquire additional
common shares through payroll deductions. Since July 1999, shares issued out of
these plans have come from treasury shares. At December 31, 2003, 80,486 new
shares had been issued and 55,780 treasury shares had been reissued by these
plans.
9. CAPITAL REQUIREMENTS
Southwest, Stillwater National and SNB Wichita are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
41
mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on Southwest's, Stillwater
National's, and SNB Wichita's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Southwest,
Stillwater National, and SNB Wichita must meet specific capital guidelines that
involve quantitative measures of Southwest's, Stillwater National's, and SNB
Wichita's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Southwest's, Stillwater National's, and
SNB Wichita's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require Southwest, Stillwater National, and SNB Wichita to maintain
minimum amounts and of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I Capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2003 and
2002, that Southwest, Stillwater National, and SNB Wichita met all capital
adequacy requirements to which they are subject.
As of December 31, 2003 and 2002, the most recent notification from the
Office of the Comptroller of the Currency ("OCC") categorized Stillwater
National as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, Stillwater National
must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed Stillwater National's
category.
SNB Wichita began operating in November 2003 and has not yet received
notification from the Office of Thrift Supervision concerning analysis of SNB
Wichita's capital position.
Southwest's, Stillwater National's and SNB Wichita's actual capital amounts
and ratios are presented below.
To Be Well Capitalized
Under Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
(dollars in thousands)
AS OF DECEMBER 31, 2003:
Total Capital (to risk-weighted assets)
Southwest $195,254 14.90% N/A N/A $ 104,828 8.00%
Stillwater National 155,596 12.00 $ 129,651 10.00% 103,720 8.00
SNB Wichita 5,940 71.02 836 10.00% 669 8.00
Tier I Capital (to risk-weighted assets)
Southwest 145,906 11.13 N/A N/A 52,414 4.00
Stillwater National 139,835 10.79 77,790 6.00 51,860 4.00
SNB Wichita 5,835 69.73 502 6.00 335 4.00
Tier I Leverage (to average assets)
Southwest 145,906 9.32 N/A N/A 62,627 4.00
Stillwater National 139,835 8.96 78,072 5.00 62,458 4.00
SNB Wichita 5,835 119.64 244 5.00 195 4.00
AS OF DECEMBER 31, 2002:
Total Capital (to risk-weighted assets)
Southwest $130,843 11.42% N/A N/A $ 91,652 8.00%
Stillwater National 127,073 11.11 114,341 10.00% 91,473 8.00
Tier I Capital (to risk-weighted assets)
Southwest 118,955 10.38 N/A N/A 45,826 4.00
Stillwater National 115,271 10.07 68,605 6.00 45,737 4.00
Tier I Leverage (to average assets)
Southwest 118,955 8.99 N/A N/A 52,933 4.00
Stillwater National 115,271 8.72 66,015 5.00 52,812 4.00
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by Stillwater National in any calendar year exceeds the
total of its net profits of that year combined with its retained net profits of
the preceding two years. In addition, Stillwater National may not pay a dividend
if, after paying the dividend,
42
Stillwater National would be under capitalized. Stillwater National's maximum
amount of dividends available for payment totaled approximately $25.9 million at
December 31, 2003. Dividends declared by Stillwater National for the years ended
December 31, 2003, 2002, and 2001 did not exceed the threshold requiring
regulatory approval.
The same dividend restrictions apply to SNB Wichita with approval required
from the Office of Thrift Supervision. SNB Wichita had zero dividends available
for payment at December 31, 2003.
10. EMPLOYEE BENEFITS
Southwest sponsors a noncontributory, defined contribution profit sharing
plan intended to provide retirement benefits for employees of Southwest. The
plan covers all employees who have completed one year of service and have
attained the age of 21. The plan is subject to the Employee Retirement Income
Security Act of 1974, as amended. Company contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not
exceed 15% of the total annual compensation of all participants. Southwest made
contributions of $1.4 million, $1.1 million, and $1.0 million in 2003, 2002, and
2001, respectively.
11. OPERATING LEASES
Southwest leases certain equipment and facilities for its operations.
Future minimum annual rental payments required under operating leases, net of
sublease agreements, that have initial or remaining lease terms in excess of one
year as of December 31, 2003 follow:
2004 $1,255,172
2005 1,190,158
2006 1,085,755
2007 826,017
2008 703,052
Thereafter 1,750,403
The total rental expense was $1.3 million, $1.1 million, and $1.0 million
in 2003, 2002, and 2001, respectively.
12. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by Southwest using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
Southwest could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - The fair value of U.S. Government and agency
obligations, other securities and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
LOANS - Fair values are estimated for certain homogeneous categories of
loans adjusted for differences in loan characteristics. Southwest's loans have
been aggregated by categories consisting of commercial, real estate, student,
and other consumer. The fair value of loans is estimated by discounting the cash
flows using credit and interest rate risks inherent in the loan category and
interest rates currently offered for loans with similar terms and credit risks.
ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable estimate
of fair value for accrued interest receivable.
DEPOSITS - The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the statement
of financial condition date. The fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
OTHER BORROWINGS - The fair values of other borrowings are the amounts
payable at the statement of financial condition date, as the carrying amount is
a reasonable estimate of fair value. Included in other borrowings are federal
funds purchased, securities sold under agreements to repurchase, and treasury
tax and loan demand notes.
SUBORDINATED DEBENTURES - The fair value of the Subordinated Debentures is
estimated based on quoted market prices or dealer quotes.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
43
The carrying values and estimated fair values of Southwest's financial
instruments follow:
At December 31, 2003 At December 31, 2002
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Values Values Values Values
----------------------------- -----------------------------
(dollars in thousands)
Cash and cash equivalents $ 33,981 $ 33,981 $ 34,847 $ 34,847
Investment securities:
Held to maturity 15,916 16,144 31,154 32,000
Available for sale 177,074 177,074 148,476 148,476
FRB and FHLB stock 11,276 11,276 9,059 9,059
Total loans 1,292,988 1,297,256 1,089,224 1,092,325
Accrued interest receivable 11,321 11,321 9,283 9,283
Deposits 1,204,125 1,214,780 1,021,757 1,028,689
Accrued interest payable 3,375 3,375 4,498 4,498
Other liabilities 4,410 4,410 2,858 2,858
Short-term borrowings 183,850 183,850 199,282 199,282
Subordinated Debentures 72,180 72,953 25,787 25,952
Commitments - - - -
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Southwest makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with generally accepted accounting principles, these
transactions are not presented in the accompanying consolidated financial
statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial
and real estate mortgage credit, standby and commercial letters of credit and
available credit card lines of credit.
The following table provides a summary of Southwest's off-balance sheet
financial instruments:
At December 31,
------------------------------
2003 2002
------------------------------
(dollars in thousands)
Commitments to extend commercial and real estate mortgage credit $475,451 $413,098
Standby and commercial letters of credit 7,151 5,670
- --------------------------------------------------------------------------------------------------
Total $482,602 $418,768
- --------------------------------------------------------------------------------------------------
A loan commitment is a binding contract to lend up to a maximum amount for
a specified period of time provided there is no violation of any financial,
economic or other terms of the contract. A standby letter of credit obligates
Southwest to honor a financial commitment to a third party should Southwest's
customer fail to perform. Many loan commitments and most standby letters of
credit expire unfunded, and, therefore, total commitments do not represent
future funding obligations of Southwest. Loan commitments and letters of credit
are made under normal credit terms, including interest rates and collateral
prevailing at the time, and usually require the payment of a fee by the
customer. Commercial letters of credit are commitments generally issued to
finance the movement of goods between buyers and sellers. Southwest's exposure
to credit loss, assuming commitments are funded, in the event of nonperformance
by the other party to the financial instrument is represented by the contractual
amount of those instruments. Southwest does not anticipate any material losses
as a result of the commitments.
44
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Southwest is at all times subject to
various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and threatened
actions with counsel, management considers that the outcome of such actions will
not have a material adverse effect on Southwest's financial position; however,
Southwest is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular
future period as the timing and amount of any resolution of such actions and
relationship to the future results of operations are not known.
At periodic intervals, the Federal Reserve Bank, the Office of the
Comptroller of the Currency , and the Office of Thrift Supervision routinely
examine Southwest's, Stillwater National's, and SNB Wichita's financial
statements as part of their legally prescribed oversight of the banking
industry. Based on these examinations, the regulators can direct that
Southwest's, Stillwater National's, and SNB Wichita's financial statements be
adjusted in accordance with their findings.
Southwest has adopted a Severance Compensation Plan (the "Plan") for the
benefit of certain officers and key members of management. The Plan's purpose is
to protect and retain certain qualified employees in the event of a change in
control (as defined) and to reward those qualified employees for loyal service
to Southwest by providing severance compensation to them upon their involuntary
termination of employment after a change in control of Southwest. At December
31, 2003, Southwest has not recorded any amounts in the consolidated financial
statements relating to the Plan. If a change of control were to occur, the
maximum amount payable to certain officers and key members of management would
approximate $1.3 million.
15. SUPPLEMENTAL CASH FLOWS INFORMATION
For the Years Ended December 31,
---------------------------------
2003 2002 2001
---------------------------------
(dollars in thousands)
Cash paid for interest $29,734 $29,662 $52,574
Cash paid for taxes on income 8,681 6,600 4,650
Loans transferred to other real estate owned 2,920 937 362
16. OPERATING SEGMENTS
Southwest operates three principal segments: Oklahoma banking, Other states
banking, and loans originated for sale in the secondary market ("Secondary
market"). The Oklahoma banking segment consists of three operating units that
provide lending and deposit services to customers in the state of Oklahoma. The
Other states banking segment consists of two operating units that provide
lending and deposit services to customers in the states of Texas and Kansas. The
Secondary market segment consists of two operating units that provide
government-guaranteed student lending services to post-secondary students in
Oklahoma and several other states and residential mortgage lending services to
customers in Oklahoma, Texas, and Kansas. Southwest's fund management unit is
included in Other operations. The primary purpose of this unit is to manage
Southwest's overall liquidity needs and interest rate risk. Each segment borrows
funds from and provides funds to the funds management unit as needed to support
their operations.
Southwest identifies reportable segments by type of service provided and
geographic location. Operating results are adjusted for intercompany loan
participations and borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of
Southwest as described in Footnote 1. Expenses for consolidated back-office
operations are allocated to operating segments based on estimated uses of those
services. General overhead expenses such as executive administration, accounting
and internal audit are allocated based on the direct expense and/or deposit and
loan volumes of the operating segment. Income tax expense for the operating
segments is calculated essentially at the statutory rate. The parent company
records the tax expense or benefit necessary to reconcile to the consolidated
unit.
45
The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2001
---------------------------------------------------------------
Oklahoma Other States Secondary Other Total
Banking Banking Market Operations Company
---------------------------------------------------------------
(Dollars in thousands)
Net interest income $ 35,329 $ -- $ 3,751 $ 2,381 $ 41,461
Provision for loan losses 3,873 -- -- 127 4,000
Other income 5,058 -- 2,752 3,003 10,813
Other expenses 24,663 -- 2,889 3,613 31,165
- -------------------------------------------------------------------------------------------------
Income before taxes 11,851 -- 3,614 1,644 17,109
Taxes on income 3,817 -- 1,270 270 5,357
- -------------------------------------------------------------------------------------------------
Net income $ 8,034 -- $ 2,344 $ 1,374 $ 11,752
=================================================================================================
Fixed asset expenditures $ 1,967 $ -- $ 13 $ 660 $ 2,640
Total assets at period end 828,441 -- 103,327 339,513 1,271,281
For the Year Ended December 31, 2002
---------------------------------------------------------------
Oklahoma Other States Secondary Other Total
Banking Banking Market Operations Company
---------------------------------------------------------------
(Dollars in thousands)
Net interest income $ 40,141 $ 283 $ 4,763 $ 630 $ 45,817
Provision for loan losses 4,684 76 -- 683 5,443
Other income 5,840 -- 3,187 3,691 12,718
Other expenses 25,497 440 3,320 4,062 33,319
- -------------------------------------------------------------------------------------------------
Income before taxes 15,800 (233) 4,630 (424) 19,773
Taxes on income 5,192 (76) 1,646 (408) 6,354
- -------------------------------------------------------------------------------------------------
Net income $ 10,608 (157) $ 2,984 $ (16) $ 13,419
=================================================================================================
Fixed asset expenditures $ 825 $ 211 $ 3 $ 1,322 $ 2,361
Total assets at period end 889,965 92,498 134,556 233,535 1,350,554
For the Year Ended December 31, 2003
---------------------------------------------------------------
Oklahoma Other States Secondary Other Total
Banking Banking Market Operations Company
---------------------------------------------------------------
(Dollars in thousands)
Net interest income $ 41,997 $ 8,475 $ 9,679 $ (4,663) $ 55,468
Provision for loan losses 6,271 2,251 -- -- 8,522
Other income 6,642 408 4,206 3,244 14,500
Other expenses 25,617 3,880 5,085 3,866 38,448
- -------------------------------------------------------------------------------------------------
Income before taxes 16,731 2,752 8,800 (5,285) 22,998
Taxes on income 6,040 936 3,240 (2,110) 8,106
- -------------------------------------------------------------------------------------------------
Net income $ 10,691 1,816 $ 5,560 $ (3,175) $ 14,892
=================================================================================================
Fixed asset expenditures $ 538 $ 1,548 $ 89 $ 1,348 $ 3,523
Total assets at period end 878,627 230,977 220,346 250,775 1,580,725
46
17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Following are the condensed financial statements of Southwest Bancorp, Inc.
("Parent Company only") for the periods indicated:
At December 31,
---------------------------
2003 2002
---------------------------
(dollars in thousands)
STATEMENTS OF FINANCIAL CONDITION
ASSETS:
Cash and due from banks $ 28,209 $ 1,290
Investment in subsidiary bank 140,475 117,984
Investments in other subsidiaries 8,001 774
Investment securities, available for sale 2,875 906
Loans, net of allowance for loan losses of $0 (2003) and $0 151 93
(2002)
Other assets 5,467 2,196
- ----------------------------------------------------------------------------------------
Total $185,178 $123,243
- ----------------------------------------------------------------------------------------
LIABILITIES:
Subordinated debentures $ 72,180 $ 25,787
Other liabilities 3,063 1,084
SHAREHOLDERS' EQUITY:
Common stock and related accounts 109,935 96,372
- ----------------------------------------------------------------------------------------
Total $185,178 $123,243
- ----------------------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
----------------------------------------
(dollars in thousands)
STATEMENTS OF OPERATIONS
INCOME:
Cash dividends from subsidiaries $ 3,893 $ 4,472 $ 3,872
Other income 1,023 375 -
Investment income 133 43 51
Interest and fees on loans 15 (7) -
Security gains (losses) - 1 6
- ----------------------------------------------------------------------------------------------
Total income 5,064 4,884 3,929
EXPENSE:
Interest on subordinated debentures 3,079 2,398 2,398
Provision for loan losses - 146 -
Other expense 2,015 957 456
- ----------------------------------------------------------------------------------------------
Total expense 5,094 3,501 2,854
- ---------------------------------------------------------------------------------------------
Total income (loss) before taxes and equity in
undistributed income of subsidiaries (30) 1,383 1,075
Taxes on income (1,488) (1,137) (1,030)
- ----------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 1,458 2,520 2,105
Equity in undistributed income of subsidiaries 13,434 10,899 9,647
- ----------------------------------------------------------------------------------------------
Net income $14,892 $13,419 $11,752
- ----------------------------------------------------------------------------------------------
47
For the Years Ended December 31,
---------------------------------------------------
2003 2002 2001
---------------------------------------------------
(dollars in thousands)
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income $ 14,892 $ 13,419 $ 11,752
Equity in undistributed income of subsidiaries (13,434) (10,899) (9,647)
Provision for loan losses - 146 -
Other, net 47 (40) 72
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,505 2,626 2,177
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (2,900) (400) (1,774)
Sales - - 399
Maturities 900 409 893
Loans originated and principal repayments, net (58) (239) -
Capital contribution to Bank (11,000) - (399)
Capital contribution to other subsidiaries (7,393) - -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (20,451) (230) (881)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings - - (223)
Net proceeds from issuance of common stock 2,318 1,509 597
Proceeds from issuance of subordinated debentures 46,393 - -
Purchases of treasury stock - (1,245) (647)
Cash dividends paid on common stock (2,846) (2,353) (1,787)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 45,865 (2,089) (2,060)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 26,919 307 (764)
Cash and cash equivalents,
Beginning of year 1,290 983 1,747
- ---------------------------------------------------------------------------------------------------------
End of year $ 28,209 $ 1,290 $ 983
- ---------------------------------------------------------------------------------------------------------
48
BOARD OF DIRECTORS OF SOUTHWEST
BANCORP, INC. AND STILLWATER NATIONAL
BANK & TRUST COMPANY
Robert B. Rodgers
Chairman of the Board
Owner, Bob Rodgers Motors LLC
Rick Green
Vice Chairman of the Board
President and Chief Executive
Officer, Southwest and Stillwater National
James E. Berry II
Owner, Shading Concepts
Tom D. Berry
Auctioneer, Real Estate Broker,
Oil & Gas Exploration, Investments
Joe Berry Cannon
Professor of Management,
Oral Roberts University
School of Business
John Cohlmia *
Vice President, NAI Harrison Levy Company
J. Berry Harrison
Oklahoma State Senator and Rancher
Erd M. Johnson
Petroleum Engineer &
Operating Partner, Johnson
Oil Partnership
Betty B. Kerns
Owner, Betty Kerns &
Associates
David P. Lambert
President, Lambert
Construction Company
Linford R. Pitts
President, Stillwater Transfer & Storage Co.
Russell W. Teubner
Founder, Host Bridge Technology
*Director of Stillwater National Bank & Trust Company only
BOARD OF DIRECTORS OF SNB BANK OF WICHITA
Robert B. Rodgers
Chairman of the Board
President, Bob Rodgers Motor Company
Rick Green
Vice Chairman of the Board
President and Chief Executive Officer,
Southwest and Stillwater National
Kerby E. Crowell, CPA
Executive Vice President and
Chief Financial Officer, Southwest
and Stillwater National
John M. Frazee
President, SNB Bank of Wichita
Anthony W. Martin
Owner, Martin & Frankenberry D.D.S.P.N.
OFFICERS OF SOUTHWEST BANCORP, INC.
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and
Chief Financial Officer
Kay W. Smith
Senior Vice President and
Comptroller
SENIOR MANAGEMENT OF STILLWATER NATIONAL BANK & TRUST COMPANY
Rick Green
President and Chief Executive Officer
Kerby E. Crowell, CPA
Executive Vice President and
Chief Financial Officer
Jerry Lanier
Executive Vice President and
Chief Lending Officer
Kimberly G. Sinclair
Executive Vice President and Chief Administrative Officer
Chuck Westerheide
Executive Vice President
and Treasurer
Steve Gobel
Executive Vice President
Rex E. Horning
President, Stillwater Division
Leonard M. McLaughlin
President, Texas Division
Joseph P. Root
President, Central Oklahoma Division
Melanie Pitchford
Vice President, Human Resources
SENIOR MANAGEMENT OF SNB BANK OF WICHITA
John M. Frazee
President
INDEPENDENT AUDITORS
Ernst & Young LLP
2121 San Jacinto Street
Dallas, TX 75201
SPECIAL COUNSEL
Kennedy, Baris & Lundy, L.L.P.
4701 Sangamore Road
Suite P-15
Bethesda, MD 20816
GENERAL COUNSEL
Hert, Baker & Koemel
222 E. 7th Avenue
Stillwater, OK 74074
TRANSFER AGENTS AND REGISTRARS
Common Stock-OKSB
Computershare Investor Services, LLC
2 North LaSalle St.
Chicago, IL 60602
Trust Preferred Securities-OKSBO
U.S. Bank
Corporate Trust Services
P.O. Box 778 Boston, MA 02102-0778
ANNUAL MEETING
The 2004 Annual Meeting of
Shareholders will be held on
April 22, 2004 at 11:00 a.m. in the
Auditorium (Room 215) at the
Stillwater Public Library, 1107 S.
Duck, Stillwater, Oklahoma.
ANNUAL REPORT ON FORM 10-K:
Copies of Southwest's Annual Report
on Form 10-K for the fiscal year ended
December 31, 2003, as filed with the
Securities and Exchange Commission,
may be obtained by shareholders as of
the record date for the Annual Meeting
at no charge by writing to Kerby E.
Crowell, Chief Financial Officer,
Southwest Bancorp, Inc., P.O. Box
1988, Stillwater, Oklahoma 74076 and
are available via the Internet at
www.oksb.com.
49
SOUTHWEST BANCORP, INC. CORPORATE HEADQUARTERS
P.O. Box 1988 608 S. Main Street
Stillwater, Oklahoma 74076
405-372-2230
STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS
CORPORATE HEADQUARTERS DRIVE-IN FACILITY WATERFORD BRANCH
P.O. Box 1988 P.O. Box 1988 6301 Waterford Blvd., Suite 101
608 S. Main Street 308 S. Main Street Oklahoma City, Oklahoma 73118
Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74076 405-427-4000
405-372-2230 405-372-2230
CHICKASHA BRANCH TULSA UTICA BRANCH TULSA 61ST BRANCH
500 W. Grand Avenue P.O. Box 521500 P.O. Box 521500
Chickasha, Oklahoma 73018 1500 S. Utica Avenue 2431 E. 61st, Suite 170
405-427-4800 Tulsa, Oklahoma 74152 Tulsa, Oklahoma 74152
918-523-3600 918-523-3600
TEXAS BRANCH OPERATIONS CENTER OSU CAMPUS BRANCH BANK
5300 Town and Country Blvd. P.O. Box 1988 P.O. Box 1988
Suite 100 1624 Cimarron Plaza 1102 W. Hall of Fame Avenue
Frisco, Texas 75034 Stillwater, Oklahoma 74076 Stillwater, Oklahoma 74074
972-624-2900 405-372-2230 405-372-2230
OSU-TULSA LOAN OFFICE OUHSC LOAN OFFICE OSU-STILLWATER MARKETING OFFICE
North Hall 1106 N. Stonewall P.O. Box 1988
700 N. Greenwood Avenue Oklahoma City, Student Union, Room 150
Tulsa, Oklahoma 74106 Oklahoma 73190 Stillwater, Oklahoma 74076
918-594-8581 405-271-3113 405-744-5961
WEBSITE ADDRESSES SNB BANK OF WICHITA
Stillwater National Bank & Trust Company: www.banksnb.com LOCATION
Texas Division, Stillwater National: www.snbdallas.com 8415 E. 21st Street North
SNB Bank of Wichita: www.snbwichita.com Suite 150
Southwest Bancorp, Inc.: www.oksb.com Wichita Kansas 67206
316-315-1600
STOCK INFORMATION
NASDAQ National Market Symbols: Common Stock - OKSB
Trust Preferred Securities - OKSBO
Number of common shareholders of record at February 27, 2004: 1,800
The following table sets forth the common stock dividends declared for each
quarter during 2003 and 2002 and the range of high and low closing trade prices
for the common stock for those periods.
2003 2002
----------------------------------------------------------------------
Dividend Dividend
High Low Declared High Low Declared
----------------------------------------------------------------------
For the Quarter Ending:
March 31 $13.36 $11.07 $0.063 $10.25 $ 8.81 $0.055
June 30 13.71 11.18 0.063 13.62 10.08 0.055
September 30 17.83 13.63 0.063 13.51 11.90 0.055
December 31 18.91 14.37 0.063 13.49 10.52 0.055
50