FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2005
Commission File Number 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1136584
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
608 SOUTH MAIN STREET, STILLWATER, OKLAHOMA 74074
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (405) 372-2230
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO*
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by a check mark if the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
The registrant's Common Stock is traded on the NASDAQ National Market under the
symbol OKSB. The aggregate market value of approximately 13,035,316 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
June 30, 2005, the last day of the registrant's most recently completed second
fiscal quarter, was approximately $267.0 million based on the closing sales
price of $20.48 per share of the registrant's Common Stock on that date. Solely
for purposes of this calculation, it is assumed that directors, officers, and 5%
stockholders of the registrant (other than institutional investors) are
affiliates.
As of the close of business on March 3, 2006, 14,110,382 shares of the
registrant's Common Stock were outstanding.
Documents Incorporated by Reference
Part III: Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 27, 2006 (the "Proxy Statement").
* The registrant is required to file reports pursuant to Section 13 of the Act.
SOUTHWEST BANCORP, INC.
INDEX
Forward-Looking Statements ................................................ii
Form 10-K Cross Reference Sheet ...........................................ii
Southwest Bancorp, Inc. ...................................................iv
About This Report .........................................................iv
Five Year Summary of Selected Financial Data .............................. 1
Securities Listing, Prices, and Dividends ................................. 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 4
Controls and Procedures ...................................................23
Reports of Independent Registered Public Accounting Firm ..................24
Consolidated Financial Statements .........................................26
Notes to the Consolidated Financial Statements ............................31
Other Material Required by Form 10-K ......................................57
Description of Business ...............................................57
Board of Directors ....................................................69
Executive Officers ....................................................70
Risk Factors ..........................................................74
Properties ............................................................80
Exhibits, Financial Statement Schedules ...............................82
Signatures ............................................................84
i
FORWARD-LOOKING STATEMENTS
Southwest Bancorp, Inc. ("Southwest") makes forward-looking statements in this
Annual Report on Form 10-K that are subject to risks and uncertainties. These
forward-looking statements include: statements of Southwest's goals, intentions,
and expectations; estimates of risks and of future costs and benefits;
expectations regarding future financial performance of Southwest and its
operating segments; assessments of loan quality, probable loan losses, and the
amount and timing of loan payoffs; liquidity, contractual obligations,
off-balance sheet risk, and market, or interest rate risk; and statements of
Southwest's ability to achieve financial and other goals. These forward-looking
statements are subject to significant uncertainties because they are based upon:
the amount and timing of future changes in interest rates, market behavior, and
other economic conditions; future laws, regulations and accounting principles;
and a variety of other matters. Because of these uncertainties, the actual
future results may be materially different from the results indicated by these
forward-looking statements. In addition, Southwest's past growth and performance
do not necessarily indicate its future results. Please see the discussion of
Risk Factors on page 74 and Critical Accounting Policies on page 21.
SOUTHWEST BANCORP, INC.
FORM 10-K CROSS REFERENCE SHEET OF MATERIAL INCORPORATED BY REFERENCE
The following table shows the location in this Annual Report on Form 10-K or the
accompanying Proxy Statement of the information required to be disclosed by the
United States Securities and Exchange Commission ("SEC") Form 10-K. Where
indicated below, information has been incorporated by reference in this Report
from the Proxy Statement that accompanies it. Other portions of the Proxy
Statement are not included in this Report. This Report is not part of the Proxy
Statement. References are to pages in this report unless otherwise indicated.
ITEM OF FORM 10-K LOCATION
--------------------------------------------- ---------------------------------------------------
PART I
Item 1. Business "Forward-Looking Statements: on page ii,
"Southwest Bancorp, Inc." and "About this Report"
on page iv, and "Business" on pages 57 through 73.
Item 1A. Risk Factors "Risk Factors" on pages 74 through 78
Item 1B. Unresolved Staff Comments Not applicable. The registrant did not receive any
comments from the staff of the Securities and
Exchange Commission regarding its periodic or
current reports within the last 180 days of 2005.
Item 2. Properties "Properties" on page 80.
Item 3. Legal Proceedings Note 14 "Commitments and Contingencies" on
page 50.
Item 4. Submission of Matters to a Vote of Holders Not applicable. No matter was submitted to a
Security vote of security holders during the
fourth quarter of 2005.
PART II
Item 5. Market for Registrant's Common Equity, "Securities Listing, Prices, and Dividends"
Related Stockholder Matters, and on pages 2 and 3.
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data "Five Year Summary of Selected Financial Data" on
pages 1 and 2.
ii
ITEM OF FORM 10-K LOCATION
--------------------------------------------- ---------------------------------------------------
Item 7. Management's Discussion and Analysis "Management's Discussion and Analysis of
Of Financial Condition and Results of Financial Condition and Results of Operations" on
Condition pages 4 through 22.
Item 7A. Quantitative and Qualitative Disclosures The section titled "Asset/Liability Management
About Market Risk Quantitative and Qualitative Disclosures about
Market Risk" on pages 18 thru 20.
Item 8. Financial Statements and Supplementary Pages 26 through 56.
Data
Item 9. Changes in and Disagreements with Not applicable. During the past two years or any
Auditors on Accounting and Financial subsequent period there has been no change in or
Disclosure reportable disagreement with the independent
registered public accounting firm for Southwest or
any of its subsidiaries.
Item 9A. Controls and Procedures "Controls and Procedures" on page 23.
Item 9B. Other Information Not applicable. The registrant reported all items
required to be reported in a Form 8-K during the
fourth quarter of 2005.
PART III
Item 10. Directors and Executive Officers of the The material labeled "Election of Directors" on
registrant pages 2 through 5 of the Proxy Statement, "Section
16(a) Beneficial Ownership Reporting Compliance"
on page 17 of the Proxy Statement, and "Code of
Ethics" on page 19 of the Proxy Statement is
incorporated by reference in this Report.
Information regarding executive officers is
included under the caption "Executive Officers" on
pages 70 through 73 of this Report.
Item 11. Executive Compensation The material labeled "Director Compensation" on
page 8 and the material labeled "Executive
Compensation and Other Benefits," and "Stock
Performance Comparisons" on pages 11 through 16 of
the Proxy Statement is incorporated by reference
in this Report.
Item 12. Security Ownership of Certain The material labeled "Common Stock Owned by
Beneficial Owners and Management and Directors and Executive Officers" and "Ownership
Related Shareholder Matters of More than 5% of Southwest's Common Stock"
on pages 9 and 10 of the Proxy Statement is
incorporated by reference in this Report.
Item 13. Certain Relationships and Related The material labeled "Certain Transactions" on
Transactions page 17 of the Proxy Statement is incorporated
by reference in this Report.
Item 14. Principal Accounting Fees and Services The material labeled "Fees" on pages 17 and 18 of
the Proxy Statement incorporated by reference in
this Report.
PART IV
Item 15. Exhibits, Financial Statement Schedules "Exhibits, Financial Statement Schedules" on pages
82 and 83.
SIGNATURES "Signatures" on page 84
iii
SOUTHWEST BANCORP, INC.
Southwest Bancorp, Inc. ("Southwest") is the financial holding company for the
Stillwater National Bank and Trust Company ("Stillwater National"), SNB Bank of
Wichita ("SNB Wichita"), Business Consulting Group, Inc. ("BCG"), and Healthcare
Strategic Support, Inc. ("HSSI"). Through its subsidiaries, Southwest offers
commercial and consumer lending, deposit and investment services, and
specialized cash management, consulting and other financial services from
offices in Oklahoma City, Stillwater, Tulsa, and Chickasha, Oklahoma; Austin,
Dallas and San Antonio, Texas; and Kansas City and Wichita, Kansas, and on the
Internet, through SNB DirectBanker(R).
Southwest's strategic focus includes expansion in carefully selected geographic
markets based upon a tested business model developed in connection with its
expansion into Oklahoma City in 1982, Tulsa in 1985 and Dallas, Texas and
Wichita, Kansas in 2002. This geographic expansion is based on identification of
markets with concentrations of customers in Southwest's traditional areas of
expertise: healthcare and health professionals, businesses and their managers
and owners, and commercial and commercial real estate lending, and makes use of
traditional and specialized financial services.
Southwest's banking philosophy has led to the development of a line of deposit,
lending, and other financial products that respond to professional and
commercial customer needs for speed, efficiency, and information, and complement
more traditional banking products. Such specialized financial services include
integrated document imaging and cash management services designed to help
customers in the healthcare industry and other record-intensive enterprises
operate more efficiently.
Southwest seeks to build close relationships with businesses, professionals and
their principals and to service their banking needs throughout their business
development and professional lives.
Southwest was organized in 1981 as the holding company for Stillwater National,
which was chartered in 1894. Southwest became a public company in late 1993 with
assets of approximately $434.0 million. At December 31, 2005, Southwest had
total assets of $2.1 billion, deposits of $1.7 billion, and shareholders' equity
of $170.4 million.
ABOUT THIS REPORT
This report comprises the entire 2005 Form 10-K, other than exhibits, as filed
with the SEC. The 2005 annual report to shareholders, including this report, and
the annual proxy materials for the 2006 annual meeting are being distributed
together to shareholders. Copies of exhibits and additional copies of the Form
10-K can be obtained free of charge by writing to Kerby E. Crowell, Chief
Financial Officer, Southwest Bancorp, Inc., P.O. Box 1988, Stillwater, OK 74076.
This report is provided along with the annual proxy statement for convenience of
use and to decrease costs, but is not part of the proxy materials.
THE SEC HAS NOT APPROVED OR DISAPPROVED THIS REPORT OR PASSED UPON ITS ACCURACY
OR ADEQUACY.
iv
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table presents Southwest's selected consolidated financial data
for each of the five years in the period ended December 31, 2005. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of Southwest, including the accompanying Notes, presented
elsewhere in this report.
For the Year Ended December 31,
-----------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003 2002 2001
- -------------------------------------------------- -----------------------------------------------------------------------------
OPERATIONS DATA
Interest income $ 137,344 $ 104,723 $ 84,079 $ 76,495 $ 90,400
Interest expense 52,238 32,246 28,611 30,678 48,939
------------- ------------- ------------- ------------- -------------
Net interest income 85,106 72,477 55,468 45,817 41,461
Provision for loan losses 15,785 12,868 8,408 5,233 4,073
Gain on sales of loans and securities 4,915 3,185 4,139 3,498 3,346
Other income 12,491 10,900 10,361 9,220 7,467
Other expenses 51,873 44,526 38,562 33,529 31,092
------------- ------------- ------------- ------------- -------------
Income before taxes 34,854 29,168 22,998 19,773 17,109
Taxes on income 13,840 10,539 8,106 6,354 5,357
------------- ------------- ------------- ------------- -------------
Net income $ 21,014 $ 18,629 $ 14,892 $ 13,419 $ 11,752
============= ============= ============= ============= =============
DIVIDENDS DECLARED
Common stock $ 4,035 $ 3,380 $ 2,959 $ 2,533 $ 1,826
Ratio of total dividends declared to net income 19.20% 18.14% 19.87% 18.87% 15.52%
PER SHARE DATA (1)
Basic earnings per common share $ 1.60 $ 1.54 $ 1.26 $ 1.17 $ 1.03
Diluted earnings per common share 1.55 1.48 1.22 1.11 1.00
Common stock cash dividends 0.30 0.28 0.25 0.22 0.16
Book value per common share (2) 12.16 10.41 9.20 8.35 7.47
Weighted average common shares outstanding:
Basic 13,165,642 12,060,842 11,798,810 11,490,166 11,386,258
Diluted 13,563,904 12,548,059 12,159,620 12,052,118 11,728,844
FINANCIAL CONDITION DATA (2)
Investment securities $ 268,093 $ 220,051 $ 204,266 $ 188,689 $ 227,346
Total loans (3) 1,735,880 1,623,875 1,308,836 1,101,112 931,046
Interest-earning assets 2,006,578 1,845,401 1,514,314 1,292,232 1,160,478
Total assets 2,099,639 1,913,787 1,581,564 1,351,279 1,217,796
Interest-bearing deposits 1,433,265 1,316,320 1,036,793 885,812 777,600
Total deposits 1,657,820 1,500,058 1,204,125 1,021,757 904,796
Other borrowings 204,508 200,065 183,850 199,282 195,367
Subordinated debentures 46,393 72,180 72,180 25,787 25,787
Total shareholders' equity (4) 170,444 125,984 109,935 96,372 85,125
Mortgage servicing portfolio 133,470 125,353 124,366 107,733 91,120
SELECTED RATIOS
Return on average assets 1.01% 1.03% 0.99% 1.05% 0.96%
Return on average equity 13.78 15.80 14.59 14.94 14.87
Net interest margin 4.29 4.16 3.80 3.75 3.53
Efficiency ratio (5) 50.60 51.44 55.11 57.28 59.48
Average assets per employee (6) $ 5,448 $ 5,098 $ 4,513 $ 3,938 $ 3,919
1
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31,
-----------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003 2002 2001
- -------------------------------------------------- -----------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans (2) 1.37% 1.17% 1.15% 1.01% 1.18%
Nonperforming loans to total loans (2)(7) 1.36 1.43 1.22 1.17 0.99
Allowance for loan losses to nonperforming 100.96 82.00 94.31 86.49 118.98
loans (2)(7)
Nonperforming assets to total loans and other real
estate owned (2)(8) 1.76 1.72 1.34 1.24 1.06
Net loan charge-offs to average total loans 0.63 0.58 0.36 0.50 0.49
CAPITAL RATIOS
Average total shareholders' equity to average
assets 7.34 6.51 6.75 7.04 6.44
Tier I capital to risk-weighted assets (2) 12.95 10.88 11.13 10.38 11.15
Total capital to risk-weighted assets (2) 14.21 13.92 14.90 11.42 12.34
Leverage ratio (2) 10.24 8.61 9.32 8.99 8.84
(1) Except as otherwise noted, all share and per share information in this
report has been restated to reflect the three-for-two stock split effected
in the form of a stock dividend paid August 29, 2001, and the two-for-one
stock split effected in the form of a stock dividend paid August 29, 2003.
(2) At period end.
(3) Net of unearned discounts but before deduction of allowance for loan
losses.
(4) Reflects the repurchases of common shares in 2001, 2002 and 2005. Please
see Note 8 to the Consolidated Financial Statements.
(5) The efficiency ratio = other expenses/(net interest income + total other
income) as shown on the Consolidated Statements of Operations. This ratio
has not been adjusted to remove any income or expense recorded under
accounting principles generally accepted in the United States.
(6) Ratio = year-to-date average assets divided by the number of full-time
equivalent employees at year-end.
(7) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with
restructured terms.
(8) Nonperforming assets consist of nonperforming loans and foreclosed assets.
SECURITIES LISTING, PRICES, AND DIVIDENDS
STOCK LISTING
Common shares of Southwest Bancorp, Inc. are traded on the National Association
of Security Dealers (NASDAQ) National Market under the symbol OKSB.
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services, LLC
2 North LaSalle St.
Chicago, IL 60602
2
RECENT STOCK PRICES AND DIVIDENDS
Shareholders received quarterly cash dividends totaling $3.8 million in 2005 and
$3.3 million in 2004. Regular dividends have been declared and paid every year
since Southwest was organized in 1981. Southwest has increased its dividends per
share each year since going public in 1993.
The dividend amount is established by the Board of Directors each quarter. In
making its decision on dividends, the Board considers operating results,
financial condition, capital adequacy, regulatory requirements, shareholder
returns, and other factors. The ability of Southwest to pay dividends depends
upon dividend payments from its subsidiaries. For information regarding the
ability of Stillwater National and SNB Wichita to pay dividends to Southwest and
the restrictions on bank dividends under federal banking laws, see "Note 9.
Capital Requirements" to the Consolidated Financial Statements on page 47 of
this report.
In June 2005, Southwest completed an offering of 2.4 million shares of common
stock resulting in net proceeds after underwriting discounts and offering
expenses of approximately $39.5 million. Stifel Nicolaus & Co., Edward Jones &
Co., Friedman Billings Ramsey, Keefe Bruyette & Woods, Inc. and SunTrust
Robinson Humphrey served as the underwriters in the offering.
Shares issued under the employee stock purchase plan, which commenced on January
1, 1996, totaled 3,530 in 2005 and 3,642 in 2004, while issuances pursuant to
the stock option plans were 174,262 and 140,726 in the respective years.
Southwest has a stock repurchase program that permits the repurchase of up to 5%
(approximately 700,000 shares) of Southwest's outstanding common stock, par
value $1.00 per share, in connection with shares expected to be issued under
Southwest's dividend reinvestment, stock option, and employee benefit plans, and
for other corporate purposes. The share repurchases are expected to be made
primarily on the open market from time to time until April 1, 2008, or earlier
termination of the repurchase program by the Board. Repurchases under the
program will be made at the discretion of management based upon market,
business, legal, and other factors. This program, which has been publicly
announced, replaced a publicly announced program that expired on March 31, 2005.
During 2005, 690,696 shares were repurchased under a selling shareholder
agreement.
As of March 3, 2006, there were approximately 3,700 holders of record of
Southwest's common stock. The following table sets forth the common stock
dividends declared for each quarter during 2005 and 2004, and the range of high
and low closing trade prices for the common stock for those periods.
2005 2004
------------------------------------ ------------------------------------
DIVIDEND Dividend
HIGH LOW DECLARED High Low Declared
---------- ---------- ---------- ---------- ---------- ----------
For the Quarter Ending:
March 31 $ 25.45 $ 17.11 $ 0.075 $ 18.94 $ 16.11 $ 0.07
June 30 20.82 16.78 0.075 18.75 15.75 0.07
September 30 23.80 20.01 0.075 22.21 17.70 0.07
December 31 24.25 18.36 0.075 27.10 21.50 0.07
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In 2005, Southwest Bancorp, Inc.'s ("Southwest") net income, diluted earnings
per share, loans, deposits, and assets reached their highest levels in our
history. The earnings growth was the result of increased yields on portfolio
loans (total loans excluding loans held for sale), loan growth, a focus on
careful management of interest margins and funding, and increased noninterest
income.
o Net income for 2005 was $21.0 million, up from $18.6 million in 2004
and $14.9 million in 2003.
o Diluted earnings per common share increased to $1.55 in 2005, compared
to $1.48 in 2004, and $1.22 in 2003.
o Total assets at year-end 2005 increased 10%, ending the year at $2.10
billion compared to $1.91 billion at year-end 2004, and $1.58 billion
at year-end 2003.
o Total loans grew to $1.74 billion at December 31, 2005, compared to
$1.62 billion at December 31, 2004, and $1.31 billion at December 31,
2003.
o Total shareholders' equity at year-end 2005 had increased 35% to
$170.4 million compared to $126.0 million for 2004 and $109.9 million
for 2003.
In late June, Southwest completed a public offering of its common stock to
provide funds for future loan growth. The difference between the percentage
growth in net income and growth in earnings per share reflects the effects of
the additional shares issued in this offering.
RESULTS OF OPERATIONS
For the year ended December 31, 2005, Southwest reported net income of $21.0
million, a $2.4 million, or 13%, increase over the $18.6 million earned in 2004.
Basic earnings per common share increased by 4% to $1.60 per share for 2005,
from $1.54 per share for 2004. Diluted earnings per common share increased by 5%
to $1.55 per share for 2005 from $1.48 per share for 2004.
Increased yields on portfolio loans and growth in total loans were the primary
factors contributing to Southwest's performance in 2005. In an increasing
interest rate environment, Southwest was able to price its loans, deposits, and
other borrowings to result in an increase in net interest margin from 4.16% in
2004 to 4.29% in 2005.
For the year ended December 31, 2004, Southwest reported net income of $18.6
million, a $3.7 million, or 25%, increase over the $14.9 million earned in 2003.
Basic earnings per common share increased by 22% to $1.54 per share for 2004,
from $1.26 per share for 2003. Diluted earnings per common share increased by
21% to $1.48 per share for 2004 from $1.22 per share for 2003.
These factors are discussed in more detail in the sections that follow.
4
SUMMARY OF ANNUAL CHANGES IN SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the years
2005, 2004, and 2003, and the annual changes between those years.
(Dollars in thousands, except per share 2005 CHANGE 2004 Change 2003 Change
data) 2005 FROM 2004 2004 From 2003 2003 From 2002
- ---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
OPERATIONS DATA
Interest income $ 137,344 $ 32,621 $ 104,723 $ 20,644 $ 84,079 $ 7,584
Interest expense 52,238 19,992 32,246 3,635 28,611 (2,067)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income 85,106 12,629 72,477 17,009 55,468 9,651
Provision for loan losses 15,785 2,917 12,868 4,460 8,408 3,175
Gain on sales of loans and securities 4,915 1,730 3,185 (954) 4,139 641
Other income 12,491 1,591 10,900 539 10,361 1,141
Other expenses 51,873 7,347 44,526 5,964 38,562 5,033
------------ ------------ ------------ ------------ ------------ ------------
Income before taxes 34,854 5,686 29,168 6,170 22,998 3,225
Taxes on income 13,840 3,301 10,539 2,433 8,106 1,752
------------ ------------ ------------ ------------ ------------ ------------
Net income $ 21,014 $ 2,385 $ 18,629 $ 3,737 $ 14,892 $ 1,473
============ ============ ============ ============ ============ ============
PER SHARE DATA
Basic earnings per common share $ 1.60 $ 0.06 $ 1.54 $ 0.28 $ 1.26 $ 0.09
Diluted earnings per common share 1.55 0.07 1.48 0.26 1.22 0.11
FINANCIAL CONDITION DATA - AVERAGES
Investment securities $ 245,086 $ 30,098 $ 214,988 $ 23,712 $ 191,276 $ (16,739)
Total loans 1,734,501 206,566 1,527,935 258,719 1,269,216 256,729
Interest-earning assets 1,983,337 239,351 1,743,986 282,402 1,461,584 238,418
Total assets 2,075,781 265,857 1,809,924 298,185 1,511,739 235,795
Interest-bearing deposits 1,433,013 252,043 1,180,970 159,655 1,021,315 159,156
Total deposits 1,638,511 283,175 1,355,336 194,960 1,160,376 179,816
Other borrowings 209,103 (43,028) 252,131 51,658 200,473 34,728
Subordinated debentures 58,686 (13,494) 72,180 30,138 42,042 16,255
Total shareholders' equity 152,454 34,542 117,912 15,866 102,046 12,201
SELECTED RATIOS
Return on average assets 1.01% (0.02)% 1.03% 0.04% 0.99% (0.06)%
Return on average equity 13.78 (2.02) 15.80 1.21 14.59 (0.35)
Net interest margin 4.29 0.13 4.16 0.36 3.80 0.05
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.37% 0.20% 1.17% 0.02% 1.15% 0.14%
Nonperforming loans to total loans 1.36 (0.07) 1.43 0.21 1.22 0.05
Allowance for loan losses to nonperforming
loans 100.96 18.96 82.00 (12.31) 94.31 7.82
Nonperforming assets to total loans and
other real estate 1.76 0.04 1.72 0.38 1.34 0.10
Net loan charge-offs to average total
loans 0.63 0.05 0.58 0.22 0.36 (0.14)
5
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
such as loans and investment securities, and interest expense on liabilities,
such as deposits and borrowings, which are used to fund those assets. Net
interest income is Southwest's largest source of revenue, representing 83% of
total revenue in 2005. Net interest margin is net interest income as a
percentage of average earning assets for the period. Net interest income and net
interest margin increase or decrease as a result of changes in the levels of
interest rates, the volume and the mix of earning assets and interest-bearing
liabilities, and the percentage of interest-earning assets funded by
noninterest-bearing funding sources.
Net interest income for 2005 was $85.1 million, an increase of $12.6 million, or
17%, from the $72.5 million earned in 2004. The net interest margin was 4.29%
for the year ended December 31, 2005, an increase of thirteen basis points from
2004.
The 2005 increase in net interest income and net interest margin from 2004 is
the result of the increase in interest-earning assets, the increase in net
interest margin due to the increasing interest rate environment experienced
during 2005, and an increased use of noninterest-bearing funding. Please see the
discussion of Asset/Liability Management and Quantitative and Qualitative
Disclosures about Market Risk on pages 18 through 20 for additional information
concerning net interest income.
The table on the next page provides certain information relating to Southwest's
average consolidated statements of financial condition and reflects the interest
income on interest-earning assets, interest expense of interest-bearing
liabilities, and the average yields earned and rates paid for the periods
indicated. Yields and rates are derived by dividing income or expense reflected
in the Consolidated Statements of Operations by the average daily balance of the
related assets or liabilities, respectively, for the periods presented.
Nonaccrual loans have been included in the average balances of total loans.
This table shows a shift in the composition of Southwest's interest-earning
assets over the periods toward a higher level of loans and a lower level of
investment securities, while the composition of interest-bearing liabilities
changed as Southwest increased noninterest-bearing deposits except for 2005 when
the percentage of investment securities increased due to the investment of
proceeds of the second quarter common stock offering and the percentage of loans
took a slight downturn. The changes in the composition of interest-earning
assets and their funding sources reflect market demand and management's efforts
to maximize net interest margin while controlling interest rate, credit and
other risks.
6
AVERAGE BALANCES, YIELDS & RATES
For the Year Ended December 31,
----------------------------------------------------------------------------------
2005 2004
---------------------------------------- ----------------------------------------
AVERAGE YIELD/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE(1) Balance Interest Rate(1)
- ----------------------------------------- ----------- ----------- -------------- ----------- ----------- --------------
ASSETS
Total loans and leases $ 1,734,501 $ 128,011 7.38% $ 1,527,935 $ 96,832 6.34%
Investment securities 245,086 9,211 3.76 214,988 7,881 3.67
Other interest-earning assets 3,750 122 3.25 1,063 10 0.94
----------- ----------- -------------- ----------- ----------- --------------
Total interest-earning assets 1,983,337 137,344 6.92 1,743,986 104,723 6.00
Other assets 92,444 65,938
----------- -----------
Total assets $ 2,075,781 $ 1,809,924
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 58,243 $ 267 0.46% $ 58,375 $ 291 0.50%
Money market accounts 392,554 10,727 2.73 405,116 6,118 1.51
Savings accounts 8,631 21 0.24 7,819 19 0.24
Time deposits 973,585 29,767 3.06 709,660 15,350 2.16
----------- ----------- -------------- ----------- ----------- --------------
Total interest-bearing deposits 1,433,013 40,782 2.85 1,180,970 21,778 1.84
Other borrowings (2) 209,103 7,343 3.51 252,131 5,979 2.37
Subordinated debentures 58,686 4,113 7.01 72,180 4,489 6.22
----------- ----------- -------------- ----------- ----------- --------------
Total interest-bearing liabilities 1,700,802 52,238 3.07 1,505,281 32,246 2.14
----------- -------------- ----------- --------------
Noninterest-bearing demand deposits 205,498 174,366
Other liabilities 17,027 12,365
Shareholders' equity 152,454 117,912
----------- -----------
Total liabilities and
shareholders' equity $ 2,075,781 $ 1,809,924
=========== ===========
Net interest income $ 85,106 $ 72,477
=========== ===========
Interest rate spread 3.85% 3.86%
============== ==============
Net interest margin (3) 4.29% 4.16%
============== ==============
Ratio of average interest-
earning assets to average
interest-bearing liabilities 116.61% 115.86%
============== ==============
For the Year Ended December 31,
----------------------------------------
2003
----------------------------------------
AVERAGE YIELD/
(Dollars in thousands) BALANCE INTEREST RATE(1)
- ----------------------------------------- ----------- ----------- --------------
ASSETS
Total loans and leases $ 1,269,216 $ 76,115 6.00%
Investment securities 191,276 7,954 4.16
Other interest-earning assets 1,092 10 0.92
----------- ----------- --------------
Total interest-earning assets 1,461,584 84,079 5.75
Other assets 50,155
-----------
Total assets $ 1,511,739
===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 56,011 $ 355 0.63%
Money market accounts 336,274 5,237 1.56
Savings accounts 6,608 17 0.26
Time deposits 622,422 15,036 2.42
----------- ----------- --------------
Total interest-bearing deposits 1,021,315 20,645 2.02
Other borrowings (2) 200,473 4,887 2.44
Subordinated debentures 42,042 3,079 7.22
----------- ----------- --------------
Total interest-bearing liabilities 1,263,830 28,611 2.26
----------- --------------
Noninterest-bearing demand deposits 139,061
Other liabilities 6,802
Shareholders' equity 102,046
-----------
Total liabilities and
shareholders' equity $ 1,511,739
===========
Net interest income $ 55,468
===========
Interest rate spread 3.49%
==============
Net interest margin (3) 3.80%
==============
Ratio of average interest-
earning assets to average
interest-bearing liabilities 115.65%
==============
(1) Yields, interest rate spreads, and net interest margins are calculated
using income recorded in accordance with accounting principles generally
accepted in the United States ("GAAP"), and are not shown on the higher,
non-GAAP tax-equivalent basis.
(2) The fluctuation in other borrowings resulted mainly from changes in Federal
Home Loan Bank borrowings.
(3) Net interest margin = net interest income / total average interest-earning
assets.
7
The following table analyzes changes in interest income and interest expense of
Southwest for the periods indicated. For each category of interest-earning asset
and interest-bearing liability, information is provided on changes attributable
to changes in average volumes and changes in rates.
2005 VS. 2004 2004 vs. 2003
---------------------------------------------------------------------------
DUE TO CHANGE Due to Change
INCREASE IN AVERAGE: Increase In Average:
OR ----------------------- Or -----------------------
(Dollars in thousands) (DECREASE) VOLUME RATE (Decrease) Volume Rate
- ----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Interest earned on:
Loans receivable (1) $ 31,179 $ 14,098 $ 17,081 $ 20,717 $ 16,206 $ 4,511
Investment securities 1,330 1,097 233 (73) 827 (900)
Other interest-earning assets 112 56 56 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 32,621 15,251 17,370 20,644 17,033 3,611
Interest paid on:
Interest-bearing demand (24) (1) (23) (64) 12 (76)
Money market accounts 4,609 (196) 4,805 881 1,054 (173)
Savings accounts 2 2 - 2 3 (1)
Time deposits 14,417 6,804 7,613 314 1,850 (1,536)
Other borrowings 1,364 (1,149) 2,513 1,092 1,236 (144)
Subordinated debentures (376) (903) 527 1,410 1,880 (470)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 19,992 4,557 15,435 3,635 6,035 (2,400)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ 12,629 $ 10,694 $ 1,935 $ 17,009 $ 10,998 $ 6,011
========== ========== ========== ========== ========== ==========
(1) Average balances include nonaccrual loans. Fees included in interest income
on loans receivable are not considered material. Interest on tax-exempt
loans and securities is not shown on a tax-equivalent basis because it is
not considered material. Changes in rate-volume (changes in rate multiplied
by changes in volume) are allocated between changes in rate and changes in
volume in proportion to the relative contribution of each.
Net interest income for 2004 was $72.5 million, an increase of $17.0 million, or
31%, from the $55.5 million earned in 2003. Net interest margin was 4.16% for
the year ended December 31, 2004, an increase of thirty-six basis points from
2003.
Interest rate spread, which represents the difference between the rate earned on
interest-earning assets and the rates paid on interest-bearing liabilities, was
3.85% for 2005 compared to 3.86% for 2004 and 3.49% for 2003.
Southwest has seen significant growth in noninterest-bearing deposit accounts
which are an alternative funding source to interest-bearing deposits and other
borrowings. The average balance of noninterest-bearing deposit accounts
increased to $205.5 million in 2005 from $174.4 million in 2004 and $139.1
million in 2003.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The amount of the allowance is based on careful,
continuous review and evaluation of the loan portfolio and ongoing, quarterly
assessments of the probable losses inherent in the loan and lease portfolio.
Southwest's systematic methodology for assessing the appropriateness of the
allowance includes determination of a formula allowance, specific allowances and
an unallocated allowance. See "Allowance for Loan Losses" in Note 1 to the
Consolidated Financial Statements for a description of Southwest's allowance for
loan losses methodology.
Based upon this methodology, management established an allowance of $23.8
million, or 1.37% of total loans, at December 31, 2005 compared to an allowance
of $19.0 million, or 1.17% of total loans, at December 31, 2004. This represents
an increase in the allowance of $4.8 million, or 25%, from year-end 2004.
8
At December 31, 2005, total nonperforming loans were $23.6 million, or 1.36% of
total loans, compared to $23.2 million, or 1.43% of total loans, at December 31,
2004. The government guaranteed portions of year-end nonperforming loans were
$1.6 million for 2005 and $1.5 million for 2004. The allowance for loan losses
equaled 100.96% of nonperforming loans at December 31, 2005 compared to 82.00%
at December 31, 2004. During 2005, 2004, and 2003, the provisions for loan
losses were $15.8 million, $12.9 million, and $8.4 million, respectively, while
net charge-offs were $11.0 million, $8.9 million, and $4.6 million,
respectively.
Those performing loans considered potential nonperforming loans, loans which are
not included in the past due, nonaccrual, or restructured categories, but for
which known information about possible credit problems cause management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms over the next six months, amounted to approximately $62.2
million at December 31, 2005, compared to $25.6 million at December 31, 2004,
$37.8 million at December 31, 2003 and $28.9 million at December 31, 2002.
Loans may be monitored by management and reported as potential nonperforming
loans for an extended period of time during which management continues to be
uncertain as to the ability of certain borrowers to comply with the present loan
repayment terms. These loans are subject to continuing management attention and
are considered by management in determining the level of the allowance for loan
losses.
Both the dollar amount and the percentage of the allowance to loans increased
during 2005. The increase was primarily the result of increases in the balance
of potential problem loans, the determination to calculate the required
allowance on performing "special mention" loans (the lowest risk rating
category, immediately below "pass" credits) separately from non-risk rated loans
using credit risk factors, and increases in the loss ratios used for non-risk
rated commercial real estate and commercial loans, nonperforming loans,
increased allocations on impaired loans, and increases in portfolio loans. At
December 31, 2005, the unallocated allowance totaled $2.1 million, a $1.0
million reduction from year-end 2004, and accounted for 9% of the total
allowance, down from 16% the prior year. The unallocated allowance related
primarily to changes in general economic conditions, including increasing
interest rates, and the increase in relatively unseasoned loans as a result of
portfolio loan growth.
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few of such loans may cause a significant increase in nonperforming assets, may
cause a significant increase in the provision for loan losses, nonperforming
assets, and charge-offs.
At the beginning of 2005, Southwest established a reserve for unfunded loan
commitments as a liability on Southwest's statement of financial condition. The
reserve formerly was presented within the allowance for loan losses; all
affected prior periods have been restated. At December 31, 2005, this reserve
for unfunded loan commitments was $1.9 million, an increase of $937,000, or 98%,
from the amount previously included in the allowance for loan losses at December
31, 2004. The reserve is computed using a methodology similar to that used to
determine the allowance for loan losses, modified to take into account the
probability of a drawdown on the commitment.
9
The following table presents a five-year history for the allocation of the
allowance for loan losses along with the percentage of total loans in each
category.
At December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
- -------------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Real estate mortgage -
Commercial $ 8,186 32% $ 6,430 32% $ 5,297 31% $ 4,136 34% $ 2,394 32%
One to four family
residential 584 5 724 5 319 6 491 9 541 11
Real estate construction 1,547 17 1,008 15 1,179 18 1,169 12 616 10
Commercial 10,922 22 6,898 24 6,451 27 3,753 32 6,199 34
Installment and consumer -
Guaranteed student loans 189 22 175 22 105 16 59 11 46 10
Other 311 2 648 2 362 2 212 2 297 3
General 2,073 3,108 1,296 1,343 884
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total $ 23,812 100% $ 18,991 100% $ 15,009 100% $ 11,163 100% $ 10,977 100%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
The following table analyzes Southwest's allowance for loan losses for the
periods indicated.
For the Year Ended December 31,
--------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Balance at beginning of period $ 18,991 $ 15,009 $ 11,163 $ 10,977 $ 11,537
LOANS CHARGED-OFF:
Real estate mortgage 2,872 812 717 777 445
Real estate construction 155 275 3 - 99
Commercial 8,587 8,382 3,915 4,248 4,364
Installment and consumer 406 565 442 371 621
---------- ---------- ---------- ---------- ----------
Total charge-offs 12,020 10,034 5,077 5,396 5,529
---------- ---------- ---------- ---------- ----------
RECOVERIES:
Real estate mortgage 186 151 173 93 54
Real estate construction 1 - - - 22
Commercial 706 907 230 107 574
Installment and consumer 163 90 112 149 246
---------- ---------- ---------- ---------- ----------
Total recoveries 1,056 1,148 515 349 896
---------- ---------- ---------- ---------- ----------
Net loans charged-off 10,964 8,886 4,562 5,047 4,633
Provision for loan losses 15,785 12,868 8,408 5,233 4,073
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 23,812 $ 18,991 $ 15,009 $ 11,163 $ 10,977
========== ========== ========== ========== ==========
Ratio of allowance for loan losses to total loans:
Average 1.37% 1.24% 1.18% 1.10% 1.17%
End of period 1.37 1.17 1.15 1.01 1.18
Ratio of net charge-offs to average total loans
during the period 0.63 0.58 0.36 0.50 0.49
10
The following table shows the amounts of nonperforming assets at the end of the
periods indicated. Please see Note 1 to the Notes to Consolidated Financial
Statements for a description of Southwest's policy for placing loans on
nonaccrual status.
At December 31,
--------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
- -------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Total nonaccrual $ 22,099 $ 22,230 $ 14,530 $ 11,455 $ 7,291
Total past due 90 days or more 1,486 929 1,384 1,452 1,935
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 23,585 23,159 15,914 12,907 9,226
Other real estate owned 7,130 4,937 1,699 747 640
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 30,715 $ 28,096 $ 17,613 $ 13,654 $ 9,866
========== ========== ========== ========== ==========
Nonperforming loans to total loans 1.36% 1.43% 1.22% 1.17% 0.99%
Allowance for loan losses to
nonperforming loans 100.96% 82.00% 94.31% 86.49% 118.98%
Government-guaranteed portion of
nonperforming loans $ 1,602 $ 1,458 $ 2,694 $ 1,017 $ 905
At December 31, 2005, a majority of nonperforming assets were commercial loans.
At December 31, 2005, three credit relationships represented 77% of
nonperforming loans and 59% of nonperforming assets.
OTHER INCOME
Other income was $17.4 million for 2005, a 24% increase when compared with 2004.
Other income in 2004 decreased 3% when compared with 2003. Other income
increased by 14% in 2003.
COMPARISON SUMMARY-OTHER INCOME
2005 Change 2004 Change
(Dollars in thousands) 2005 From 2004 2004 From 2003 2003
- -------------------------------------------------- ---------- ----------- ---------- ----------- ----------
Service charges and fees $ 10,945 $ 1,047 $ 9,898 $ 605 $ 9,293
Gain on sales of loans 4,915 1,668 3,247 (864) 4,111
Other noninterest income 1,546 544 1,002 (66) 1,068
Gain (loss) on sales of
investment securities - 62 (62) (90) 28
---------- ----------- ---------- ----------- ----------
Total other income $ 17,406 $ 3,321 $ 14,085 $ (415) $ 14,500
========== =========== ========== =========== ==========
Service charges and fees increased $1.0 million, or 11%, in 2005 due to
increased fees from the company's multi-state ATM network, increased fees on
overdrawn deposit accounts, and increased fees from brokerage services. Service
charges and fees increased $605,000, or 7%, in 2004 due to increased fees
received on overdrawn deposit accounts and increased servicing fees received on
participated loans.
Gains on sales of loans, the major factor for the increase of other income in
2005, increased due to a $950,000 increase in gains on sales of student loans
and a $743,000 increase in gains on sales of other loans. Gains on sales of
mortgage loans decreased $25,000 during the year due primarily to the higher
mortgage interest rates. Gain on sales of loans, the major factor in the
reduction of other income, declined in 2004 due primarily to a $1.1 million
reduction in gain on sales of mortgage loans, which occurred due to the lower
refinancing demand created by higher mortgage interest rates during 2004 as
compared to those prevalent during 2003. Gains on sales of student loans
increased $174,000, or 11%, during 2004.
Other noninterest income increased $544,000 in 2005 as compared to 2004
primarily due to a $360,000 increase in income from Southwest's consulting
subsidiaries.
11
OTHER EXPENSE
Other expense was $51.9 million for 2005, an increase of $7.3 million, or 17%,
from 2004. Other expense increased $6.0 million, or 15%, in 2004 from 2003.
COMPARISON SUMMARY-OTHER EXPENSE
2005 Change 2004 Change
(Dollars in thousands) 2005 From 2004 2004 From 2003 2003
- -------------------------------------------------- ---------- ----------- ---------- ----------- ----------
Salaries and employee benefits $ 25,285 $ 2,686 $ 22,599 $ 2,807 $ 19,792
Occupancy 9,910 687 9,223 1,116 8,107
FDIC and other insurance 486 66 420 80 340
Other real estate 971 729 242 27 215
Provision for unfunded loan
commitments 937 823 114 0 114
General and administrative 14,284 2,356 11,928 1,934 9,994
---------- ----------- ---------- ----------- ----------
Total other expense $ 51,873 $ 7,347 $ 44,526 $ 5,964 $ 38,562
========== =========== ========== =========== ==========
Salaries and employee benefits increased $2.7 million, or 12%, in 2005 and $2.8
million, or 14% in 2004 primarily as a result of the cost of employees hired to
staff the offices opened in the Texas and Kansas markets, as well as normal
increases in salaries and benefits of existing staff.
Occupancy expense increased $687,000, or 7%, in 2005 and $1.1 million, or 14%,
in 2004 due to the expenses related to opening the new offices in Texas and
Kansas, and the furniture and equipment costs related to those offices. Data
processing costs related to guaranteed student loans, which are included in
occupancy expense, increased $678,000, in 2004 but only $84,000 in 2005.
The increases in other real estate expenses occurred as Southwest continued
operations of certain acquired properties and prepared other properties to be
sold.
General and administrative expense increased $2.4 million, or 20%, in 2005 and
$1.9 million, or 19%, in 2004. The primary factor for the 2005 increase was the
required write-off of $970,000 in unamortized issuance costs related to the SBI
Capital trust preferred securities that were redeemed in June 2005. Legal fees
increased $650,000, or 55%, and marketing costs increased $234,000, or 37%, in
2005 compared to 2004. The increase in legal fees was primarily related to work
involving nonperforming loans. Fees paid to SLMA for the origination of
government guaranteed student loans increased $166,000 in 2005 and $361,000 in
2004.
12
OPERATING SEGMENTS
FOR THE YEARS ENDED DECEMBER 31,
CONTRIBUTION OF OPERATING SEGMENTS ----------------------------------------
(Dollars in thousands) 2005 2004 2003
- ---------------------------------- ----------- ----------- -----------
Oklahoma banking $ 8,819 $ 8,114 $ 10,691
Other states banking 2,393 2,610 1,816
Secondary market 9,428 10,420 5,560
Other operations 374 (2,515) (3,175)
----------- ----------- -----------
Consolidated net income $ 21,014 $ 18,629 $ 14,892
=========== =========== ===========
Oklahoma banking $ 836,850 $ 881,682 $ 865,688
Other states banking 518,708 388,002 228,620
Secondary market 380,346 353,812 214,377
Other operations (24) 379 151
----------- ----------- -----------
Consolidated total loans $ 1,735,880 $ 1,623,875 $ 1,308,836
=========== =========== ===========
Oklahoma banking $ 843,584 $ 889,768 $ 878,627
Other states banking 516,212 386,379 230,977
Secondary market 397,940 368,557 220,346
Other operations 341,903 269,083 250,775
----------- ----------- -----------
Consolidated total assets $ 2,099,639 $ 1,913,787 $ 1,580,725
=========== =========== ===========
Southwest has three reportable operating segments: Oklahoma Banking operations;
Other States Banking operations; and loans originated for sale in the secondary
market ("Secondary Market"). These business units were identified through the
products and services that are offered within each unit and the geographic area
they serve.
The contribution of the Oklahoma Banking segment increased $705,000, or 9%, in
2005, primarily as a result of increased net interest margin and increased
noninterest income after decreasing $2.6 million, or 24%, in 2004, primarily as
a result of greater loan loss provision and increased operating expenses.
The contribution of the Other States Banking segment decreased by $217,000, or
8%, in 2005, primarily as a result of increased noninterest expense after
increasing by $794,000, or 44%, in 2004, as a result of increased net interest
margin due to earning asset growth, offset in part by increased provision for
loan losses related to loan growth and increased other expenses due in part to
expansion. Southwest's Texas and Kansas offices were responsible for the 2005
growth in portfolio loans. At December 31, 2005, Southwest's five Texas and two
Kansas offices accounted for $518.7 million in loans, or 38% of total portfolio
loans.
The Secondary Market segment contributed $9.4 million to net income in 2005, a
reduction of $992,000, or 10%, from 2004. The reduction occurred primarily in
net interest margin which decreased $1.8 million due primarily to the lower
rates on guaranteed student loans. This reduction, and a $297,000 increase in
other operating expense, was partially offset by a $1.1 million increase in
noninterest income. The Secondary Market segment contributed $10.4 million to
net income in 2004, up $4.9 million, or 87%, from 2003, primarily as a result of
growth in guaranteed student lending, offset in part by a decrease in yield on
private student loans and lower mortgage banking revenues.
The segment disclosures above and in Note 16 to the Consolidated Financial
Statements show that, although the Oklahoma Banking and Secondary Market
segments provide the majority of consolidated net interest income and net
income, the newer, Other States Banking segment, consisting of the Texas and
Kansas operations, contributed
13
an increasing percentage of consolidated net interest income and net income in
2003 and 2004, and by year-end 2005 accounted for approximately $516.2 million,
or 25%, of total assets.
The segment disclosures are based upon a number of assumptions and allocations
of expense. Southwest allocates resources and evaluates performance of its
segments after allocation of funds, indirect expenses, taxes, and capital costs.
The funds management unit is included in the Other Operations segment. The cost
of funds borrowed from the funds management unit by the operating segments is
transfer priced at Southwest's incremental borrowing rates.
The value of funds provided by the operating segments to the funds management
unit is based on blended borrowing rates which include core deposits and
borrowings from the Federal Home Loan Bank and other wholesale sources. Deposit
accounts with indeterminate maturities, such as demand deposit accounts and
interest-bearing transaction accounts, are transfer priced based on the expected
duration of the accounts. The expected duration ranges from two to three years.
Please also see "Note 16. Operating Segments" to the Consolidated Financial
Statements on page 51 of this report, and "Business-Organization" on page 58 of
this report.
TAXES ON INCOME
Southwest's income tax expense for fiscal years 2005, 2004, and 2003 was $13.8
million, $10.5 million, and $8.1 million, respectively. Southwest's effective
tax rates have been lower than statutory federal and state statutory rates
primarily because of tax-exempt income on municipal obligations and loans and
the organization in July 2001 of a real estate investment trust, as well as tax
credits generated by certain lending and investment activities.
FINANCIAL CONDITION
Southwest's total assets increased by $185.9 million, or 10%, from $1.91 billion
at December 31, 2004 to $2.10 billion at December 31, 2005 after increasing by
$332.2 million, or 21%, between December 31, 2004 and 2003. The growth in assets
in 2005 was primarily attributable to the $112.0 million, or 7%, increase in
total loans.
Southwest's investment securities increased by $48.0 million, or 22%, to $268.1
million at December 31, 2005 from $220.1 million at December 31, 2004. The
increases in 2005 came from U.S. government and federal agency securities, which
increased $49.2 million, or 28%, and mortgage-backed securities, which increased
$4.6 million, or 26%. Southwest's investments in Federal Reserve Bank and
Federal Home Loan Bank ("FHLB") stock decreased after the sale of $4.6 million
in FHLB stock during the fourth quarter. Tax-exempt municipal securities also
decreased from $5.5 million at December 31, 2004 to $3.5 million at December 31,
2005.
Southwest's investment securities increased by $15.8 million, or 8%, to $220.1
million at December 31, 2004 from $204.3 million at December 31, 2003. The
increases in 2004 came primarily from U.S. government and federal agency
securities, which increased $24.6 million, or 16%. Southwest's investments in
Federal Reserve Bank and Federal Home Loan Bank stock also increased. Decreases
occurred during the same period in Southwest's investment in mortgage-backed
securities, which decreased $2.1 million, or 11%, and tax-exempt municipal
securities, which decreased $9.5 million, or 63%.
14
At December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- ---------------------------------------------------- ---------- ---------- ----------
U.S. Government and agency obligations $ 227,111 $ 177,953 $ 153,344
Obligations of states and political subdivisions 3,457 5,477 14,997
Mortgage-backed securities 22,186 17,565 19,681
Other securities 15,339 19,056 16,244
---------- ---------- ----------
Total investment securities $ 268,093 $ 220,051 $ 204,266
========== ========== ==========
Available for sale (fair value) $ 256,751 $ 204,092 $ 177,074
Held to maturity (amortized cost) 1,538 2,495 15,916
Federal Reserve Bank and Federal Home
Loan Bank Stock 9,804 13,464 11,276
---------- ---------- ----------
Total investment securities $ 268,093 $ 220,051 $ 204,266
========== ========== ==========
Southwest does not have any material amounts of investment securities or other
interest-earning assets, other than loans, that would have been classified as
nonperforming if such assets were loans, or which were recognized by management
as potential problem assets based upon known information about possible credit
problems of the borrower or issuer.
The following table shows the maturities, carrying value (amortized cost for
investment securities being held to maturity or estimated fair value for
investment securities available for sale), estimated fair market values, and
average yields for Southwest's investment portfolio at December 31, 2005. Yields
are not presented on a tax-equivalent basis. Maturities of mortgage-backed
securities are based on expected maturities. Expected maturities differ from
contractual maturities because borrowers on the underlying mortgages may have
the right to call or prepay obligations with or without prepayment penalties.
The securities of no single issuer (other than the United States or its
agencies), or in the case of securities issued by state and political
subdivisions, no source or group of sources of repayment, accounted for more
than 10% of shareholders' equity of Southwest at December 31, 2005.
One Year Two through Five through More than Total Investment
or Less Five Years Ten Years Ten Years Securities
---------------- ---------------- ---------------- ---------------- ---------------------------
(Dollars in thousands) Cost Yield Cost Yield Cost Yield Cost Yield Cost Market Yield
- -------------------------- --------- ----- --------- ----- --------- ----- --------- ----- --------- --------- -----
Held to Maturity:
U.S. government and
agency obligations $ 1,008 2.51% $ - -% $ - -% $ - -% $ 1,008 $ 1,001 2.51%
Obligations of states and
political subdivisions 530 2.50 - - - - - - 530 529 2.50
--------- --------- --------- --------- --------- ---------
Total 1,538 2.51 - - - - - - 1,538 1,530 2.51
--------- --------- --------- --------- --------- ---------
Available for Sale:
U.S. government and
agency obligations - - 231,285 3.79 - - - - 231,285 226,103 3.79
Obligations of states and
political subdivisions 1,170 5.38 1,780 3.16 - - - - 2,950 2,927 4.04
Mortgage-backed securities 24 8.57 22,426 3.81 - - - - 22,450 22,186 3.81
Other securities - - 3,489 - - - 2,006 5.19 5,495 5,535 1.89
--------- --------- --------- --------- --------- ---------
Total 1,194 5.44 258,980 3.73 - - 2,006 5.19 262,180 256,751 3.76
--------- --------- --------- --------- --------- ---------
Total $ 2,732 $ 258,980 $ - $ 2,006 $ 263,718 $ 258,281
========= ========= ========= ========= ========= =========
15
Total loans were $1.74 billion at December 31, 2005, an increase of $112.0
million, or 7%, compared to December 31, 2004. All categories of loans
increased, except commercial. The allowance for loan losses increased by $4.8
million, or 25%, from December 31, 2004 to December 31, 2005. At December 31,
2005, the allowance for loan losses was $23.8 million, or 1.37% of total loans,
compared to $19.0 million, or 1.17% of total loans, at December 31, 2004.
Total loans were $1.62 billion at December 31, 2004, an increase of $315.0
million, or 24%, compared to December 31, 2003. All categories of loans
increased, except other consumer loans. The allowance for loan losses increased
by $4.0 million, or 27%, from December 31, 2003 to December 31, 2004. At
December 31, 2004, the allowance for loan losses was $19.0 million, or 1.17% of
total loans, compared to 15.0 million, or 1.15% of total loans, at December 31,
2003. (See "Provision for Loan Losses" on page 8.)
This table presents the trends in the composition of the loan portfolio over the
previous five years.
At December 31,
--------------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
- -------------------------------- ------------ ------------ ------------ ------------ ------------
Real estate mortgage -
Commercial $ 563,074 $ 523,358 $ 402,596 $ 374,999 $ 301,578
One to four family residential 93,478 87,858 83,250 102,423 106,206
Real estate construction 299,344 248,278 230,292 130,001 91,897
Commercial 374,101 390,272 355,965 348,879 312,577
Installment and consumer -
Guaranteed student loans 377,110 348,970 211,546 119,064 91,841
Other 28,773 25,139 25,187 25,746 26,947
------------ ------------ ------------ ------------ ------------
1,735,880 1,623,875 1,308,836 1,101,112 931,046
Less: Allowance for loan loss (23,812) (18,991) (15,009) (11,163) (10,977)
------------ ------------ ------------ ------------ ------------
Total $ 1,712,068 $ 1,604,884 $ 1,293,827 $ 1,089,949 $ 920,069
============ ============ ============ ============ ============
Southwest has a continuing strategic focus on providing loans and other services
to healthcare and health professionals, businesses and their managers and
owners, and commercial and commercial real estate borrowers. At December 31,
2005, loans to individuals and businesses in the healthcare industry totaled
$428.2 million, or 25% of total loans.
CAPITAL RESOURCES
At December 31, 2005, total shareholders' equity was $170.4 million compared to
$126.0 million at December 31, 2004. Southwest's common stock offering during
the second quarter of 2005 contributed $39.5 million in net proceeds to
shareholders' equity. Earnings, net of common dividends, contributed $17.0
million to shareholders' equity. Sales of common stock through the dividend
reinvestment plan, the employee stock purchase plan, and the employee stock
option plan contributed an additional $2.7 million to shareholders' equity in
2005, including tax benefits realized by Southwest relating to option exercises.
Under accounting principles generally accepted in the United States, these tax
benefits increase shareholders' equity, but do not affect net income. Net
unrealized holding losses on investment securities available for sale (net of
tax) increased to a loss of $3.3 million at December 31, 2005 compared to a loss
of $797,000 at December 31, 2004. Repurchases of 690,696 shares were made during
the second and third quarters of 2005 under a selling shareholder agreement.
During 2005 and 2004, repurchased shares were used to satisfy the requirements
of the employee stock option plan, the employee stock purchase plan, and the
dividend reinvestment plan. Repurchases of approximately 700,000 shares may be
made under the repurchase plan adopted in January 2006. Repurchases may be made
from time to time based on market conditions, projected capital needs, and other
factors.
At December 31, 2004, total shareholders' equity was $126.0 million compared to
$109.9 million at December 31, 2003. Earnings, net of common dividends,
contributed $15.2 million to shareholders' equity. Sales of common stock through
the dividend reinvestment plan, the employee stock purchase plan, and the
employee stock
16
option plan contributed an additional $2.0 million to shareholders' equity in
2004, including tax benefits realized by Southwest relating to option exercises.
Net unrealized holding gains (losses) on investment securities available for
sale (net of tax) decreased to a loss of $797,000 at December 31, 2004 compared
to a gain of $360,000 at December 31, 2003. Although Southwest had share
repurchase plans in place during 2004, no shares were repurchased during the
year.
Bank holding companies are required to maintain capital ratios in accordance
with guidelines adopted by the Federal Reserve Board. The guidelines are
commonly known as Risk-Based Capital Guidelines. On December 31, 2005, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 14.21%, a Tier 1 risk-based capital ratio of 12.95%, and a leverage
ratio of 10.24%. As of December 31, 2005, Stillwater National and SNB Wichita
also met the criteria for classification as a "well-capitalized" institution
under the prompt corrective action rules promulgated under the Federal Deposit
Insurance Act. Designation as a well-capitalized institution under these
regulations does not constitute a recommendation or endorsement of Southwest,
Stillwater National, or SNB Wichita by Federal bank or thrift regulators.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans and available for sale investments in
order to meet current and future cash flow needs as they become due. Southwest's
portfolio of guaranteed student loans and Small Business Administration ("SBA")
loans are also readily salable. Additional sources of liquidity, including cash
flow from the repayment of loans and maturities of investment securities, are
also considered in determining whether liquidity is satisfactory. Liquidity is
also achieved through growth of deposits and liquid assets, and accessibility to
the capital and money markets. These funds are used to meet deposit withdrawals,
maintain reserve requirements, fund loans, purchase securities, and operate the
organization.
The following table indicates the amount of Southwest's certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 2005:
(Dollars in thousands) Amount
- -------------------------------- ----------
Three months or less(1) $ 221,466
Over three through six months(1) 134,115
Over six through 12 months(1) 191,061
Over 12 months 62,347
----------
Total $ 608,989
==========
(1) The amount of certificates of deposit that mature within 12 months is $546.6
million. The Company does not have any liquidity concerns as a result of the
volume of these maturities.
17
Percentage of Total Average Assets
----------------------------------
Sources and uses of funds 2005 2004 2003
- ------------------------------------------------------------ --------- --------- ---------
Sources of Funds:
Deposits:
Noninterest-bearing demand 9.90% 9.63% 9.20%
Interest-bearing demand and money market accounts 21.72 25.61 25.95
Time and savings deposits 47.32 39.65 41.61
Other borrowings 10.07 13.93 13.26
Subordinated debentures 2.83 3.99 2.78
Other liabilities 0.82 0.68 0.45
Equity capital 7.34 6.51 6.75
--------- --------- ---------
Total 100.00% 100.00% 100.00%
========= ========= =========
Uses of Funds:
Loans 83.56% 84.42% 83.96%
Investment securities 11.81 11.88 12.65
Other interest-earning assets 0.18 0.06 0.07
Noninterest-earning assets 4.45 3.64 3.32
--------- --------- ---------
Total 100.00% 100.00% 100.00%
========= ========= =========
Sources and uses of cash are presented in the Consolidated Statements of Cash
Flows. Total cash increased by $26.2 million, or 109%, to $50.3 million in 2005
from $24.1 million at year-end 2004, as a result of a $113.1 million increase in
cash provided from operating activities (primarily from the increase in proceeds
from sales of guaranteed student loans); a $71.5 million reduction in cash used
in investing activities (primarily from reductions in net loan originations and
purchases of available for sale securities); and a $148.5 million decrease in
cash provided from financing activities (primarily from a $138.2 million
reduction in the net increase in deposits).
Total cash decreased by $9.9 million, or 29%, to $24.1 million in 2004 from
$34.0 million at year-end 2003, as a result of a $15.9 million increase in cash
used in operating activities (primarily from the increase in originations of
guaranteed student loans, net of sales proceeds); a $90.6 million increase in
cash used in investing activities (primarily from an increase in loans
originated); and a $97.5 million increase in cash provided by financing
activities (primarily from a $113.6 million increase in the net increase in
deposits).
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Southwest's net income is largely dependent on its net interest income.
Southwest seeks to maximize its net interest margin within an acceptable level
of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities. Net
interest income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by other
sources of funds, such as noninterest-bearing deposits and shareholders' equity.
Southwest attempts to manage interest rate risk while enhancing net interest
margin by adjusting its asset/liability position. At times, depending on the
level of general interest rates, the relationship between long-term and other
interest rates, market conditions and competitive factors, Southwest may
determine to increase its interest rate risk position in order to increase its
net interest margin. Southwest monitors interest rate risk and adjusts the
composition of its rate-sensitive assets and liabilities in order to limit its
exposure to changes in interest rates on net interest income over time.
Southwest's asset/liability committee reviews its interest rate risk position
and profitability, and recommends adjustments. The asset/liability committee
also reviews the securities portfolio, formulates investment strategies, and
oversees the timing and implementation of transactions. Notwithstanding
18
Southwest's interest rate risk management activities, the actual magnitude,
direction, and relationship of future interest rates are uncertain, and can have
adverse effects on net income and liquidity.
Interest rate sensitivity analysis measures the cumulative differences between
the amounts of assets and liabilities maturing or repricing within various time
periods.
The following table shows Southwest's interest rate sensitivity gaps for
selected maturity periods at December 31, 2005:
0 to 3 4 to 12 Over 1 to Over
(Dollars in thousands) Months Months 5 Years 5 Years Total
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
RATE-SENSITIVE ASSETS:
Total loans $ 1,308,327 $ 261,197 $ 108,690 $ 57,666 $ 1,735,880
Investment securities 14,283 1,795 232,276 19,739 268,093
Due from banks 2,605 - - - 2,605
------------ ------------ ------------ ------------ ------------
Total 1,325,215 262,992 340,966 77,405 2,006,578
RATE-SENSITIVE LIABILITIES:
Money market deposit accounts 402,709 - - - 402,709
Time deposits 344,967 498,574 128,912 103 972,556
Savings accounts 8,765 - - - 8,765
Interest-bearing demand 49,235 - - - 49,235
Other borrowings 68,008 80,000 25,000 31,500 204,508
Subordinated debentures - - - 46,393 46,393
------------ ------------ ------------ ------------ ------------
Total 873,684 578,574 153,912 77,996 1,684,166
------------ ------------ ------------ ------------ ------------
Interest sensitivity gap $ 451,531 $ (315,582) $ 187,054 $ (591) $ 322,412
============ ============ ============ ============ ============
Cumulative interest sensitivity gap $ 451,531 $ 135,949 $ 323,003 $ 322,412 $ 322,412
============ ============ ============ ============ ============
Percentage of rate-sensitive assets
to rate-sensitive liabilities 151.68% 45.46% 221.53% 99.24% 119.14%
============ ============ ============ ============ ============
Percentage of cumulative gap to
total assets 21.51% 6.47% 15.38% 15.36% 15.36%
============ ============ ============ ============ ============
The percentage of rate-sensitive assets to rate-sensitive liabilities presents a
static position as of a single day and is not necessarily indicative of
Southwest's position at any other point in time and does not take into account
the sensitivity of yields and costs of specific assets and liabilities to
changes in market rates. The foregoing analysis assumes that Southwest's
mortgage-backed securities mature during the period in which they are estimated
to prepay. No other prepayment or repricing assumptions have been applied to
Southwest's interest-earning assets for this analysis.
A principal objective of Southwest's asset/liability management effort is to
balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of Southwest within acceptable risk
levels. To measure its interest rate sensitivity position, Southwest utilizes a
simulation model that facilitates the forecasting of net interest income over
the next twelve month period under a variety of interest rate and growth
scenarios.
At December 31, 2005, the model projected net income would decrease by 8.68% if
interest rates immediately fell by 100 basis points. It projected an increase in
net income of 8.64% if interest rates immediately rose by 100 basis points. The
model projected net income would decrease by 5.36% if interest rates gradually
fell by 100
19
basis points over a one-year time horizon. It projected an increase in net
income of 6.49% if interest rates gradually rose by 100 basis points over a
one-year time horizon.
The earnings simulation model uses numerous assumptions regarding the effect of
changes in interest rates on the timing and extent of repricing characteristics,
future cash flows, and customer behavior. These assumptions are inherently
uncertain and, as a result, the model cannot precisely estimate net income.
Actual results differ from simulated results due to timing, cash flows,
magnitude, and frequency of interest rate changes and changes in market
conditions and management strategies, among other factors.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, Southwest makes use of a number of different
financial instruments to help meet the financial needs of its customers. In
accordance with accounting principles generally accepted in the United States,
the full notional amounts of these transactions are not recorded in the
accompanying consolidated financial statements and are referred to as
off-balance sheet instruments. These transactions and activities include
commitments to extend lines of commercial and real estate mortgage credit, and
standby and commercial letters of credit and are discussed further in Note 13 to
the Consolidated Financial Statements on page 50 of this report.
Off-balance sheet arrangements also include the Trust Preferred Securities,
which have been de-consolidated in this report as required by Financial
Accounting Standards Board Interpretation 46R, "Consolidation of Variable
Interest Entities." Further information regarding the Trust Preferred Securities
can be found in Note 6 to the Consolidated Financial Statements on page 43 of
this report.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial data in
this report have been prepared in accordance with accounting principles
generally accepted in the United States and practices within the banking
industry that require the measurement of financial position and operating
results in terms of historical dollars without considering fluctuations in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation.
20
CONTRACTUAL OBLIGATIONS
Southwest has various contractual obligations that require future cash payment.
The following table presents, as of December 31, 2005, significant fixed and
determinable contractual obligations to third parties by payment date.
Payments due by period
-----------------------------------------------------------------------------
Less than 1-3 3-5 Over
(Dollars in thousands) 1 Year Years Years 5 Years Total
- --------------------------------------------- ------------- ------------- ------------- ------------- -------------
Deposits without stated maturity:(1)
Noninterest bearing $ 224,555 $ - $ - $ - $ 224,555
Interest bearing 460,709 - - - 460,709
Time deposits(2) 856,909 105,020 35,033 132 997,094
Other borrowings(2) 152,769 14,263 17,920 32,457 217,409
Subordinated debentures(2) 3,375 6,751 6,751 126,164 143,041
Operating leases 1,841 3,048 2,130 669 7,688
------------- ------------- ------------- ------------- -------------
Total $ 1,700,158 $ 129,082 $ 61,834 $ 159,422 $ 2,050,496
============= ============= ============= ============= =============
(1) Excludes interest.
(2) Includes interest. Interest on variable rate obligations is shown at
rates in effect at December 31, 2005. The contractual amounts to be
paid on variable rate obligations are affected by changes in market
interest rates. Future changes in market interest rates could
materially affect the contractual amounts to be paid.
At December 31, 2005, Southwest's purchase obligations not reflected on the
Consolidated Statements of Condition, and its other long-term liabilities
(consisting primarily of benefits under deferred compensation arrangements) are
not considered material.
For additional information regarding contractual obligations, please also see
"Asset/Liability Management and Quantitative and Qualitative Disclosures about
Market Risk" on page 18, "Off-Balance Sheet Arrangements" on page 20, and "Note
5. Other Borrowed Funds" on page 42, "Note 6. Subordinated Debentures" on page
43, "Note 11. Operating Leases" on page 49, "Note 13. Financial Instruments with
Off-Balance Sheet Risk" on page 50, and "Note 14. Commitments and Contingencies"
on page 50, to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Southwest's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and follow general practices within the banking industry. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information that is subject to change. Certain policies inherently rely more on
the use of estimates, assumptions, and judgments, and as such have a greater
possibility of producing results that could be materially different than
originally reported. Management is required to use estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or
valuation allowance to be established, or when an asset or liability must be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility. The fair values
and the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when readily available.
The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies", which requires that losses be accrued when they
are probable
21
of occurring and estimable, and (2) SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", which requires that losses be accrued when it is probable
that Southwest will not collect all principal and interest payments according to
the loan's contractual terms.
Management believes that the allowance is adequate. However, its determination
requires significant judgment, and estimates of probable losses inherent in the
loan portfolio can vary significantly from the amounts that actually occur.
While management uses available information to recognize probable losses, future
additions to the allowance may be necessary based on changes in the loans
comprising the portfolio and changes in the financial condition of borrowers,
such as may result from changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by Southwest, periodically review the loan
portfolio and the allowance. These reviews may result in additional provisions
based on the agencies judgments based upon information available at the time of
each examination. Because the loan portfolio contains a significant number of
commercial and commercial real estate loans with relatively large balances, the
unexpected deterioration of one or a few of such loans may cause a significant
increase in the provision for loan losses, nonperforming assets, and
charge-offs.
Southwest's systematic methodology for assessing the appropriateness of the
allowance includes determination of a formula allowance, specific allowances,
and an unallocated allowance, as described in "Provision for Loan Losses" on
page 8 and in Note 1 to the Consolidated Financial Statements on page 31. The
formula and specific allowances comprised 91.29% of the total allowance at
December 31, 2005. At that date, a 10% decrease or increase in all categories of
risk rated assets for which specific allowances had not been recorded would have
resulted in a corresponding decrease or increase of approximately $962,000 in
the recommended allowance, assuming no change in other elements considered in
the methodology.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt earning
assets. Readers of this report should be aware that non-GAAP ratios and other
measures presented by some banking organizations or financial analysts may not
be directly comparable to similarly named ratios or other measures used by
Southwest or other banking organizations.
22
CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As required by SEC rules, Southwest's management evaluated the effectiveness of
Southwest's disclosure controls and procedures as of December 31, 2005.
Southwest's Chief Executive Officer and Chief Financial Officer participated in
the evaluation. Based on this evaluation, Southwest's Chief Executive Officer
and Chief Financial Officer concluded that Southwest's disclosure controls and
procedures were effective as of December 31, 2005.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Southwest's management is responsible for establishing and maintaining adequate
internal control over financial reporting. As required by SEC rules, Southwest's
management evaluated the effectiveness of Southwest's internal control over
financial reporting as defined in SEC Rule 13a-15 as of December 31, 2005.
Southwest's Chief Executive Officer and Chief Financial Officer participated in
the evaluation, which was based upon the criteria for effective internal control
over financial reporting included in the "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, Southwest's Chief Executive Officer and Chief
Financial Officer concluded that Southwest's internal control over financial
reporting was effective as of December 31, 2005.
The report by Southwest's independent registered public accounting firm, Ernst &
Young LLP, on management's assessment of internal control over financial
reporting is included on page 25.
FOURTH QUARTER 2005 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change occurred during the fourth quarter of 2005 that has materially
affected, or is reasonably likely to materially affect, Southwest's internal
control over financial reporting.
23
REPORTS OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Southwest Bancorp, Inc. as of December 31, 2005 and 2004, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Bancorp,
Inc. at December 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Southwest
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 10, 2006
24
REPORT ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of Southwest Bancorp, Inc.
We have audited management's assessment, included in the accompanying report on
Internal Control over Financial Reporting, that Southwest Bancorp, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Southwest Bancorp, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Southwest Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Southwest Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2005 consolidated financial
statements of Southwest Bancorp, Inc. and our report dated March 10, 2006
expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 10, 2006
25
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31,
----------------------------
(Dollars in thousands, except per share data) 2005 2004
- ------------------------------------------------------------------------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 50,277 $ 24,097
Investment securities:
Held to maturity, fair value $1,530 (2005) and $2,509 (2004) 1,538 2,495
Available for sale, amortized cost $262,180 (2005) and $205,393 (2004) 256,751 204,092
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 9,804 13,464
Loans held for sale 383,447 354,557
Loans receivable, net of allowance for loan losses
of $23,812 (2005) and $18,991 (2004) 1,328,621 1,250,327
Accrued interest receivable 14,382 15,091
Premises and equipment, net 20,584 19,860
Other assets 34,235 29,804
------------ ------------
Total assets $ 2,099,639 $ 1,913,787
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 224,555 $ 183,738
Interest-bearing demand 49,235 57,359
Money market accounts 402,709 379,818
Savings accounts 8,765 8,108
Time deposits of $100,000 or more 608,989 609,670
Other time deposits 363,567 261,365
------------ ------------
Total deposits 1,657,820 1,500,058
Accrued interest payable 8,953 4,911
Income tax payable 288 2,266
Other liabilities 11,233 8,323
Other borrowings 204,508 200,065
Subordinated debentures 46,393 72,180
------------ ------------
Total liabilities 1,929,195 1,787,803
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized;
14,658,042 (2005) and 12,243,042 (2004) shares issued and outstanding 14,658 12,243
Paid in capital 45,672 7,993
Retained earnings 124,882 107,905
Accumulated other comprehensive gain (loss) (3,325) (797)
Treasury stock, at cost; 636,125 (2005) and 138,189 (2004) (11,443) (1,360)
------------ ------------
Total shareholders' equity 170,444 125,984
------------ ------------
Total liabilities & shareholders' equity $ 2,099,639 $ 1,913,787
============ ============
The accompanying notes are an integral part of this statement.
26
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003
- --------------------------------------------------- ------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 128,011 $ 96,832 $ 76,115
Investment securities:
U.S. Government and agency obligations 7,643 6,136 5,485
Mortgage-backed securities 625 659 1,036
State and political subdivisions 171 407 856
Other securities 772 679 577
Federal funds sold 122 10 10
------------ ------------ ------------
Total interest income 137,344 104,723 84,079
INTEREST EXPENSE:
Interest-bearing demand 267 291 355
Money market accounts 10,727 6,118 5,237
Savings accounts 21 19 17
Time deposits of $100,000 or more 19,977 9,762 8,520
Other time deposits 9,790 5,588 6,516
Other borrowings 7,343 5,979 4,887
Subordinated debentures 4,113 4,489 3,079
------------ ------------ ------------
Total interest expense 52,238 32,246 28,611
------------ ------------ ------------
Net interest income 85,106 72,477 55,468
Provision for loan losses 15,785 12,868 8,408
OTHER INCOME:
Service charges and fees 10,945 9,898 9,293
Other noninterest income 1,546 1,002 1,068
Gain on sales of loans 4,915 3,247 4,111
Gain (loss) on sales of investment securities - (62) 28
------------ ------------ ------------
Total other income 17,406 14,085 14,500
OTHER EXPENSE:
Salaries and employee benefits 25,285 22,599 19,792
Occupancy 9,910 9,223 8,107
FDIC and other insurance 486 420 340
Other real estate 971 242 215
General and administrative 15,221 12,042 10,108
------------ ------------ ------------
Total other expense 51,873 44,526 38,562
------------ ------------ ------------
Income before taxes 34,854 29,168 22,998
Taxes on income 13,840 10,539 8,106
------------ ------------ ------------
Net income $ 21,014 $ 18,629 $ 14,892
============ ============ ============
Basic earnings per common share (1) $ 1.60 $ 1.54 $ 1.26
Diluted earnings per common share (1) 1.55 1.48 1.22
Cash dividends declared per share (1) 0.30 0.28 0.25
The accompanying notes are an integral part of this statement.
(1) All share and per share information has been restated to reflect the
two-for-one stock split effected in the form of a stock dividend paid
August 29, 2003.
27
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------------------------------ ------------ ------------ ------------
Net income $ 21,014 $ 18,629 $ 14,892
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gain (loss) on available for
sale securities (4,128) (1,967) (2,703)
Reclassification adjustment for (gains) losses
arising during the period $ - 62 (28)
------------ ------------ ------------
Other comprehensive income (loss), before tax (4,128) (1,905) (2,731)
Tax (expense) benefit related to items
of other comprehensive income (loss) 1,600 748 890
------------ ------------ ------------
Other comprehensive income (loss), net of tax (2,528) (1,157) (1,841)
------------ ------------ ------------
Comprehensive income $ 18,486 $ 17,472 $ 13,051
============ ============ ============
The accompanying notes are an integral part of this statement.
28
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Total
Common Stock Other Share-
(Dollars in thousands, except --------------------- Paid in Retained Comprehensive Treasury holders'
per share data)(1) Shares Amount Capital Earnings Income (Loss) Stock Equity
- -------------------------------------- ----------- -------- -------- -------- ------------- -------- --------
BALANCE, JANUARY 1, 2003 12,243,042 $ 12,243 $ 6,196 $ 80,724 $ 2,201 $ (4,992) $ 96,372
----------- -------- -------- -------- ------------- -------- --------
Cash dividends:
Common, $0.25 per share, and
other dividends - - - (2,959) - - (2,959)
Common stock issued:
Employee Stock Option Plan - - (424) - - 2,603 2,179
Employee Stock Purchase Plan - - 31 - - 28 59
Dividend Reinvestment Plan - - 41 - - 39 80
Tax benefit related to exercise
of stock options - - 1,153 - - - 1,153
Other comprehensive income
(loss), net of tax - - - - (1,841) - (1,841)
Treasury shares purchased - - - - - - -
Net income - - - 14,892 - - 14,892
----------- -------- -------- -------- ------------- -------- --------
BALANCE, DECEMBER 31, 2003 12,243,042 12,243 6,997 92,657 360 (2,322) 109,935
----------- -------- -------- -------- ------------- -------- --------
Cash dividends:
Common, $0.28 per share, and
other dividends - - - (3,381) - - (3,381)
Common stock issued:
Employee Stock Option Plan - - 380 - - 901 1,281
Employee Stock Purchase Plan - - 40 - - 25 65
Dividend Reinvestment Plan - - 57 - - 36 93
Tax benefit related to exercise
of stock options - - 519 - - - 519
Other comprehensive income
(loss), net of tax - - - - (1,157) - (1,157)
Treasury shares purchased - - - - - - -
Net income - - - 18,629 - - 18,629
----------- -------- -------- -------- ------------- -------- --------
BALANCE, DECEMBER 31, 2004 12,243,042 12,243 7,993 107,905 (797) (1,360) 125,984
----------- -------- -------- -------- ------------- -------- --------
Cash dividends:
Common, $0.30 per share, and
other dividends - - - (4,037) - - (4,037)
Common stock issued:
Employee Stock Option Plan - - (422) - - 2,157 1,735
Employee Stock Purchase Plan - - 36 - - 34 70
Dividend Reinvestment Plan - - 49 - - 43 92
Restricted Stock - - 97 - - 99 196
Public Offering 2,415,000 2,415 37,085 - - - 39,500
Tax benefit related to exercise
of stock options - - 834 - - - 834
Other comprehensive income
(loss), net of tax - - - - (2,528) - (2,528)
Treasury shares purchased - - - - - (12,416) (12,416)
Net income - - - 21,014 - - 21,014
----------- -------- -------- -------- ------------- -------- --------
BALANCE, DECEMBER 31, 2005 14,658,042 $ 14,658 $ 45,672 $124,882 $ (3,325) $(11,443) $170,444
=========== ======== ======== ======== ============= ======== ========
The accompanying notes are an integral part of this statement.
(1) All share and per share information has been restated to reflect the
two-for-one stock split effected in the form of a stock dividend paid
August 29, 2003.
29
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
(Dollars in thousands) 2005 2004 2003
- ----------------------------------------------------------------- ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income $ 21,014 $ 18,629 $ 14,892
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 15,785 12,868 8,408
Deferred taxes (1,252) (626) (1,592)
Depreciation and amortization expense 2,610 2,607 2,745
Amortization of premiums and accretion of
discounts on securities, net 135 164 227
Amortization of intangibles 379 327 398
Tax benefit from exercise of stock options 834 519 1,153
(Gain) Loss on sales/calls of securities - 62 (28)
(Gain) Loss on sales of loans (4,915) (3,247) (4,111)
(Gain) Loss on sales of premises/equipment 20 (11) (53)
(Gain) Loss on other real estate owned, net 27 63 108
Proceeds from sales of residential mortgage loans 89,238 87,512 177,396
Residential mortgage loans originated for sale (87,808) (86,838) (169,694)
Proceeds from sales of guaranteed student loans 778,196 537,246 278,119
Guaranteed student loans originated for sale (817,477) (672,900) (396,920)
Changes in assets and liabilities:
Accrued interest receivable 709 (3,770) (2,038)
Other assets 233 (7,167) (7,006)
Income taxes payable (1,978) (584) 2,850
Accrued interest payable 4,042 1,536 (1,123)
Other liabilities 2,706 2,974 1,554
------------ ------------ ------------
Net cash (used in) provided from operating activities 2,498 (110,636) (94,715)
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities - 11,040 6,951
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 1,995 13,400 15,210
Available for sale securities 9,009 77,679 86,332
Proceeds from redemptions of Federal Home Loan Bank stock 4,629 - -
Purchases of Federal Home Loan Bank stock and Federal Reserve
Bank stock (969) (2,188) (2,217)
Purchases of held to maturity securities (528) - -
Purchases of available for sale securities (66,439) (117,848) (124,783)
Loans originated and principal repayments, net (87,456) (189,733) (99,996)
Purchases of premises and equipment (3,424) (2,864) (3,523)
Proceeds from sales of premises and equipment 90 226 1,215
Proceeds from sales of other real estate owned 5,013 734 1,860
------------ ------------ ------------
Net cash (used in) provided from investing activities (138,080) (209,554) (118,951)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 157,762 295,933 182,368
Net increase (decrease) in other borrowings 4,443 16,215 (15,432)
Net proceeds from issuance of common stock 41,593 1,439 2,318
Net proceeds from issuance of subordinated debentures - - 46,393
Redemption of subordinated debentures (25,787) - -
Purchases of treasury stock (12,416) - -
Common stock dividends paid (3,833) (3,281) (2,847)
------------ ------------ ------------
Net cash (used in) provided from financing activities 161,762 310,306 212,800
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 26,180 (9,884) (866)
CASH AND CASH EQUIVALENTS,
Beginning of period 24,097 33,981 34,847
------------ ------------ ------------
End of period $ 50,277 $ 24,097 $ 33,981
============ ============ ============
The accompanying notes are an integral part of this statement.
30
SOUTHWEST BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc. ("Southwest"),
incorporated in 1981, is a financial holding company headquartered in
Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the state of Oklahoma, the Dallas, Austin, and San Antonio, Texas
and Wichita and Kansas City, Kansas areas and in student lending nationally. The
accompanying consolidated financial statements include the accounts of
Stillwater National Bank and Trust Company ("Stillwater National"), a national
bank established in 1894, Business Consulting Group, Inc. ("BCG"), a business
consulting company established in 2002, Healthcare Strategic Support, Inc.
("HSSI"), a healthcare consulting company established in 2003, SNB Bank of
Wichita ("SNB Wichita"), a federal savings bank established in 2003, and
consolidated subsidiaries of Stillwater National, including SNB Real Estate
Holdings, Inc. Stillwater National, BCG, HSSI, and SNB Wichita are wholly owned,
direct subsidiaries of Southwest. All significant intercompany balances and
transactions have been eliminated in consolidation.
MANAGEMENT ESTIMATES - In preparing Southwest's financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
as of the dates shown on the consolidated statements of financial condition and
revenues and expenses during the periods reported. Actual results could differ
significantly from those estimates. Changes in economic conditions could affect
the determination of material estimates such as the allowance for loan losses,
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans, income taxes, and the fair value of financial
instruments.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from depository institutions, and
federal funds sold. Interest-bearing balances held at depository institutions
were $2.6 million at December 31, 2005 and $1.5 million at December 31, 2004.
Federal funds sold are sold for one-to-four day periods.
INVESTMENT SECURITIES - Investments in debt and equity securities are identified
as held to maturity and available for sale based on management considerations of
asset/liability strategy, changes in interest rates and prepayment risk, the
need to increase liquidity, and other factors. Southwest has the ability and
intent to hold to maturity its investment securities classified as held to
maturity. Southwest had no investments held for trading purposes for any period
presented. Under certain circumstances (including the deterioration of the
issuer's creditworthiness, a change in tax law, or statutory or regulatory
requirements), Southwest may change the investment security classification. The
classifications Southwest utilizes determine the related accounting treatment
for each category of investments. Available for sale securities are accounted
for at fair value with unrealized gains or losses, net of taxes, excluded from
operations and reported as accumulated other comprehensive income or loss. Held
to maturity securities are accounted for at amortized cost.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to operations over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
Southwest's investments in state and political subdivisions generally is not
subject to ordinary Federal income tax.
Southwest periodically reviews all individual securities for which the fair
values are below the book values. If it is determined that Southwest does not
have the ability and intent to hold these securities for a period of time
31
sufficient for a forecasted market price recovery up to (or beyond) the cost of
the investment, or to maturity when the full cost will be recovered, then an
other than temporary loss will be recognized in the consolidated statements of
operations. Southwest had no other-than-temporary losses for 2005, 2004, or
2003.
Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") stock are not
readily marketable, therefore these investments are carried at cost.
LOANS - Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Loan origination fees and certain costs of
originated loans are amortized as an adjustment to the yield over the term of
the loan. Net unamortized deferred loan fees were $3.1 million and $2.3 million
at December 31, 2005 and 2004, respectively. Southwest generally places loans,
except for consumer loans, on nonaccrual when any portion of the principal or
interest is ninety days past due and collateral is insufficient to discharge the
debt in full. Interest accrual may also be discontinued earlier if, in
management's opinion, collection is unlikely. Generally, consumer installment
loans are not placed on nonaccrual, but are charged-off when they are five
months past due. Accrued interest is written off when a loan is placed on
nonaccrual status. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. In general, accrued interest income on impaired loans is
written off after the loan is 90 days past due; subsequent interest income is
recorded when cash receipts are received from the borrower. Southwest identifies
past due loans based on contractual terms on a loan by loan basis. Southwest
originates real estate mortgage loans and guaranteed student loans for portfolio
investment or sale in the secondary market. During the period of origination,
real estate mortgage loans are designated as held either for investment purposes
or sale. Mortgage loans held for sale are generally sold within a one-month
period from loan closing at amounts determined by the investor commitment based
upon the pricing of the loan. Guaranteed student loans have typically been sold
at the time the student graduates or withdraws from school, however, an
increasing number of student loans are now being sold after 90 days of the time
the loan is fully disbursed. Real estate mortgage loans held for sale are
carried at the lower of cost or market, which is determined on an individual
loan basis. Guaranteed student loans held for sale are carried at the lower of
cost or market, which is determined on an aggregate basis. Gains or losses
recognized upon the sale of loans are determined on a specific identification
basis and are received on a contractual basis.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
a provision for loan losses charged to operations. Loan amounts which are
determined to be uncollectible are charged against this allowance, and
recoveries, if any, are added to the allowance. The appropriate amount of the
allowance is based on continuous review and evaluation of the loan portfolio and
ongoing, quarterly assessments of the probable losses inherent in the loan and
lease portfolio using a systematic methodology. Southwest's methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and an unallocated allowance. The formula
allowance is calculated by applying loss factors to corresponding categories of
outstanding loans and leases. Loss factors generally are based on Southwest's
historical loss experience in the various portfolio categories over the prior
eighteen months or twelve months, but may be adjusted for categories where
eighteen and twelve month loss experience is historically unusual. The use of
these loss factors is intended to reduce the differences between estimated
losses inherent in the portfolio and observed losses. Formula allowances also
are established for loans that do not have specific allowances according to the
application of credit risk factors. These factors are set by management to
reflect its assessment of the relative level of risk inherent in each credit
grade. Specific allowances are established in cases where management has
identified significant conditions or circumstances related to individual loans
that management believes indicate the probability that losses may be incurred in
an amount different from the amounts determined by application of the formula
allowance. Specific allowances include amounts related to loans that are
identified for evaluation of impairment. A loan is considered to be impaired
when, based on current information and events, it is probable that Southwest
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. The allowance for loan losses related to loans that are
evaluated for impairment is based either on the discounted cash flows using the
loan's initial effective interest rate or on the fair value of the collateral
for certain collateral dependent loans. Smaller balance, homogeneous loans,
including mortgage, student, and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material
estimates
32
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. All of Southwest's
nonaccrual loans are considered to be impaired loans. The unallocated allowance
is based upon management's evaluation of various factors that are not directly
measured in the determination of the formula and specific allowances. These
factors may include general economic and business conditions affecting lending
areas, credit quality trends (including trends in delinquencies and
nonperforming loans expected to result from existing conditions), loan volumes
and concentrations, specific industry conditions within portfolio categories,
recent loss experience in particular loan categories, duration of the current
business cycle, bank regulatory examination results, findings of internal credit
examiners, and management's judgment with respect to various and other
conditions including credit administration and management and the quality of
risk identification systems. Management reviews these conditions quarterly.
RESERVE FOR UNFUNDED LOAN COMMITMENTS - At the beginning of 2005, Southwest
established a reserve for unfunded loan commitments as a liability on
Southwest's statement of financial condition. The reserve formerly was presented
within the allowance for loan losses. All affected prior periods have been
restated. The reserve is computed using a methodology similar to that used to
determine the allowance for loan losses, modified to take into account the
probability of a drawdown on the commitment.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful life of each asset,
which ranges from three to forty years. Southwest reviews the carrying value of
long-lived assets used in operations when changes in events or circumstances
indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated
to be generated by those assets. If this review indicates that an asset is
impaired, Southwest records a charge to operations to reduce the asset's
carrying value to fair value, which is based on estimated discounted cash flows.
Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less costs to sell.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at the
lesser of the carrying value or fair value less the estimated costs to sell the
asset. Write-downs of carrying value required at the time of foreclosure are
recorded as a charge to the allowance for loan losses. Costs related to the
development of such real estate are capitalized, and costs related to holding
the property are expensed. Foreclosed property is subject to periodic
revaluation based upon estimates of fair value. In determining the valuation of
other real estate owned, management obtains independent appraisals for
significant properties. Valuation adjustments are provided, as necessary, by
charges to operations. Profits and losses from sales of foreclosed property by
Southwest are recognized as incurred. At December 31, 2005 and 2004, the
balances of other real estate owned were $7.1 million and $4.9 million,
respectively.
INTANGIBLES - Intangibles consist of goodwill and loan servicing rights and are
included in other assets in the consolidated statements of financial condition.
Goodwill is no longer amortized, but is reviewed for impairment at least
annually. Southwest has determined that no impairment exists. At December 31,
2005 and 2004, the balance of goodwill was $194,000 and Southwest had recorded
cumulative amortization of $1.4 million.
Loan servicing rights are capitalized based on estimated fair market value at
the point of origination. The servicing rights are amortized on an individual
loan by loan basis over the period of estimated net servicing income. Impairment
of loan servicing rights is assessed based on the fair value of those rights.
Southwest reviews the carrying value of loan servicing rights quarterly for
impairment. Assets are considered impaired when the balances are not recoverable
from estimated future cash flows. At December 31, 2005, the fair value of loan
servicing rights was $1.5 million, which exceeded book value. The fair value of
loan servicing rights is estimated by calculating the present value of net
servicing revenue over the anticipated life of each loan.
33
At December 31, 2005 and 2004, the balances of loan servicing rights were $1.4
million and $1.3 million and Southwest had recorded cumulative amortization of
$2.1 million and $1.7 million, respectively. The estimated amortization of loan
servicing rights over the next five years is as follows:
2006 $ 310,395
2007 265,507
2008 221,975
2009 178,616
2010 137,433
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $609.0 million and $609.7 million at December 31,
2005 and 2004, respectively. The total amount of overdrawn deposit accounts that
were reclassified as loans at December 31, 2005 and 2004 was $2.5 million and
$1.3 million, respectively. Time deposit maturities are as follows: $843.5
million in 2006, $64.5 million in 2007, $34.0 million in 2008, $21.9 million in
2009, and $8.7 million thereafter.
LOAN SERVICING INCOME - Southwest earns fees for servicing real estate mortgages
and other loans owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when earned.
TAXES ON INCOME - Southwest and its subsidiaries file consolidated income tax
returns. Income tax expense is based on the results of operations, adjusted for
permanent differences between items of income or expense reported in the
financial statements and those reported for tax purposes. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance will be established if it is more likely than
not that some portion of the deferred tax asset will not be realized.
EARNINGS PER COMMON SHARE - Basic earnings per common share is computed based
upon net income divided by the weighted average number of common shares
outstanding during each period. Diluted earnings per common share is computed
based upon net income divided by the weighted average number of common shares
outstanding during each period adjusted for the effect of dilutive potential
common shares calculated using the treasury stock method. For the years ended
December 31, 2005, 2004, and 2003, Southwest had 27,500, 2,500, and zero
antidilutive options to purchase common shares, respectively. The following is a
reconciliation of the common shares used in the calculations of basic and
diluted earnings per common share:
2005 2004 2003
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic earnings per share 13,165,642 12,060,842 11,798,810
EFFECT OF DILUTIVE SECURITIES:
Stock options 398,262 487,217 360,810
------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Diluted earnings per share 13,563,904 12,548,059 12,159,620
============ ============ ============
STOCK OPTION PLAN - The Southwest Bancorp, Inc. 1994 Stock Option Plan and 1999
Stock Option Plan (the "Stock Plans") provide selected key employees with the
opportunity to acquire common stock. The exercise price of all options granted
under the Stock Plans is the fair market value on the grant date. Depending upon
terms of the stock option agreements, stock options generally become exercisable
on an annual basis over a three to ten year time period and expire from five to
ten years after the date of grant. Southwest applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for the Stock Plans;
accordingly, no compensation expense has been recorded in the accompanying
consolidated statements of operations.
Had compensation cost for the Stock Plans been determined based upon the fair
value of the options at their grant date as prescribed in SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
34
Accounting for Stock-Based Compensation - Transition and Disclosure, Southwest's
proforma data would have been as follows:
For the Years Ended December 31,
------------------------------------
(Dollars in thousands, except per share data) 2005 2004 2003
- -------------------------------------------------------- ---------- ---------- ----------
Net income, as reported $ 21,014 $ 18,629 $ 14,892
Less: Proforma compensation expense related to options
net of tax effects 386 288 375
---------- ---------- ----------
Net income, proforma $ 20,628 $ 18,341 $ 14,517
========== ========== ==========
Earnings per common share
Basic, as presented $ 1.60 $ 1.54 $ 1.26
Basic, proforma $ 1.57 $ 1.52 $ 1.23
Diluted, as presented $ 1.55 $ 1.48 $ 1.22
Diluted, proforma $ 1.52 $ 1.46 $ 1.19
Weighted average fair value at grant date $ 3.04 $ 2.62 $ 2.34
The compensation cost is calculated using the Black-Scholes option pricing model
with the following weighted average assumptions:
For the Years Ended December 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Expected dividend yield 1.90% 1.97% 1.78%
Expected volatility 28.09% 25.21% 24.71%
Risk-free interest rate 4.94% 4.74% 5.45%
Expected option term (in years) 7.93 7.82 8.49
The Stock Plan's activity follows:
Number of Weighted
Restricted Number of Average
Shares Options Exercise Price
---------- ------------ --------------
Outstanding at December 31, 2002 - 1,297,758 $ 7.12
---------- ------------ --------------
Granted - 153,588 11.72
Exercised - (398,713) 5.46
Canceled/expired - (18,150) 8.07
---------- ------------ --------------
Outstanding at December 31, 2003 - 1,034,483 8.43
---------- ------------ --------------
Granted - 123,402 17.09
Exercised - (140,726) 7.86
Canceled/expired - (27,447) 9.44
---------- ------------ --------------
Outstanding at December 31, 2004 - 989,712 9.56
---------- ------------ --------------
Granted 10,800 148,236 20.22
Exercised - (174,262) 9.96
Canceled/expired (900) (41,813) 11.66
---------- ------------ --------------
Outstanding at December 31, 2005 9,900 921,873 $ 11.21
========== ============ ==============
Total exercisable at December 31, 2003 - 502,612 $ 8.40
Total exercisable at December 31, 2004 - 623,333 $ 9.44
Total exercisable at December 31, 2005 - 636,124 $ 10.50
35
In February 2005, Southwest granted 10,800 shares of restricted stock to
independent directors of Southwest, Stillwater National and SNB Wichita at a
grant price of $19.75, which was the market price on the date of grant.
Subsequently, 900 shares were canceled. The restrictions on these shares will
lapse one-third on the first anniversary of the date of grant, one-third on the
second anniversary of the date of grant, and one-third on the third anniversary
of the date of grant.
At December 31, 2005, Southwest had reserved 2,886,566 shares under the Stock
Plans, had 921,873 shares under option, and had 501,940 shares available for
additional awards. The following summarizes the information concerning options
outstanding and exercisable at December 31, 2005.
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- --------------- ---------------- ---------------- ---------------- ----------------
107,350 $ 4.25 - $ 5.61 4.9 $ 5.30 52,150 $ 5.32
182,920 $ 6.48 - $ 7.31 3.8 $ 7.08 122,320 $ 7.09
269,247 $ 8.25 - $ 9.37 2.0 $ 8.93 227,247 $ 8.97
123,222 $10.12 - $13.16 2.0 $ 11.80 123,222 $ 11.80
211,634 $16.80 - $19.75 3.6 $ 18.39 101,181 $ 17.89
27,500 $22.08 - $25.93 4.8 $ 23.05 10,004 $ 23.29
COMPREHENSIVE INCOME - Southwest's comprehensive income (net income plus all
other changes in shareholders' equity from non-equity sources) consists of its
net income and unrealized holding gains (losses) in its available for sale
securities.
TRUST - Southwest offers trust services to customers through its relationship
with the Heritage Trust Company, a trust services company. Property (other than
cash on deposit) held by Southwest in a fiduciary or agency capacity for its
customers is not included in the consolidated statements of financial condition
as it is not an asset or liability of Southwest.
LIQUIDITY - Stillwater National is required by the Federal Reserve Bank to
maintain average reserve balances. Cash and due from banks in the consolidated
statements of financial condition include restricted amounts of $626,000 and
$471,000 at December 31, 2005 and 2004, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
36
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
At December 31, 2005
--------------------------------------------------
Gross Unrealized
Amortized ----------------------- Fair
(Dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------- ---------- ---------- ---------- ----------
Held to Maturity:
U.S. Government and agency obligations $ 1,008 $ - $ (7) $ 1,001
Obligations of state and political subdivisions 530 - (1) 529
---------- ---------- ---------- ----------
Total $ 1,538 $ - $ (8) $ 1,530
========== ========== ========== ==========
Available for Sale:
U.S. Government and agency obligations $ 231,285 $ - $ (5,182) $ 226,103
Obligations of state and political subdivisions 2,950 7 (30) 2,927
Mortgage-backed securities 22,451 21 (286) 22,186
Equity securities 5,494 69 (28) 5,535
---------- ---------- ---------- ----------
Total $ 262,180 $ 97 $ (5,526) $ 256,751
========== ========== ========== ==========
At December 31, 2004
--------------------------------------------------
Gross Unrealized
Amortized ----------------------- Fair
(Dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------- ---------- ---------- ---------- ----------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 1,028 $ - $ (4) $ 1,024
Obligations of state and political subdivisions 1,467 18 - 1,485
---------- ---------- ---------- ----------
Total $ 2,495 $ 18 $ (4) $ 2,517
========== ========== ========== ==========
Available for Sale:
U.S. Government and agency obligations $ 178,330 $ 94 $ (1,499) $ 176,925
Obligations of state and political subdivisions 3,930 80 - 4,010
Mortgage-backed securities 17,612 56 (103) 17,565
Equity securities 5,521 113 (42) 5,592
---------- ---------- ---------- ----------
Total $ 205,393 $ 343 $ (1,644) $ 204,092
========== ========== ========== ==========
37
Gross unrealized losses and fair value by length of time that the individual
securities have been in a continuous unrealized loss position at December 31,
2005 and 2004 are as follows:
Continuous Unrealized Losses Existing for:
-----------------------------------------------
Amortized cost of Fair value of
securities with Less Than Number of More Than Number of securities with
(Dollars in thousands) unrealized losses 12 Months Securities 12 Months Securities unrealized losses
- --------------------------------------- ----------------- --------- ---------- --------- ---------- -----------------
AT DECEMBER 31, 2005:
HELD TO MATURITY:
U.S. Government and agency obligations $ 1,008 $ - - $ (7) 1 $ 1,001
Obligations of state and political
subdivisions 530 (1) 1 - - 529
----------------- --------- ---------- --------- ---------- -----------------
Total $ 1,538 $ (1) 1 $ (7) 1 $ 1,530
================= ========= ========== ========= ========== =================
AVAILABLE FOR SALE:
U.S. Government and agency obligations $ 231,285 $ (1,554) 38 $ (3,628) 54 $ 226,103
Obligations of state and political
subdivisions 2,950 (30) 1 - - 2,927
Mortgage-backed securities 22,451 (82) 18 (204) 17 22,186
Equity securities 5,494 (28) 2 - - 5,535
----------------- --------- ---------- --------- ---------- -----------------
Total $ 262,180 $ (1,694) 59 $ (3,832) 71 $ 256,751
================= ========= ========== ========= ========== =================
AT DECEMBER 31, 2004:
HELD TO MATURITY:
U.S. Government and agency obligations $ 1,028 $ (4) 1 $ - - $ 1,024
Obligations of state and political
subdivisions 1,467 - - - - 1,485
----------------- --------- ---------- --------- ---------- -----------------
Total $ 2,495 $ (4) 1 $ - - $ 2,509
================= ========= ========== ========= ========== =================
AVAILABLE FOR SALE:
U.S. Government and agency obligations $ 178,330 $ (1,138) 56 $ (361) 6 $ 176,925
Obligations of state and political
subdivisions 3,930 - - - - 4,010
Mortgage-backed securities 17,612 (98) 23 (5) 1 17,565
Equity securities 5,521 (11) 2 (31) 2 5,592
----------------- --------- ---------- --------- ---------- -----------------
Total $ 205,393 $ (1,247) 81 $ (397) 9 $ 204,092
================= ========= ========== ========= ========== =================
Southwest has reviewed all these securities on an individual basis and has
determined that the unrealized losses are not related to a decline in the credit
quality of the issuers. Additionally, Southwest has the ability and intent to
hold these securities for a period of time sufficient for a forecasted market
price recovery up to (or beyond) the cost of the investment, or to maturity when
the full cost will be recovered. As a result, management has determined that
none of the unrealized losses are other than temporary.
As required by law, investment securities are pledged to secure public and trust
deposits, as well as the Sweep Agreement product and borrowings from the FHLB.
Securities with an amortized cost of $227.5 million and $192.9 million were
pledged to meet such requirements of $90.1 million and $75.9 million at December
31, 2005 and 2004, respectively. Any amount overpledged can be released at any
time.
38
A comparison of the amortized cost and approximate fair value of Southwest's
debt securities by maturity date at December 31, 2005 follows in the next table.
Available for Sale Held to Maturity
------------------------ ------------------------
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
- ------------------------------- ---------- ----------- ----------- ----------
(dollars in thousands)
One year or less $ 1,194 $ 1,203 $ 1,538 $ 1,530
Two years through five years 258,980 253,547 - -
Five years through ten years - - - -
More than ten years 2,006 2,001 - -
---------- ----------- ----------- ----------
Total $ 262,180 $ 256,751 $ 1,538 $ 1,530
========== =========== =========== ==========
The foregoing analysis assumes that Southwest's mortgage-backed securities
mature during the period in which they are estimated to prepay. No other
prepayment or repricing assumptions have been applied to Southwest's debt
securities for this analysis.
Gross realized gains (losses) on sales of investment securities were zero during
2005, $103,000 and $(165,000) during 2004, and $29,000 and $(1,000) during 2003,
respectively. The gross proceeds from such sales of investment securities
totaled approximately zero, $11.0 million, and $7.0 million during 2005, 2004,
and 2003, respectively. A portion of the gain on sales of investment securities
during 2004 and 2003 occurred when securities classified as "held to maturity"
and "available for sale", originally purchased at a discount, were called prior
to their stated maturity dates.
3. LOANS
Major classifications of loans are as follows:
At December 31,
--------------------------
(Dollars in thousands) 2005 2004
- ----------------------------------------------- ----------- -----------
Real estate mortgage:
Commercial $ 563,074 $ 523,358
One-to-four family residential 93,478 87,858
Real estate construction 299,344 248,278
Commercial 374,101 390,272
Installment and consumer:
Guaranteed student loans 377,110 348,970
Other 28,773 25,139
----------- -----------
1,735,880 1,623,875
Allowance for loan losses (23,812) (18,991)
----------- -----------
Total loans, net $ 1,712,068 $ 1,604,884
=========== ===========
Southwest extends commercial and consumer credit primarily to customers in the
states of Oklahoma, Texas, and Kansas which subjects the loan portfolio to the
general economic conditions within these areas. At December 31, 2005 and 2004,
substantially all of Southwest's loans were collateralized with real estate,
inventory, accounts receivable, and/or other assets, or are guaranteed by
agencies of the United States Government or, in the case of private student
loans, insured by a private insurer.
Loans to individuals and businesses in the healthcare industry totaled $428.2
million, or 25% of total loans at December 31, 2005. Southwest does not have any
other concentrations of loans to individuals or businesses involved in a single
industry of more than 5% of total loans. In the event of total nonperformance by
the borrowers or guarantors, Southwest's accounting loss would be limited to the
recorded investment in the loans reduced by proceeds received from disposition
of the related collateral.
39
Southwest had loans which were held for sale of $383.4 million and $354.6
million at December 31, 2005 and 2004, respectively. These loans are carried at
the lower of cost or market. Guaranteed student loans are generally sold to a
single servicer. A substantial portion of the one-to-four family residential
loans and loan servicing rights are sold to five servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $22.1 million and $22.2 million at December
31, 2005 and 2004, respectively. If interest on those loans had been accrued,
the interest income as reported in the accompanying consolidated statements of
operations would have increased by approximately $889,000, $810,000, and
$802,000, for 2005, 2004, and 2003, respectively.
The principal balance of loans past due ninety days or more for which Southwest
was still accruing interest totaled $1.5 million and $929,000 at December 31,
2005 and 2004, respectively.
The unpaid principal balance of real estate mortgage loans serviced for others
totaled $133.5 million and $125.4 million at December 31, 2005 and 2004,
respectively. Southwest maintained escrow accounts totaling $731,000 and
$629,000 for real estate mortgage loans serviced for others at December 31, 2005
and 2004, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 2005. Student loans that do not have stated
maturities are treated as due in one year or less. Real estate construction
includes certain loans which will convert to permanent financing at the point
when construction is completed; these loans are reported according to their
final maturity.
One year One to Over
(Dollars in thousands) or less five years five years Total
- ---------------------------------------- ---------- ---------- ---------- -----------
Real estate mortgage:
Commercial $ 99,077 $ 284,718 $ 179,279 $ 563,074
One-to-four family residential 17,309 38,748 37,421 93,478
Real estate construction 129,012 130,068 40,264 299,344
Commercial 137,604 149,839 86,658 374,101
Installment and consumer:
Guaranteed student loans 377,110 - - 377,110
Other 13,968 14,063 742 28,773
---------- ---------- ---------- -----------
Total $ 774,080 $ 617,436 $ 344,364 $ 1,735,880
========== ========== ========== ===========
The following table sets forth at December 31, 2005 the dollar amount of all
loans due more than one year after December 31, 2005.
(Dollars in thousands) Fixed Variable Total
- --------------------------------------- ---------- ---------- -----------
Real estate mortgage:
Commercial $ 35,703 $ 428,294 $ 463,997
One-to-four family residential 26,901 49,268 76,169
Real estate construction 5,634 164,698 170,332
Commercial 30,161 206,336 236,497
Installment and consumer 5,882 8,923 14,805
---------- ---------- -----------
Total $ 104,281 $ 857,519 $ 961,800
========== ========== ===========
40
The allowance for loan losses is summarized as follows:
For the Years Ended December 31,
--------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------------------ ---------- ---------- ----------
Beginning balance $ 18,991 $ 15,009 $ 11,163
Provision for loan losses 15,785 12,868 8,408
Loans charged off (12,020) (10,034) (5,077)
Recoveries 1,056 1,148 515
---------- ---------- ----------
Total $ 23,812 $ 18,991 $ 15,009
========== ========== ==========
As of December 31, 2005 and 2004, impaired loans totaled $22.1 million and $22.2
million and had a related allowance for loan loss of $4.4 million and $4.7
million, respectively. The average balance of impaired loans totaled $12.9
million and $9.0 million for the years ended December 31, 2005 and 2004,
respectively. Interest income recognized on impaired loans totaled $195,000,
$58,000, and $11,000, respectively, for the years ended December 31, 2005, 2004,
and 2003.
Directors and officers of Southwest, Stillwater National, and SNB Wichita were
customers of, and had transactions with, Southwest in the ordinary course of
business, and similar transactions are expected in the future. All loans
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than normal
risk of loss or present other unfavorable features. Certain directors, and
companies in which they have ownership interests, had indebtedness to Southwest
totaling $1.6 million, $1.4 million, and $1.8 million, at December 31, 2005,
2004 and 2003, respectively. During 2005, $2.7 million of new loans and advances
on existing loans were made to these persons and repayments totaled $2.5
million.
4. PREMISES AND EQUIPMENT
These consist of the following:
At December 31,
------------------------
(Dollars in thousands) 2005 2004
- ------------------------------------------ ---------- ----------
Land $ 4,530 $ 4,530
Buildings and improvements 11,205 11,196
Furniture, fixtures, and equipment 24,908 24,709
Construction/Remodeling in progress 2,108 261
---------- ----------
42,751 40,696
Accumulated depreciation and amortization (22,167) (20,836)
---------- ----------
Premises and equipment, net $ 20,584 $ 19,860
========== ==========
41
5. OTHER BORROWED FUNDS
During 2005, the only category of other borrowings whose average exceeded 30% of
ending shareholders' equity was funds borrowed from the FHLB.
At December 31,
--------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------------------------------------ ---------- ---------- ----------
AMOUNTS OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option $ 2,216 $ 2,359 $ 2,490
Federal funds purchased and securities sold
under repurchase agreements 65,342 60,006 61,335
Borrowed from the Federal Home Loan Bank 136,850 137,700 120,025
Other 100 - -
WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option 3.95% 1.87% 0.73%
Federal funds purchased and securities sold
under repurchase agreements 2.88 1.59 0.71
Borrowed from the Federal Home Loan Bank 4.33 3.54 3.36
Other 5.25 - -
MAXIMUM AMOUNTS OF BORROWINGS OUTSTANDING
AT ANY MONTH-END:
Treasury, tax and loan note option $ 2,216 $ 2,500 $ 2,500
Federal funds purchased and securities sold
under repurchase agreements 130,342 111,359 97,893
Borrowed from the Federal Home Loan Bank 146,500 189,788 166,500
Other 100 - -
APPROXIMATE AVERAGE SHORT-TERM BORROWINGS
OUTSTANDING FOR THE YEAR:
Treasury, tax and loan note option $ 672 $ 758 $ 752
Federal funds purchased and securities sold
under repurchase agreements 78,641 85,680 64,927
Borrowed from the Federal Home Loan Bank 129,763 165,693 134,794
Other 1 - -
APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR:
Treasury, tax and loan note option 3.00% 1.12% 0.91%
Federal funds purchased and securities sold
under repurchase agreements 2.86 1.22 0.84
Borrowed from the Federal Home Loan Bank 3.91 2.97 3.22
Other 5.25 - -
Southwest has entered into an agreement with the FHLB to obtain advances from
the FHLB from time to time. The terms of the agreement are set forth in the
Advance, Pledge and Security Agreement (the "Agreement"). The FHLB requires that
Southwest pledge collateral on such advances. Under the terms of the Agreement,
the discounted value of the collateral, as defined by the FHLB, should at all
times be at least equal to the amount borrowed by Southwest. Such advances
outstanding are subject to a blanket collateral arrangement, which requires the
pledging of eligible collateral to secure such advances. Such collateral
principally includes certain loans and securities. At December 31, 2005 and
2004, loans pledged under the Agreement were $465.1 million and $460.6 million
and investment securities pledged (at carrying value) were $101.7 million and
$86.1 million, respectively.
Southwest has available various forms of other borrowings for cash management
and liquidity purposes. These forms of borrowings include federal funds
purchases, securities sold under agreements to repurchase, and
42
borrowings from the FRB, the Student Loan Marketing Association ("SLMA"), the
F&M Bank of Tulsa ("F&M") and the FHLB. Southwest has a $2.5 million line of
credit from F&M, none of which was outstanding at December 31, 2005. Southwest
also carries interest-bearing demand notes issued by the U.S. Treasury in
connection with the Treasury Tax and Loan note program; the outstanding balance
of those notes was $2.2 million at December 31, 2005. Southwest has approved
federal funds purchase lines totaling $350.5 million with nine financial
entities; the outstanding balance on these lines totaled $1.5 million at
December 31, 2005. In addition, Southwest has available a $200.0 million line of
credit from the SLMA and a $340.7 million line of credit from the FHLB.
Borrowings under the SLMA line would be secured by student loans. Borrowings
under the FHLB line are secured by all unpledged securities and other loans. The
SLMA line expires April 20, 2007; no amount was outstanding on this line at
December 31, 2005. The FHLB line of credit had an outstanding balance of $136.9
million at December 31, 2005 and maturities as follows: $80.4 million in 2006,
zero in 2007, $10.0 million in 2008, $15.0 million in 2009, zero in 2010, and
$31.5 million after 2010. Southwest also has available unsecured brokered
certificate of deposit lines of credit in connection with its retail certificate
of deposit program from Merrill Lynch & Co., Morgan Stanley & Co., Inc.,
Citigroup Global Markets, Inc., Wachovia Securities LLC, UBS Financial Services,
Inc., RBC Dain Rauscher, and CountryWide Securities that total $1.5 billion. In
conjunction with these lines of credit, $379.3 million in retail certificates of
deposit were included in total deposits at December 31, 2005.
Southwest sells securities under agreements to repurchase with Southwest
retaining custody of the collateral. Collateral consists of direct obligations
of U.S. Government Agency issues, which are designated as pledged with
Southwest's safekeeping agent. The type of collateral required, the retention of
the collateral, and the security sold minimize Southwest's risk of exposure to
loss. These transactions are for one-to-four day periods. At December 31, 2005,
one repurchase agreement to one entity totaling $18.0 million exceeded more than
10% of equity capital.
6. SUBORDINATED DEBENTURES
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued its 9.30% Cumulative Trust Preferred Securities (the "SBI Capital Trust
Preferred") in an underwritten public offering. Proceeds of the SBI Capital
Trust Preferred totaling $25,786,500 were invested in the 9.30% Subordinated
Debentures (the "SBI Capital Subordinated Debentures") of Southwest. After
deducting underwriter's compensation and other expenses of the offering, the net
proceeds were available to Southwest to increase capital and for general
corporate purposes, including use in investment and lending activities, and the
redemption of Southwest's 9.20% Redeemable Cumulative Preferred Stock, Series A
(the "Series A Preferred Stock"). Interest payments on the SBI Capital
Subordinated Debentures are deductible for federal income tax purposes.
The SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures were
redeemed in June 2005. At that time, $970,000 in unamortized issuance costs
related to the SBI Capital Trust Preferred were written off to general and
administrative expense.
On June 26, 2003, OKSB Statutory Trust I, a newly-formed subsidiary of
Southwest, issued its Floating Rate Capital Securities (the "OKSB Trust
Preferred") in a private placement. Proceeds of the OKSB Trust Preferred
totaling $20,619,000 were invested in the Floating Rate Junior Subordinated
Deferrable Interest Debentures (the "OKSB Subordinated Debentures") of
Southwest. After deducting underwriter's compensation and other expenses of the
offering, the net proceeds were available to Southwest to increase capital and
for general corporate purposes. Interest payments on the OKSB Subordinated
Debentures are deductible for federal income tax purposes.
The OKSB Trust Preferred and the OKSB Subordinated Debentures each mature on
June 26, 2033. If certain conditions are met, the maturity dates of the OKSB
Trust Preferred and the OKSB Subordinated Debentures may be shortened to a date
not earlier than June 26, 2008. The OKSB Trust Preferred and the OKSB
Subordinated Debentures also may be redeemed prior to maturity if certain events
occur. The OKSB Trust Preferred is subject
43
to mandatory redemption, in whole or in part, upon repayment of the OKSB
Subordinated Debentures at maturity or their earlier redemption. Southwest also
has the right, if certain conditions are met, to defer payment of interest on
the OKSB Subordinated Debentures, which would result in a deferral of dividend
payments on the OKSB Trust Preferred, at any time or from time to time for a
period not to exceed 20 consecutive quarters in a deferral period.
On October 14, 2003, SBI Capital Trust II, a newly-formed subsidiary of
Southwest, issued its Floating Rate Trust Preferred Securities (the "SBI II
Trust Preferred") in a private placement. Proceeds of the SBI II Trust Preferred
totaling $25,774,000 were invested in the Floating Rate Junior Subordinated
Deferrable Interest Debentures (the "SBI II Subordinated Debentures") of
Southwest. The proceeds were available to Southwest to increase capital and for
general corporate purposes. Interest payments on the SBI II Subordinated
Debentures are deductible for federal income tax purposes.
The SBI II Trust Preferred and the SBI II Subordinated Debentures each mature on
October 7, 2033. If certain conditions are met, the maturity dates of the SBI II
Trust Preferred and the SBI II Subordinated Debentures may be shortened to a
date not earlier than October 7, 2008. The SBI II Trust Preferred and the SBI II
Subordinated Debentures also may be redeemed prior to maturity if certain events
occur. The SBI II Trust Preferred is subject to mandatory redemption, in whole
or in part, upon repayment of the SBI II Subordinated Debentures at maturity or
their earlier redemption. Southwest also has the right, if certain conditions
are met, to defer payment of interest on the SBI II Subordinated Debentures,
which would result in a deferral of dividend payments on the OKSB Trust
Preferred, at any time or from time to time for a period not to exceed 20
consecutive quarters in a deferral period.
Proceeds from the SBI II trust preferred issuance were used to retire the $25.0
million in fixed rate trust preferred securities issued in 1997, which became
subject to redemption by Southwest in the third quarter of 2002.
Southwest, SBI Capital Trust, OKSB Statutory Trust I and SBI Capital Trust II
believe that, taken together, the obligations of Southwest under the Trust
Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the
Subordinated Debentures, the Indentures and the Agreements as to Expenses and
Liabilities, entered into in connection with the offering of the Trust Preferred
and the Subordinated Debentures, in the aggregate constitute a full and
unconditional guarantee by Southwest of the obligations of SBI Capital Trust,
OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the SBI Trust Preferred and purchasing the SBI Subordinated Debentures,
which were its sole assets. This entity is now inactive.
OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose
of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated
Debentures, which are its sole assets. Southwest owns all of the 619 outstanding
common securities of OKSB Statutory Trust I; the liquidation value is $1,000 per
share.
SBI Capital Trust II is a Delaware statutory trust created for the purpose of
issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated
Debentures, which are its sole assets. Southwest owns all of the 774 outstanding
common securities of SBI Capital Trust II; the liquidation value is $1,000 per
share.
Each of the Trust Preferred issuances meets the regulatory criteria for Tier I
capital, subject to Federal Reserve guidelines that limit the amount of the
Trust Preferred and cumulative perpetual preferred stock to an aggregate of 25%
of Tier I capital. At December 31, 2005, $45.0 million of the Trust Preferred
was included in Tier I capital.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation was to provide guidance on how
to identify a variable interest entity ("VIE") and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. FIN 46 has
required Southwest to de-consolidate its investments in OKSB Statutory Trust I
and SBI Capital Trust II (the "Trusts") in this Annual Report and all future
reports. Due to this required de-consolidation, the Trust Preferred Securities
are not presented on the Consolidated Statements
44
of Financial Condition and the Subordinated Debentures are presented on the
Consolidated Statements of Financial Condition as a separate liability category.
7. INCOME TAXES
The components of taxes on income follow:
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- -------------------------------------------------------- ---------- ---------- ----------
CURRENT TAX EXPENSE:
Federal $ 13,657 $ 9,921 $ 8,577
State 1,435 1,244 1,121
DEFERRED TAX EXPENSE (BENEFIT):
Federal (1,127) (532) (1,274)
State (125) (94) (318)
---------- ---------- ----------
Taxes on income $ 13,840 $ 10,539 $ 8,106
========== ========== ==========
The amounts of taxes on income in the consolidated statements of operations in
this report are different from the expected outcomes using U.S. Federal income
tax rates for the following reasons:
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- -------------------------------------------------------- ---------- ---------- ----------
Computed tax expense at statutory rates $ 12,199 $ 10,209 $ 8,044
INCREASE (DECREASE) IN INCOME
TAXES RESULTING FROM:
Low income housing credit (500) (125) -
Benefit of income not subject to U.S. Federal income tax (111) (462) (583)
Expenses not deductible for U.S. Federal income tax 172 170 124
State income taxes, net of Federal income tax benefit 852 747 522
Other 1,228 - (1)
---------- ---------- ----------
Taxes on income $ 13,840 $ 10,539 $ 8,106
========== ========== ==========
Deferred tax expense (benefit) relating to temporary differences includes the
following components:
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- -------------------------------------------------------- ---------- ---------- ----------
Provision for loan losses $ (2,241) $ (1,593) $ (1,726)
Accumulated depreciation (267) 828 347
Prepaid maintenance 39 39 239
Deferred compensation accrual (9) 65 (73)
Mark-to-market adjustments 540 66 (389)
FHLB stock dividends 580 (156) (33)
Write-downs on other real estate (171) - (4)
Other 277 125 47
---------- ---------- ----------
Total $ (1,252) $ (626) $ (1,592)
========== ========== ==========
45
Net deferred tax assets of $9.3 million and $6.4 million at December 31, 2005
and 2004, respectively, are reflected in the accompanying Consolidated
Statements of Financial Condition in other assets. There were no valuation
allowances at December 31, 2005 or 2004.
Temporary differences that give rise to the deferred tax assets (liabilities)
include the following:
At December 31,
-----------------------
(Dollars in thousands) 2005 2004
- ------------------------------------------- ---------- ----------
Provision for loan losses $ 9,999 $ 7,758
Accumulated depreciation (2,572) (2,839)
Prepaid maintenance (317) (278)
Deferred compensation accrual 168 159
Mark-to-market adjustments 210 750
FHLB stock dividends (391) 189
Write-downs on other real estate 171 -
Other (92) 185
---------- ----------
7,176 5,924
Deferred taxes (payable) receivable on
investment securities available for sale 2,104 505
---------- ----------
Net deferred tax asset $ 9,280 $ 6,429
========== ==========
8. SHAREHOLDERS' EQUITY
On August 29, 2003, Southwest effected a two-for-one stock split of its common
stock in the form of a dividend of 6,121,521 shares. Share and per share amounts
in this report have been retroactively restated to reflect this stock split.
In April 2002, Southwest's Board of Directors (the "Board") authorized the
repurchase of up to 5%, or 572,000 shares, of its outstanding common stock, par
value $1.00 per share, in connection with shares expected to be issued under
Southwest's dividend reinvestment, stock option, and employee benefit plans and
for other corporate purposes. Additional one year programs were authorized by
the Board in March 2003 and April 2004 with the Board authorizing the repurchase
of up to another 5%, or approximately 560,000 and 500,000 shares, respectively.
In January 2006, the Board authorized a two year program to repurchase up to
another 5%, or approximately 700,000 shares. The additional repurchases were
also to be made in connection with shares expected to be issued under
Southwest's dividend reinvestment, stock option, and employee benefit plans, and
for other corporate purposes. The share repurchases are expected to be made
primarily on the open market from time to time until February 1, 2008, or
earlier termination of the repurchase program by the Board. Repurchases under
the program will be made at the discretion of management based upon market,
business, legal, and other factors.
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board believes are unfair or
otherwise not in the best interests of Southwest and its shareholders. Under the
Rights Plan, each holder of record of Southwest's common stock, as of the close
of business on April 22, 1999, received one right per common share. The rights
generally become exercisable if an acquiring party accumulates, or announces an
offer to acquire, 10% or more of Southwest's voting stock. The rights will
expire on April 22, 2009. Each right will entitle the holder (other than the
acquiring party) to buy, at the right's then current exercise price, Southwest's
common stock or equivalent securities having a value of twice the right's
exercise price. The exercise price of each right was initially set at $36.67. In
addition, upon the occurrence of certain events, holders of the rights would be
entitled to purchase, at the then current exercise price, common stock or
equivalent securities of an acquiring entity worth twice the exercise price.
Under the Rights Plan, Southwest also may exchange each right, other than rights
owned by an acquiring party, for a share of its common stock or equivalent
securities.
46
Southwest has reserved for issuance 600,000 shares of common stock pursuant to
the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The
Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Southwest's employees to acquire additional
common shares through payroll deductions. Since July 1999, shares issued out of
these plans have come from treasury shares. At December 31, 2005, 80,486 new
shares had been issued and 71,974 treasury shares had been issued under these
plans.
Southwest has reserved 1,760,000 shares of common stock pursuant to the terms of
the 1999 Stock Option Plan. The 1999 Stock Option Plan provides selected key
employees with the opportunity to acquire common stock. At December 31, 2005,
90,000 new shares and 1,083,038 treasury shares had been reissued by this plan.
See "Stock Option Plan" in Note 1 to the Consolidated Financial Statements
beginning on page 34 for additional information on Southwest's stock option
plans.
9. CAPITAL REQUIREMENTS
Southwest, Stillwater National and SNB Wichita are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Southwest's, Stillwater National's, and SNB Wichita's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Southwest, Stillwater National, and SNB
Wichita must meet specific capital guidelines that involve quantitative measures
of Southwest's, Stillwater National's, and SNB Wichita's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. Southwest's, Stillwater National's, and SNB Wichita's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require Southwest,
Stillwater National, and SNB Wichita to maintain minimum amounts and of Total
and Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I Capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2005 and 2004, that Southwest,
Stillwater National, and SNB Wichita met all capital adequacy requirements to
which they are subject.
As of December 31, 2005 and 2004, the most recent notification from the Office
of the Comptroller of the Currency ("OCC") categorized Stillwater National as
well-capitalized under the regulatory framework for prompt corrective action. As
of December 31, 2005 and 2004, the most recent notification from the Office of
Thrift Supervision ("OTS") categorized SNB Wichita as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, Stillwater National and SNB Wichita must maintain minimum
Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since these notifications that
management believes have changed Stillwater National's or SNB Wichita's
categories.
47
Southwest's, Stillwater National's, and SNB Wichita's actual capital amounts and
ratios are presented below.
To Be Well Capitalized
Under Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
----------------------- ----------------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
AS OF DECEMBER 31, 2005:
Total Capital (to risk-weighted assets)
Southwest $ 239,759 14.21% N/A N/A $ 135,002 8.00%
Stillwater National 202,444 12.26 $ 165,087 10.00% 132,069 8.00
SNB Wichita 5,741 17.84 3,218 10.00 2,575 8.00
Tier I Capital (to risk-weighted assets)
Southwest 218,587 12.95 N/A N/A 67,501 4.00
Stillwater National 181,729 11.01 99,052 6.00 66,035 4.00
SNB Wichita 5,349 16.62 1,931 6.00 1,287 4.00
Tier I Leverage (to average assets)
Southwest 218,587 10.24 N/A N/A 85,393 4.00
Stillwater National 181,729 8.83 102,877 5.00 82,302 4.00
SNB Wichita 5,349 11.43 2,339 5.00 1,871 4.00
AS OF DECEMBER 31, 2004:
Total Capital (to risk-weighted assets)
Southwest $ 216,038 13.92% N/A N/A $ 124,186 8.00%
Stillwater National 177,433 11.69 $ 151,718 10.00% 121,374 8.00
SNB Wichita 5,788 19.63 2,948 10.00 2,358 8.00
Tier I Capital (to risk-weighted assets)
Southwest 168,847 10.88 N/A N/A 62,093 4.00
Stillwater National 158,445 10.44 91,031 6.00 60,687 4.00
SNB Wichita 5,471 18.56 1,769 6.00 1,179 4.00
Tier I Leverage (to average assets)
Southwest 168,847 8.61 N/A N/A 78,411 4.00
Stillwater National 158,445 8.24 96,091 5.00 76,872 4.00
SNB Wichita 5,471 15.82 1,730 5.00 1,384 4.00
The approval of the Comptroller of the Currency is required if the total of all
dividends declared by Stillwater National in any calendar year exceeds the total
of its net profits of that year combined with its retained net profits of the
preceding two years. In addition, Stillwater National may not pay a dividend if,
after paying the dividend, Stillwater National would be under capitalized.
Stillwater National's maximum amount of dividends available for payment totaled
approximately $37.4 million at December 31, 2005. Dividends declared by
Stillwater National for the years ended December 31, 2005, 2004, and 2003 did
not exceed the threshold requiring regulatory approval.
The same dividend restrictions apply to SNB Wichita with approval required from
the Office of Thrift Supervision. SNB Wichita had zero dividends available for
payment at December 31, 2005, 2004, and 2003.
10. EMPLOYEE BENEFITS
Southwest sponsors a noncontributory, defined contribution profit sharing plan
intended to provide retirement benefits for employees of Southwest. The plan
covers all employees who have completed one year of service and have attained
the age of 21. The plan is subject to the Employee Retirement Income Security
Act of 1974, as amended. Southwest's contributions are made at the discretion of
the Board of Directors; however, the annual contribution may not exceed 15% of
the total annual compensation of all participants. Southwest made contributions
of $1.9 million, $1.8 million, and $1.3 million, in 2005, 2004, and 2003,
respectively.
48
11. OPERATING LEASES
Southwest leases certain equipment and facilities for its operations. Future
minimum annual rental payments required under operating leases, net of sublease
agreements, that have initial or remaining lease terms in excess of one year as
of December 31, 2005 follow:
2006 $ 1,840,909
2007 1,631,829
2008 1,416,445
2009 1,310,757
2010 819,581
Thereafter 669,268
The total rental expense was $1.7 million, $1.4 million, and $1.3 million, in
2005, 2004, and 2003, respectively.
12. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by Southwest using available market information and appropriate
valuation methodologies. However, considerable judgment is required to interpret
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts Southwest could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - The fair value of U.S. Government and agency
obligations, other securities, and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
LOANS - Fair values are estimated for certain homogeneous categories of
loans adjusted for differences in loan characteristics. Southwest's loans have
been aggregated by categories consisting of commercial, real estate, student,
and other consumer. The fair value of loans is estimated by discounting the cash
flows using credit and interest rate risks inherent in the loan category and
interest rates currently offered for loans with similar terms and credit risks.
ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable estimate
of fair value for accrued interest receivable.
DEPOSITS - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the statement of
financial condition date. The fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
OTHER BORROWINGS - The fair values of other borrowings are the amounts
payable at the statement of financial condition date, as the carrying amount is
a reasonable estimate of fair value due to the short-term maturity rates.
Included in other borrowings are federal funds purchased, securities sold under
agreements to repurchase, and treasury tax and loan demand notes.
SUBORDINATED DEBENTURES - The fair value of the Subordinated debentures is
based on current book value. The Subordinated debentures have floating rates
that reset quarterly.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit, and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
49
The carrying values and estimated fair values of Southwest's financial
instruments follow:
AT DECEMBER 31, 2005 At December 31, 2004
--------------------------- ---------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Values Values Values Values
- -------------------------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 50,277 $ 50,277 $ 24,097 $ 24,097
Investment securities:
Held to maturity 1,538 1,530 2,495 2,509
Available for sale 256,751 256,751 204,092 204,092
FRB and FHLB stock 9,804 9,804 13,464 13,464
Total loans 1,712,068 1,713,849 1,604,884 1,604,188
Accrued interest receivable 14,382 14,382 15,091 15,091
Deposits 1,657,820 1,654,440 1,500,058 1,595,711
Accrued interest payable 8,953 8,953 4,911 4,911
Other liabilities 11,233 11,233 8,323 8,323
Other borrowings 204,508 204,508 200,065 200,065
Subordinated debentures 46,393 46,393 72,180 72,891
Commitments - - - -
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Southwest makes use of a number of different
financial instruments to help meet the financial needs of its customers. In
accordance with generally accepted accounting principles, these transactions are
not presented in the accompanying consolidated financial statements and are
referred to as off-balance sheet instruments. These transactions and activities
include commitments to extend lines of commercial and real estate mortgage
credit, and standby and commercial letters of credit.
The following table provides a summary of Southwest's off-balance sheet
financial instruments:
At December 31,
---------------------------
(Dollars in thousands) 2005 2004
- ---------------------------------------------------------------- ------------ ------------
Commitments to extend commercial and real estate mortgage credit $ 451,095 $ 367,105
Standby and commercial letters of credit 16,344 9,599
------------ ------------
Total $ 467,439 $ 376,704
============ ============
A loan commitment is a binding contract to lend up to a maximum amount for a
specified period of time provided there is no violation of any financial,
economic, or other terms of the contract. A standby letter of credit obligates
Southwest to honor a financial commitment to a third party should Southwest's
customer fail to perform. Many loan commitments and most standby letters of
credit expire unfunded, and, therefore, total commitments do not represent
future funding obligations of Southwest. Loan commitments and letters of credit
are made under normal credit terms, including interest rates and collateral
prevailing at the time, and usually require the payment of a fee by the
customer. Commercial letters of credit are commitments generally issued to
finance the movement of goods between buyers and sellers. Southwest's exposure
to credit loss, assuming commitments are funded, in the event of nonperformance
by the other party to the financial instrument is represented by the contractual
amount of those instruments. Southwest does not anticipate any material losses
as a result of the commitments.
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Southwest is at all times subject to various
pending and
50
threatened legal actions. The relief or damages sought in some of these actions
may be substantial. After reviewing pending and threatened actions with counsel,
management considers that the outcome of such actions will not have a material
adverse effect on Southwest's financial position; however, Southwest is not able
to predict whether the outcome of such actions may or may not have a material
adverse effect on results of operations in a particular future period as the
timing and amount of any resolution of such actions and relationship to the
future results of operations are not known.
At periodic intervals, the Federal Reserve Bank, the Office of the Comptroller
of the Currency, and the Office of Thrift Supervision routinely examine
Southwest's, Stillwater National's, and SNB Wichita's financial statements as
part of their legally prescribed oversight of the banking industry. Based on
these examinations, the regulators can direct that Southwest's, Stillwater
National's, and SNB Wichita's financial statements be adjusted in accordance
with their findings.
Southwest has adopted a Severance Compensation Plan (the "Plan") for the benefit
of certain officers and key members of management. The Plan's purpose is to
protect and retain certain qualified employees in the event of a change in
control (as defined) and to reward those qualified employees for loyal service
to Southwest by providing severance compensation to them upon their involuntary
termination of employment after a change in control of Southwest. At December
31, 2005, Southwest has not recorded any amounts in the consolidated financial
statements relating to the Plan. If a change of control were to occur, the
maximum amount payable to certain officers and key members of management would
approximate $3.4 million.
15. SUPPLEMENTAL CASH FLOWS INFORMATION
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- -------------------------------------------------------- ---------- ---------- ----------
Cash paid for interest $ 48,196 $ 30,710 $ 29,734
Cash paid for taxes on income 15,544 8,300 8,681
Loans transferred to other real estate owned 7,303 4,035 2,920
16. OPERATING SEGMENTS
Southwest operates three principal segments: Oklahoma Banking, Other States
Banking, and loans originated for sale in the secondary market ("Secondary
Market"). The Oklahoma Banking segment consists of three operating units that
provide lending and deposit services to customers in the state of Oklahoma. The
Other States Banking segment consists of two operating units that provide
lending and deposit services to customers in the states of Texas and Kansas. The
Secondary Market segment consists of two operating units that provide guaranteed
student lending services to post-secondary students in Oklahoma and several
other states and residential mortgage lending services to customers primarily in
Oklahoma, Texas, and Kansas. Southwest's fund management unit is included in
Other Operations. The primary purpose of this unit is to manage Southwest's
overall liquidity needs and interest rate risk. Each segment borrows funds from
and provides funds to the funds management unit as needed to support their
operations. The Other Operations segment also includes SNB Investor Services and
nonbank cash machine operations.
Southwest identifies reportable segments by type of service provided and
geographic location. Operating results are adjusted for intercompany loan
participations and borrowings, allocated service costs, and management fees.
The accounting policies of each reportable segment are the same as those of
Southwest as described in Note 1. Expenses for consolidated back-office
operations are allocated to operating segments based on estimated uses of those
services. General overhead expenses such as executive administration,
accounting, and internal audit are allocated based on the direct expense and/or
deposit and loan volumes of the operating segment. Income tax
51
expense for the operating segments is calculated essentially at the statutory
rate. The parent company records the tax expense or benefit necessary to
reconcile to the consolidated unit.
The following table summarizes financial results by operating segment:
For the Year Ended December 31, 2005
------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ------------------------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 46,119 $ 19,272 $ 16,971 $ 2,744 $ 85,106
Provision for loan losses 11,371 4,414 - - 15,785
Other income 8,284 990 4,221 3,911 17,406
Other expenses 28,262 12,082 5,780 5,749 51,873
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes 14,770 3,766 15,412 906 34,854
Taxes on income 5,951 1,373 5,984 532 13,840
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 8,819 $ 2,393 $ 9,428 $ 374 $ 21,014
============ ============ ============ ============ ============
Fixed asset expenditures $ 485 $ 1,412 $ - $ 1,527 $ 3,424
Total loans at period end 836,850 518,708 380,346 (24) 1,735,880
Total assets at period end 843,584 516,212 397,940 341,903 2,099,639
For the Year Ended December 31, 2004
------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ------------------------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 42,272 $ 14,331 $ 18,817 $ (2,943) $ 72,477
Provision for loan losses 8,941 3,927 - - 12,868
Other income 7,252 867 3,104 2,862 14,085
Other expenses 27,671 7,281 5,483 4,091 44,526
------------ ------------ ------------ ------------ ------------
Income before taxes 12,912 3,990 16,438 (4,172) 29,168
Taxes on income 4,798 1,380 6,018 (1,657) 10,539
------------ ------------ ------------ ------------ ------------
Net income $ 8,114 $ 2,610 $ 10,420 $ (2,515) $ 18,629
============ ============ ============ ============ ============
Fixed asset expenditures $ 480 $ 650 $ 2 $ 1,732 $ 2,864
Total loans at period end 881,682 388,002 353,812 379 1,623,875
Total assets at period end 889,768 386,379 368,557 269,083 1,913,787
For the Year Ended December 31, 2003
------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ------------------------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 41,977 $ 8,475 $ 9,679 $ (4,663) $ 55,468
Provision for loan losses 6,231 2,177 - - 8,408
Other income 6,642 408 4,206 3,244 14,500
Other expenses 25,657 3,954 5,085 3,866 38,562
------------ ------------ ------------ ------------ ------------
Income before taxes 16,731 2,752 8,800 (5,285) 22,998
Taxes on income 6,040 936 3,240 (2,110) 8,106
------------ ------------ ------------ ------------ ------------
Net income $ 10,691 $ 1,816 $ 5,560 $ (3,175) $ 14,892
============ ============ ============ ============ ============
Fixed asset expenditures $ 538 $ 1,548 $ 89 $ 1,348 $ 3,523
Total loans at period end 865,688 228,620 214,377 151 1,308,836
Total assets at period end 879,290 231,153 220,346 250,775 1,581,564
52
17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Following are the condensed financial statements of Southwest Bancorp, Inc.
("Parent Company only") for the periods indicated:
At December 31,
-----------------------
(Dollars in thousands) 2005 2004
- ------------------------------------------------------------------------------- ---------- ----------
STATEMENTS OF FINANCIAL CONDITION
ASSETS:
Cash and due from banks $ 3,401 $ 30,459
Investment in subsidiary bank 178,927 157,952
Investments in other subsidiaries 6,701 7,618
Investment securities, available for sale 29,442 2,860
Loans, net of allowance for loan losses of $0 (2005) and $0 (2004) - 151
Other assets 2,564 3,008
---------- ----------
Total $ 221,035 $ 202,048
========== ==========
LIABILITIES:
Subordinated debentures $ 46,393 $ 72,180
Other liabilities 4,198 3,884
SHAREHOLDERS' EQUITY:
Common stock and related accounts 170,444 125,984
---------- ----------
Total $ 221,035 $ 202,048
========== ==========
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------------------------------------------------ ---------- ---------- ----------
STATEMENTS OF OPERATIONS
INCOME:
Cash dividends from subsidiaries $ 13,624 $ 3,335 $ 3,893
Other income 1,443 1,301 1,023
Investment income 717 346 133
Interest and fees on loans 9 18 15
---------- ---------- ----------
Total income 15,793 5,000 5,064
EXPENSE:
Interest on subordinated debentures 4,113 4,489 3,079
Other expense 3,108 1,924 2,015
---------- ---------- ----------
Total expense 7,221 6,413 5,094
---------- ---------- ----------
Total income (loss) before taxes and equity in
undistributed income of subsidiaries 8,572 (1,413) (30)
Taxes on income (1,840) (1,799) (1,488)
---------- ---------- ----------
Income before equity in undistributed
income of subsidiaries 10,412 386 1,458
Equity in undistributed income of subsidiaries 10,602 18,243 13,434
---------- ---------- ----------
Net income $ 21,014 $ 18,629 $ 14,892
========== ========== ==========
53
For the Years Ended December 31,
------------------------------------
(Dollars in thousands) 2005 2004 2003
- ------------------------------------------------------------------ ---------- ---------- ----------
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income $ 21,014 $ 18,629 $ 14,892
Equity in undistributed income of subsidiaries (10,602) (18,243) (13,434)
Provision for loan losses - - -
Other, net 1,544 3,705 47
---------- ---------- ----------
Net cash provided by operating activities 11,956 4,091 1,505
---------- ---------- ----------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases (26,998) - (2,900)
Sales - - -
Maturities - - 900
Loans originated and principal repayments, net 151 - (58)
Capital contribution to Bank (12,500) - (11,000)
Capital contribution to other subsidiaries - - (7,393)
Return of capital contribution to other subsidiaries 774 - -
---------- ---------- ----------
Net cash provided by (used in) investing activities (38,573) - (20,451)
---------- ---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - -
Net increase (decrease) in deposits - - -
Net increase (decrease) in short-term borrowings - - -
Net proceeds from issuance of common stock 41,593 1,439 2,318
Proceeds from issuance of subordinated debentures - - 46,393
Redemption of subordinated debentures (25,787) - -
Purchases of treasury stock (12,416) - -
Cash dividends paid on common stock (3,831) (3,280) (2,846)
---------- ---------- ----------
Net cash provided by (used in) financing activities (441) (1,841) 45,865
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (27,058) 2,250 26,919
Cash and cash equivalents,
Beginning of year 30,459 28,209 1,290
---------- ---------- ----------
End of year $ 3,401 $ 30,459 $ 28,209
========== ========== ==========
54
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Quarter Ended
---------------------------------------------------------
(Dollars in thousands, except per share data) 12-31-05 09-30-05 06-30-05 03-31-05
- -------------------------------------------------- ------------ ------------ ------------ ------------
OPERATIONS DATA
Interest income $ 37,205 $ 34,948 $ 33,245 $ 31,946
Interest expense 15,476 13,555 12,353 10,854
------------ ------------ ------------ ------------
Net interest income 21,729 21,393 20,892 21,092
Provision for loan losses 4,348 4,142 2,986 4,309
Gain on sales of securities and loans 1,813 1,333 916 853
Other income 3,104 3,258 3,262 2,867
Other expenses 13,220 12,725 13,784 12,144
------------ ------------ ------------ ------------
Income before taxes 9,078 9,117 8,300 8,359
Taxes on income 4,486 3,310 3,071 2,973
------------ ------------ ------------ ------------
Net income $ 4,592 $ 5,807 $ 5,229 $ 5,386
============ ============ ============ ============
PER SHARE DATA (1)
Basic earnings per common share $ 0.33 $ 0.41 $ 0.42 $ 0.44
Diluted earnings per common share 0.31 0.41 0.40 0.43
Dividends declared per common share 0.075 0.075 0.075 0.075
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,001,209 13,944,877 12,533,323 12,154,300
Diluted 14,387,171 14,359,808 12,893,800 12,579,941
For the Quarter Ended
---------------------------------------------------------
(Dollars in thousands, except per share data) 12-31-04 09-30-04 06-30-04 03-31-04
- -------------------------------------------------- ------------ ------------ ------------ ------------
OPERATIONS DATA
Interest income $ 30,333 $ 27,209 $ 24,423 $ 22,758
Interest expense 9,509 8,239 7,358 7,140
------------ ------------ ------------ ------------
Net interest income 20,824 18,970 17,065 15,618
Provision for loan losses 4,641 3,823 2,700 1,704
Gain on sales of securities and loans 908 963 707 607
Other income 2,855 2,957 2,577 2,511
Other expenses 12,302 11,314 10,453 10,457
------------ ------------ ------------ ------------
Income before taxes 7,644 7,753 7,196 6,575
Taxes on income 2,676 2,898 2,592 2,373
------------ ------------ ------------ ------------
Net income $ 4,968 $ 4,855 $ 4,604 $ 4,202
============ ============ ============ ============
PER SHARE DATA (1)
Basic earnings per common share $ 0.41 $ 0.40 $ 0.38 $ 0.35
Diluted earnings per common share 0.39 0.39 0.36 0.34
Dividends declared per common share 0.07 0.07 0.07 0.07
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 12,091,688 12,081,379 12,074,336 11,995,400
Diluted 12,650,601 12,547,962 12,504,682 12,463,367
55
19. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. On April 14, 2005,
the SEC announced it would provide for a phased-in implementation process for
this revised statement.
Generally, the approach to accounting for share-based payments in Statement
123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than January 1, 2006. Early adoption
will be permitted in periods in which financial statements have not yet been
issued. Statement 123(R) permits public companies to adopt its requirements
using one of two methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective
date, and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented,
or (b) prior interim periods of the year of adoption.
Southwest plans to adopt Statement 123(R) on January 1, 2006 using the modified
prospective method. Management of Southwest believes that adoption of Statement
123(R) will not have a material impact on Southwest's consolidated financial
condition or results of operations.
56
OTHER MATERIAL REQUIRED BY FORM 10-K
BUSINESS
GENERAL
Southwest is a financial holding company headquartered in Stillwater, Oklahoma.
Southwest provides commercial and consumer banking services through its banking
subsidiaries, Stillwater National Bank & Trust Company ("Stillwater National")
and SNB Bank of Wichita ("SNB Wichita") and management consulting services
through Business Consulting Group, Inc. and Healthcare Strategic Support, Inc.
Southwest was organized in 1981 as the holding company for Stillwater National,
which was chartered in 1894. Southwest is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). As such, Southwest is subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
Southwest became a financial holding company during 2000 pursuant to the Holding
Company Act. Stillwater National is a national bank subject to supervision and
regulation by the Office of the Comptroller of the Currency (the "OCC"). SNB
Wichita, headquartered in Wichita, Kansas, is a federal savings bank chartered
in November 2003 and is subject to supervision and regulation by the Office of
Thrift Supervision ("OTS"). The deposit accounts of Southwest's banking
subsidiaries are insured by the Federal Deposit Insurance Corporation (the
"FDIC") to the maximum permitted by law.
PRODUCTS AND SERVICES
Southwest offers a wide variety of commercial and consumer lending and deposit
services. Southwest has developed internet banking services, called SNB
DirectBanker(R), for consumer and commercial customers, a highly automated
lockbox, imaging, and information service for commercial customers called "SNB
Digital Lockbox," and deposit products that automatically sweep excess funds
from commercial demand deposit accounts and invest them in interest bearing
funds ("Sweep Agreements"). The commercial loans offered by Southwest include
(i) commercial real estate loans, (ii) working capital and other commercial
loans, (iii) construction loans, and (iv) Small Business Administration ("SBA")
guaranteed loans. Consumer lending services include (i) student loans, (ii)
residential real estate loans and mortgage banking services, and (iii) personal
lines of credit and other installment loans. Southwest also offers deposit and
personal banking services, including (i) commercial deposit services such as SNB
Digital Lockbox, commercial checking, money market, and other deposit accounts,
and (ii) retail deposit services such as certificates of deposit, money market
accounts, checking accounts, NOW accounts, savings accounts, and automatic
teller machine ("ATM") access. Insurance, benefit, and annuity products are
offered through SNB Insurance Agency, Inc., a wholly owned subsidiary of
Stillwater National. Trust services, personal brokerage, and credit cards are
offered through relationships with independent institutions.
STRATEGIC FOCUS
Southwest's banking philosophy is to provide a high level of customer service, a
wide range of financial services, and products responsive to customer needs.
This philosophy has led to the development of a line of deposit, lending, and
other financial products that respond to professional and commercial customer
needs for speed, efficiency, and information. These include Southwest's Sweep
Agreements, SNB Digital Lockbox, and SNB DirectBanker(R) and other internet
banking products, which complement Southwest's more traditional banking
products. Southwest also emphasizes marketing personal banking, investment, and
other financial services to highly educated, professional and business persons
in its markets. Southwest seeks to build close relationships with businesses,
professionals and their principals and to service their banking needs throughout
their business development and professional lives. Southwest's strategic focus
includes expansion in carefully selected geographic markets based upon a tested
business model developed in connection with its expansion into Oklahoma City in
1982. This geographic expansion is based on identification of markets with
concentrations of customers in Southwest's traditional areas of expertise:
healthcare and health professionals, businesses and their managers and owners,
and commercial and commercial real estate lending, and makes uses of traditional
and specialized financial services. Specialized services include integrated
document imaging and cash management services designed to help our customers in
the healthcare
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industry and other record-intensive enterprises operate more efficiently, and
management consulting services through Southwest's management consulting
subsidiaries: Healthcare Strategic Support, Inc., serving physicians, hospitals,
and healthcare groups, and Business Consulting Group, Inc., serving small and
large commercial enterprises.
ORGANIZATION
Southwest's business operations are conducted through four operating segments
that include regional divisions, a Secondary Market segment consisting of
student lending and residential mortgage lending services, and an "other"
segment that includes funds management (investment portfolio and funding), SNB
Investor Services, and nonbank cash machine operations. The organizational
structure is designed to facilitate high customer service, prompt response,
efficiency, and appropriate, uniform credit standards and other controls.
BANKING SEGMENTS. The banking segments include Oklahoma Banking, which includes
the Stillwater division, the Central Oklahoma division, based in Oklahoma City,
and the Tulsa division; and Other States Banking, which includes the Texas
division, based in metropolitan Dallas, and the Kansas Division, based in
Wichita. The Stillwater division serves the Stillwater market as a full-service
community bank emphasizing both commercial and consumer lending. The other four
divisions pursue a more focused marketing strategy, targeting managers,
professionals, and businesses for lending, and offering more specialized
services. All of the regional divisions focus on commercial and consumer
financial services to local businesses and their senior employees and to other
managers and professionals living and working in Southwest's market areas.
Southwest has a high-service level philosophy. Loan officers often meet at the
customer's home or place of business to close loans. Third-party courier
services often are used to collect commercial deposits.
OKLAHOMA BANKING SEGMENT. The Oklahoma Banking segment accounted for
$8.8 million, or 42% of consolidated net income. Net income from this segment
increased $705,000, or 9%, primarily as a result of limiting the growth in other
expenses to less than 2%. During 2005, total banking assets declined $45.6
million, or 5%. The decline in banking assets, which is primarily loans, can be
attributed to some customers seeking long-term fixed rate loans at other
institutions as a result of the increasing rate environment. Additionally,
Southwest has concentrated on reducing the level of loans in certain higher risk
industries.
OTHER STATES BANKING SEGMENT. During 2002, Southwest first established
offices in Wichita, Kansas and Dallas, Texas. At December 31, 2005, Southwest
had six offices (including loan production offices and branches) in Kansas and
Texas. During 2005, these offices produced $2.4 million in net income (11% of
the consolidated total), and $130.2 million in additional banking assets. (See
"Banking Offices and Geographic Markets" on page 59).
SECONDARY MARKET SEGMENT. Southwest has a long history of student and
residential mortgage lending. These operations comprise the Secondary Market
business segment. During 2005, this segment produced $9.4 million in net income,
a reduction of $992,000, or 10%, from 2004, and $29.4 million greater year-end
assets, primarily loans held for sale. This growth was the result of expanded
student lending, which more than offset the effects of the residential mortgage
slowdown. Loan volumes in the Secondary Market segment may vary significantly
from period to period. Southwest manages its mortgage and student lending
operations through its home office. Southwest markets its student lending
program directly to financial aid directors at colleges and universities
throughout the United States. Southwest also originates first mortgage loans for
sale to the Federal National Mortgage Association ("FNMA") or private investors.
Servicing on these loans may be released in connection with the sale.
Operation of the student lending portion of this segment is substantially
dependent on the SLM Corporation ("Sallie Mae"), which provides substantially
all of the servicing for government guaranteed and private student loans and
provides liquidity through its purchases of student loans and lines of credit.
Southwest makes government guaranteed student loans and private student loans.
At December 31, 2005, approximately 94% of private student loans were
self-insured by Sallie Mae. The remaining $14.0 million in private student loans
at year-end 2005 were
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secured by substantial cash balances held in Stillwater National, but were not
government guaranteed or self-insured by Sallie Mae.
The majority of private student loans made by this segment were to students who
attend schools owned by Career Education Corporation ("CEC"). At December 31,
2005, approximately 57% of total student loans were private CEC-related loans.
The profitability of these CEC-related loans began to decrease beginning in
2005, due to an increase in servicing fees. This decrease in profitability was
partially offset by an increase in outstanding balances.
In October 2005, Sallie Mae received approval to establish Sallie Mae Bank, an
FDIC-insured Utah industrial bank. The establishment of Sallie Mae Bank is
intended to reduce Sallie Mae's reliance on independent financial institutions,
such as Stillwater National, in origination of student loans. The effects of the
establishment of Sallie Mae Bank on Stillwater National's future student lending
operations are not known. Please see "Risk Factors" on page 74.
SUPPORT AND CONTROL FUNCTIONS. Support and control functions are centralized,
although each segment has support and control personnel. Costs of centrally
managed support and control functions other than funds management (which is
included in the Other Operations segment) are allocated to the Banking and
Secondary Market segments. Southwest's philosophy of customer service extends to
its support and control functions. Southwest manages and offers products that
are technology based, or that otherwise are more efficiently offered centrally,
through its home office. These include products that are marketed through the
regional offices, such as Southwest's internet banking product for commercial
and retail customers (SNB DirectBanker(R)), commercial information, and item
processing services (SNB Digital Lockbox), and products marketed and managed
directly by central staff, such as cash dispensing machines. Southwest's
technology products are marketed both to existing customers and to help develop
new customer relationships. Use of these products by customers enables Southwest
to serve its customers more effectively, use its resources more efficiently, and
increase fee income.
For additional information regarding Southwest's operating segments, please see
"Note 16. Operating Segments" to the Consolidated Financial Statements on page
51 of this report. The total of net income of the segments discussed above is
less than consolidated net income for 2005 due to income allocated to the Other
Operations segment, which provides funding and liquidity services to the rest of
the organization.
BANKING OFFICES AND GEOGRAPHIC MARKETS
Southwest intends to focus its efforts on markets with characteristics that will
allow it to capitalize on its strengths, and to continue establishing new
offices in those markets. Southwest considers acquisitions of other financial
institutions and other companies, from time to time. Southwest also extends
loans to borrowers in Oklahoma and neighboring states through participations
with correspondent banks.
Southwest has thirteen full-service banking offices, three located in
Stillwater, Oklahoma, two located in Tulsa, Oklahoma, two each located in the
Dallas and Austin, Texas metropolitan areas, and one each in Oklahoma City and
Chickasha, Oklahoma, San Antonio, Texas, and Wichita, Kansas; loan production
offices in the Kansas City, Kansas area, and on the campus of the University of
Oklahoma Health Sciences Center; and on the Internet, through SNB
DirectBanker(R). See "Item 2. Properties." Before 1999, laws of the State of
Oklahoma limited the number and location of de novo branches that a financial
institution could establish. Southwest has developed and continues to pursue a
business strategy that does not rely on an extensive branch network. National
banks in Oklahoma now have broad ability to establish de novo branches anywhere
in the state.
COMPETITION
Southwest encounters competition in seeking deposits and in obtaining loan, cash
management, investment, and other customers. The level of competition for
deposits is high. Southwest's principal competitors for deposits are other
financial institutions, including other national banks, federal savings banks,
and credit unions. Competition among these institutions is based primarily on
interest rates and other terms offered, service charges imposed on
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deposit accounts, the quality of services rendered, and the convenience of
banking facilities. Additional competition for depositors' funds comes from U.S.
Government securities, private issuers of debt obligations, and suppliers of
other investment alternatives for depositors, such as securities firms.
Competition from credit unions has intensified in recent years as historic
federal limits on membership have been relaxed. Because federal law subsidizes
credit unions by giving them a general exemption from federal income taxes,
credit unions have a significant cost advantage over national banks and federal
savings banks, which are fully subject to federal income taxes. Credit unions
may use this advantage to offer rates that are highly competitive with those
offered by national banks and federal savings banks.
Southwest also competes in its lending activities with other financial
institutions such as securities firms, insurance companies, credit unions, small
loan companies, finance companies, mortgage companies, and other sources of
funds. Many of Southwest's nonbank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and
federally-insured banks. As a result, such nonbank competitors have advantages
over Southwest in providing certain services. A number of the financial
institutions with which Southwest competes in lending, deposit, investment, cash
management, and other activities are larger than Southwest or have a
significantly larger market share. The Texas and Kansas offices compete for
loans, deposits, and other services against local and nationally based financial
institutions, many of which have much larger market shares and widespread office
networks. In recent periods, competition has increased in Southwest's Oklahoma
market areas as new entrants and existing competitors have sought to more
aggressively expand their loan and deposit market share.
The business of mortgage banking is highly competitive. Southwest competes for
loan originations with other financial institutions, such as mortgage bankers,
state and national banks, federal savings banks, credit unions, and insurance
companies. Many of Southwest's competitors have financial resources that are
substantially greater than those available to Southwest. Southwest competes
principally by providing competitive pricing, by motivating its sales force
through the payment of commissions on loans originated, and by providing high
quality service to builders, borrowers, and realtors.
The Holding Company Act permits the Federal Reserve to approve an application of
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a commercial
bank located in a state other than that holding company's home state. The
Federal Reserve may not approve the acquisition of a commercial bank that has
not been in existence for the minimum time period (not exceeding five years)
specified by the statutory law of the host state. The Holding Company Act also
prohibits the Federal Reserve from approving an application if the applicant
(and its depository institution affiliates) controls or would control more than
10% of the insured deposits in the United States or 30% or more of the deposits
in the target commercial bank's home state or in any state in which the target
commercial bank maintains a branch. The Holding Company Act does not affect the
authority of states to limit the percentage of total insured deposits in the
state which may be held or controlled by a commercial bank or bank holding
company to the extent such limitation does not discriminate against out-of-state
commercial banks or bank holding companies. The State of Oklahoma allows
out-of-state financial institutions to establish branches in Oklahoma, subject
to certain limitations. Federal savings banks generally may establish branches
in any state, and bank holding companies may acquire federal savings banks in
any state, without regard to state law.
Financial holding companies such as Southwest may engage in banking as well as
types of securities, insurance, consulting, and other financial activities that
had been prohibited for bank holding companies under prior law. Financial
institutions with or without holding companies also are authorized to establish
and operate financial subsidiaries that may engage in most financial activities
in which financial holding companies may engage. Competition may increase as
bank holding companies and other large financial service companies take greater
advantage of the ability to conduct new types of activities and provide a wider
array of products.
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REGULATION, SUPERVISION, AND GOVERNMENTAL POLICY
Following is a brief summary of certain statutes and regulations that
significantly affect Southwest and its banking subsidiaries. A number of other
statutes and regulations affect Southwest and its subsidiaries but are not
summarized below. Although Stillwater National and SNB Wichita have different
primary federal banking regulators, many of the rules that govern them are
substantially the same. Where practical, the rules for both banks are discussed
together below. For ease of reference the term "banks" is used below to include
national and federal savings banks, unless otherwise indicated. The term
"commercial banks" includes nationally and state chartered banks, but not
federal savings associations or federal savings banks.
BANK HOLDING COMPANY REGULATION. Southwest is registered as a bank holding
company under the Holding Company Act and, as such, is subject to supervision
and regulation by the Federal Reserve. As a bank holding company, Southwest is
required to furnish to the Federal Reserve annual and quarterly reports of its
operations and additional information and reports. Southwest is also subject to
regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any national bank or
bank holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (2) acquiring
all or substantially all of the assets of another national bank or bank holding
company; or (3) merging or consolidating with another bank holding company.
Under the Holding Company Act, any company must obtain approval of the Federal
Reserve prior to acquiring control of Southwest or its banking subsidiaries. For
purposes of the Holding Company Act, "control" is defined as ownership of more
than 25% of any class of voting securities, the ability to control the election
of a majority of the directors, or the exercise of a controlling influence over
management or policies.
The federal Change in Bank Control Act and the related regulations of the
Federal Reserve require any person or persons acting in concert (except for
companies required to make application under the Holding Company Act), to file a
written notice with the Federal Reserve before the person or persons acquire
control of Southwest or its banking subsidiaries. The Change in Bank Control Act
defines "control" as the direct or indirect power to vote 25% or more of any
class of voting securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also limits the investments and activities of bank
holding companies. In general, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a commercial bank or a bank holding company or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling commercial banks, providing services for its
subsidiaries, non-bank activities that are closely related to banking (including
ownership and control of a federal savings bank), and other financially related
activities. However, bank holding companies, such as Southwest, that qualify as
financial holding companies under the Holding Company Act also may engage in a
broad range of additional non-bank activities. Southwest qualified as a
financial holding company in 2000.
The activities of Southwest are subject to these legal and regulatory
limitations under the Holding Company Act and Federal Reserve regulations.
Non-bank and financially related activities of bank holding companies, including
companies that become financial holding companies, also may be subject to
regulation and oversight by regulators other than the Federal Reserve.
The Federal Reserve also has the power to order a holding company or its
subsidiaries to terminate any activity, or to terminate its ownership or control
of any subsidiary, when it has reasonable cause to believe that the continuation
of such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any banking subsidiary of that
holding company.
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The Federal Reserve has adopted guidelines regarding the capital adequacy of
bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "Regulatory Capital Requirements."
The Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the company's capital
needs, asset quality, and overall financial condition.
NATIONAL BANK REGULATION. As a national bank, Stillwater National is subject to
the primary supervision of the OCC under the National Bank Act. The prior
approval of the OCC is required for a national bank to establish or relocate an
additional branch office or to engage in any merger, consolidation, or
significant purchase or sale of assets. Before 1999, laws of the State of
Oklahoma severely limited the number and location of de novo branches that a
national bank could establish. National banks in Oklahoma now have broad ability
to establish de novo branches anywhere in the state as a result of changes in
state laws enacted in 1999, and interpretations of those laws by the OCC.
The OCC regularly examines the operations and condition of Stillwater National,
including but not limited to its capital adequacy, loans, allowance for loan
losses, investments, liquidity, interest rate risk, and management practices.
These examinations are for the protection of Stillwater National's depositors
and the deposit insurance funds administered by the FDIC. In addition,
Stillwater National is required to furnish quarterly and annual reports to the
OCC. The OCC's enforcement authority includes the power to remove officers and
directors and the authority to issue cease-and-desist orders to prevent a
national bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
No national bank may pay dividends from its paid-in capital. All dividends must
be paid out of current or retained net profits. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a dividend on its shares of common stock until the surplus
fund equals the amount of capital stock or, if the surplus fund does not equal
the amount of capital stock, until one-tenth of a national bank's net profits
for the preceding half year in the case of quarterly or semi-annual dividends,
or the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend if the
total of all dividends declared by a national bank in any calendar year would
exceed the total of its net profits for that year combined with its retained net
profits for the two preceding years, less any required transfers to surplus or a
fund for the retirement of any preferred stock. In addition, Stillwater National
is prohibited by federal statute from paying dividends or making any other
capital distribution that would cause Stillwater National to fail to meet its
regulatory capital requirements. Further, the OCC also has authority to prohibit
the payment of dividends by a national bank when it determines that their
payment would be an unsafe and unsound banking practice.
FEDERAL SAVINGS BANK REGULATION. As a federal savings bank, SNB Wichita is
subject to the primary supervision of the OTS. The prior approval of the OTS is
required for SNB Wichita to establish or relocate a branch office or to engage
in any merger, consolidation, or significant purchase or sale of assets. The OTS
examines the operations and condition of SNB Wichita, including, but not limited
to, its capital adequacy, reserves, loans, investments, and management
practices. These examinations are for the protection of SNB Wichita's depositors
and the deposit insurance funds administered by the FDIC. In addition, SNB
Wichita is required to furnish quarterly and annual reports to the OTS. The OTS
enforcement authority includes the power to remove officers and directors and
the authority to issue cease-and-desist orders to prevent a federal savings bank
from engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
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In general, OTS regulations permit federal savings banks to branch in any state
or states of the United States and its territories.
A federal savings bank that does not meet the Qualified Thrift Lender ("QTL")
test must either convert to a national bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; and
(iii) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and must not retain any investment not permissible for a national bank
and a federal savings bank. To qualify as a QTL, a federal savings bank must
either qualify as a "domestic building and loan association" under the Internal
Revenue Code or maintain at least 65% of its "portfolio assets" in Qualified
Thrift Investments. Portfolio assets are defined as total assets less
intangibles, the value of property used by a federal savings bank in its
business and liquidity investments in an amount not exceeding 20% of assets.
Qualified Thrift Investments consist of (i) loans, equity positions, or
securities related to domestic, residential real estate, or manufactured
housing, and educational, small business, and credit card loans; and (ii)
subject to an aggregate 20% of portfolio assets limit, shares of stock in the
FHLMC and the FNMA, loans for personal, family, household purposes, 50% of the
dollar amount of residential mortgage loans originated and sold within 90 days
of origination, and 200% of a federal savings bank's investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas. In order to maintain QTL status, the federal savings bank
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65% on a monthly average basis in nine out of 12
months. A federal savings bank that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. At December 31, 2005, approximately 96.05% of SNB
Wichita's assets were invested in Qualified Thrift Investments, which exceeded
the percentage required to qualify it under the QTL test.
Under regulations of the OTS, federal savings banks must submit notice to the
OTS prior to making a capital distribution (which includes dividends, stock
repurchases, and amounts paid to stockholders in another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the federal savings
bank's common or preferred stock or debt counted as its regulatory capital, or
(c) the federal savings bank is a subsidiary of a holding company. A federal
savings bank must make application to the OTS to pay a capital distribution if
(x) the federal savings bank would not be adequately capitalized following the
distribution, (y) the federal savings bank's total distributions for the
calendar year exceed the federal savings bank's net income for the calendar year
to date plus its net income (less distributions) for the preceding two years, or
(z) the distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS. Under the OTS' prompt corrective
action regulations, SNB Wichita also is prohibited from making any capital
distributions if after making the distribution, SNB Wichita would have: (i) a
total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
LIMITS ON LOANS TO ONE BORROWER. National banks and federal savings banks
generally are subject to the same loan to one borrower limits. With certain
limited exceptions, loans and extensions of credit outstanding to any borrower
(including certain related entities of the borrower) at any one time may not
exceed 15% of the unimpaired capital and surplus of the institution. A national
bank or federal savings bank may lend an additional amount, equal to 10% of
unimpaired capital and surplus, if the loan is fully secured by readily
marketable collateral. Federal savings banks are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the federal savings bank is in
compliance with its regulatory capital requirements; (iii) the loans comply with
applicable loan-to-value requirements, and; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of unimpaired capital and
surplus. The
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lending limits generally do not apply to purchase money mortgage notes taken
from the purchaser of real property acquired by federal savings banks in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the federal savings bank is not placed in a more detrimental
position as a result of the sale. Certain types of loans are exempted from the
lending limits, including loans secured by in-bank deposits.
TRANSACTIONS WITH AFFILIATES. Stillwater National and SNB Wichita are subject to
restrictions imposed by federal law on extensions of credit to, and certain
other transactions with, Southwest and other affiliates, and on investments in
their stock or other securities. These restrictions prevent Southwest and its
nonbanking subsidiaries from borrowing from Stillwater National or SNB Wichita
unless the loans are secured by specified collateral, and require those
transactions to have terms comparable to terms of arms-length transactions with
third persons. In addition, secured loans and other transactions and investments
by Stillwater National or SNB Wichita are generally limited in amount as to
Southwest and as to any other affiliate to 10% of Stillwater National's or SNB
Wichita's capital and surplus and as to Southwest and all other affiliates
together to an aggregate of 20% of Stillwater National's or SNB Wichita's
capital and surplus. Certain exemptions to these limitations apply to extensions
of credit by, and other transactions between, Stillwater National or SNB Wichita
and Southwest's other subsidiaries. These regulations and restrictions may limit
Southwest's ability to obtain funds from Stillwater National and SNB Wichita for
its cash needs, including funds for acquisitions and for payment of dividends,
interest, and operating expenses.
REAL ESTATE LENDING GUIDELINES. Under federal banking regulations, banks must
adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit secured by liens or interests in real estate
or are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards; prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable; loan administration procedures; and documentation, approval, and
reporting requirements. A bank's real estate lending policy must reflect
consideration of the Guidelines for Real Estate Lending Policies (the
"Guidelines") adopted by the federal banking regulators. The Guidelines, among
other things, call for internal loan-to-value limits for real estate loans that
are not in excess of the limits specified in the Guidelines. The Guidelines
state, however, that it may be appropriate in individual cases to originate or
purchase loans with loan-to-value ratios in excess of the supervisory
loan-to-value limits.
FEDERAL DEPOSIT INSURANCE. The FDIC has established a risk-based deposit
insurance premium assessment system for insured depository institutions. Under
the system, the assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC,
based upon the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- based on the data reported to
regulators. Well-capitalized institutions are institutions satisfying the
following capital ratio standards: (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well-capitalized
institutions but that satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Institutions that do not qualify as either well-capitalized or adequately
capitalized are deemed to be undercapitalized. Within each capital group,
institutions are assigned to one of three subgroups on the basis of supervisory
evaluations by the institution's primary supervisory authority and such other
information as the FDIC determines to be relevant to the institution's financial
condition and the risk it poses to the deposit insurance fund. Subgroup A
consists of financially sound institutions with only a few minor weaknesses.
Subgroup B consists of institutions with demonstrated weaknesses that, if not
corrected, could result in significant deterioration of the institution and
increased risk of loss to the deposit insurance fund. Subgroup C consists of
institutions that pose a substantial probability of loss to the deposit
insurance fund unless effective corrective action is taken. Both Stillwater
National and SNB Wichita have been informed that they are in the
lowest-cost/best risk assessment category for the first assessment period of
2006.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve, the OCC, and the OTS have
established guidelines for maintenance of appropriate levels of capital by bank
holding companies, national banks, and federal savings banks, respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and national banks to maintain a
specified minimum ratio of capital to total
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assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.
The regulations of the Federal Reserve and the federal banking regulators
require bank holding companies, national banks, and federal savings banks,
respectively, to maintain a minimum leverage ratio of Tier 1 capital (as defined
in the risk-based capital guidelines discussed in the following paragraphs) to
total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies, national banks, and federal savings banks with
composite examination ratings of 1 under the rating system used by the federal
banking regulators, would be permitted to operate at or near this minimum level
of capital. All other bank holding companies, national banks, and federal
savings banks are expected to maintain a leverage ratio of at least 1% to 2%
above the minimum ratio, depending on the assessment of an individual
organization's capital adequacy by its primary regulator. A federal savings
bank, national bank, or bank holding company experiencing or anticipating
significant growth is expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that it also may consider
the level of an organization's ratio of tangible Tier 1 capital (after deducting
all intangibles) to total assets in making an overall assessment of capital.
Under OTS capital regulations, federal savings banks also must maintain tangible
capital equal to 1.5% of adjusted total assets. Tangible capital for OTS
purposes is Tier 1 capital reduced by the amount of all the federal savings
bank's intangible assets except for limited amounts of mortgage servicing
rights.
The risk-based capital rules of the Federal Reserve, the OCC, and the OTS
require bank holding companies, national banks, and federal savings banks to
maintain minimum regulatory capital levels based upon a weighting of their
assets and off-balance sheet obligations according to risk. The risk-based
capital rules have two basic components: a core capital (Tier 1) requirement and
a supplementary capital (Tier 2) requirement. Core capital consists primarily of
common stockholders' equity, certain perpetual preferred stock (noncumulative
perpetual preferred stock with respect to national banks), and minority
interests in the equity accounts of consolidated subsidiaries; less all
intangible assets, except for certain mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements include, subject to
certain limitations, the allowance for losses on loans and leases; perpetual
preferred stock that does not qualify as Tier 1 capital; long-term preferred
stock with an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to 45%
of pre-tax net unrealized gains on available for sale equity securities.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50%, and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all federal savings banks, national
banks, and bank holding companies to maintain a minimum ratio of total capital
to total risk-weighted assets of 8%, with at least 4% as core capital. For the
purpose of calculating these ratios: (i) supplementary capital is limited to no
more than 100% of core capital; and (ii) the aggregate amount of certain types
of supplementary capital is limited. In addition, the risk-based capital
regulations limit the allowance for loan losses that may be included in capital
to 1.25% of total risk-weighted assets.
The federal banking regulatory agencies have established a joint policy
regarding the evaluation of federal savings banks' and national banks' capital
adequacy for interest rate risk. Under the policy, the assessment of a national
bank's capital adequacy includes an assessment of exposure to adverse changes in
interest rates. The OCC has determined to rely on its examination process for
such evaluations rather than on standardized measurement systems or formulas.
A federal savings bank's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. A federal
savings bank with more than normal interest rate risk is required to deduct an
interest rate risk component equal to one-half of the excess of its measured
interest rate risk over the normal level from its total capital for purposes of
determining its compliance with the OTS risk-based capital guidelines. The
federal banking regulators may require federal savings banks that are found to
have a high level of interest rate risk
65
exposure or weak interest rate risk management systems to take corrective
actions. Management believes its interest rate risk management systems and its
capital relative to its interest rate risk are adequate.
Federal banking regulations also require national banks and federal savings
banks with significant trading assets or liabilities to maintain supplemental
risk-based capital based upon their levels of market risk. Neither Stillwater
National nor SNB Wichita had any trading assets or liabilities during 2004,
2003, or 2002, and were not required to maintain such supplemental capital.
The federal banking regulators have established regulations that classify
national banks and federal savings banks by capital levels and provide for
various "prompt corrective actions" to resolve the problems of any national bank
or federal savings bank that fails to satisfy the capital standards. Under these
regulations, a well-capitalized bank is one that is not subject to any
regulatory order or directive to meet any specific capital level and that has a
total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio
of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized
bank is one that does not qualify as well-capitalized but meets or exceeds the
following capital requirements: a total risk-based capital ratio of 8%, a Tier 1
risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3%
if the bank has the highest composite examination rating. A bank that does not
meet these standards is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized, depending on its capital
levels. A bank that falls within any of the three undercapitalized categories
established by the prompt corrective action regulation is subject to severe
regulatory sanctions. As of December 31, 2005, Stillwater National and SNB
Wichita were well-capitalized as defined in applicable banking regulations.
For information regarding Southwest's, Stillwater National's, and SNB Wichita's
compliance with their respective regulatory capital requirements, see
"Management's Discussion and Analysis -- Capital Resources" on page 16 of this
report, and, in the Notes to Consolidated Financial Statements in this report
"Note 6-Subordinated Debentures" on page 43 and "Note 9- Capital Requirements"
on pages 47 through 48.
BROKERED DEPOSITS. Well-capitalized institutions are not subject to limitations
on brokered deposits, while an adequately capitalized institution is able to
accept, renew, or rollover brokered deposits only with a waiver from the FDIC
and subject to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits.
Stillwater National and SNB Wichita are each eligible to accept brokered
deposits as a result of their capital levels. Stillwater National regularly
makes use of brokered deposits. SNB Wichita has not used brokered deposits but
may do so in the future when management deems it appropriate from an
asset/liability management perspective.
SUPERVISION AND REGULATION OF MORTGAGE BANKING OPERATIONS. Southwest's mortgage
banking business is subject to the rules and regulations of the U.S. Department
of Housing and Urban Development ("HUD"), the Federal Housing Administration
("FHA"), the Veterans' Administration ("VA"), and FNMA with respect to
originating, processing, selling, and servicing mortgage loans. Those rules and
regulations, among other things, prohibit discrimination and establish
underwriting guidelines, which include provisions for inspections, and
appraisals, require credit reports on prospective borrowers, and fix maximum
loan amounts. Lenders such as Southwest are required annually to submit
financial statements to FNMA, FHA, and VA, and each regulatory entity has its
own financial requirements. Southwest's affairs are also subject to examination
by the Federal Reserve, FNMA, FHA, and VA at all times to assure compliance with
the applicable regulations, policies, and procedures. Mortgage origination
activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act, Fair Housing Act, Home Mortgage Disclosure Act,
Fair Credit Reporting Act, the National Flood Insurance Act, and the Real Estate
Settlement Procedures Act, and related regulations that prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Southwest's mortgage banking operations also
are affected by various state and local laws and regulations and the
requirements of various private mortgage investors.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), a
financial institution has a continuing and affirmative obligation to help meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, or limit an institution's discretion to
develop the types of products and services that it believes
66
are best suited to its particular community. However, institutions are rated on
their performance in meeting the needs of their communities. Performance is
tested in three areas: (a) lending, to evaluate the institution's record of
making loans in its assessment areas; (b) investment, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low- or moderate-income individuals and
businesses; and (c) service, to evaluate the institution's delivery of services
through its branches, ATMs and other offices. The CRA requires each federal
banking agency, in connection with its examination of a financial institution,
to assess and assign one of four ratings to the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by the institution, including applications
for charters, branches, and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and
savings and loan holding company acquisitions. The CRA also requires that all
institutions make public disclosure of their CRA ratings.
Stillwater National was assigned a "satisfactory" rating as a result of its last
CRA examination. SNB Wichita has not yet received a CRA rating.
BANK SECRECY ACT. Under the Bank Secrecy Act ("BSA"), a financial institution is
required to have systems in place to detect certain transactions, based on the
size and nature of the transaction. Financial institutions are generally
required to report cash transactions involving more than $10,000 to the United
States Treasury. In addition, financial institutions are required to file
suspicious activity reports for transactions that involve more than $5,000 and
which the financial institution knows, suspects, or has reason to suspect
involves illegal funds, is designed to evade the requirements of the BSA, or has
no lawful purpose. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly
referred to as the "USA PATRIOT Act" or the "Patriot Act," enacted in response
to the September 22, 2001, terrorist attacks, enacted prohibitions against
specified financial transactions and account relationships, as well as enhanced
due diligence standards intended to prevent the use of the United States
financial system for money laundering and terrorist financing activities. The
Patriot Act requires banks and other depository institutions, brokers, dealers
and certain other businesses involved in the transfer of money to establish
anti-money laundering programs, including employee training and independent
audit requirements meeting minimum standards specified by the act, to follow
standards for customer identification and maintenance of customer identification
records, and to compare customer lists against lists of suspected terrorists,
terrorist organizations and money launderers. The Patriot Act also requires
federal bank regulators to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve a proposed bank
acquisition.
SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley")
established a broad range of corporate governance and accounting measures
intended to increase corporate responsibility and protect investors by improving
the accuracy and reliability of disclosures under federal securities laws.
Southwest is subject to Sarbanes-Oxley because it is required to file periodic
reports with the SEC under the Securities and Exchange Act of 1934. Among other
things, Sarbanes-Oxley, its implementing regulations, and related Nasdaq Stock
Market rules, have established new membership requirements and additional
responsibilities for Southwest's audit committee, imposed restrictions on the
relationship between Southwest and its outside auditors (including restrictions
on the types of non-audit services auditors may provide to their clients),
imposed additional financial statement certification responsibilities for
Southwest's chief executive officer and chief financial officer, expanded the
disclosure requirements for corporate insiders, required management to evaluate
Southwest's disclosure controls and procedures and its internal control over
financial reporting, and required Southwest's auditors to issue a report on
Southwest's internal control over financial reporting.
OTHER LAWS AND REGULATIONS. Some of the aspects of the lending and deposit
business of Stillwater National and SNB Wichita that are subject to regulation
by the Federal Reserve and the FDIC include reserve requirements and disclosure
requirements in connection with personal and mortgage loans and deposit
accounts. Stillwater National's federal student lending activities are subject
to regulation and examination by the United States Department of Education. In
addition, Stillwater National and SNB Wichita are subject to numerous federal
and state laws and regulations that include specific restrictions and procedural
requirements with respect to the
67
establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms, and discrimination in credit
transactions.
ENFORCEMENT ACTIONS. Federal statutes and regulations provide financial
institution regulatory agencies with great flexibility to undertake an
enforcement action against an institution that fails to comply with regulatory
requirements. Possible enforcement actions range from the imposition of a
capital plan and capital directive to civil money penalties, cease and desist
orders, receivership, conservatorship, or the termination of deposit insurance.
EMPLOYEES
As of December 31, 2005, Southwest employed 381 persons on a full-time
equivalent basis, including executive officers, loan, and other banking
officers, branch personnel, and others. No employees of Southwest or any of its
consolidated subsidiaries are represented by a union or covered under a
collective bargaining agreement. Management of Southwest considers their
employee relations to be excellent.
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BOARD OF DIRECTORS OF SOUTHWEST BANCORP, INC. AND STILLWATER NATIONAL BANK &
TRUST COMPANY
Robert B. Rodgers, Chairman of the Board President, Bob Rodgers Motor Company
Rick Green, Vice Chairman of the Board President and Chief Executive Officer
Southwest and Stillwater National
James E. Berry II Owner, Shading Concepts
Tom D. Berry Auctioneer, Real Estate Broker, Oil & Gas Exploration
Joe Berry Cannon Assistant Professor of Management, Oral Roberts
University School of Business
J. Berry Harrison Oklahoma State Senator and Rancher
Erd M. Johnson Petroleum Engineer & Operating Partner,
Johnson Oil Partnership
David P. Lambert Chairman of the Board, Lambert Construction Company
Linford R. Pitts President, Stillwater Transfer & Storage, Inc.
Russell W. Teubner Founder and Chief Executive Officer,
HostBridge Technology
John Cohlmia * Real Estate Broker, Grubb & Ellis/Levy Beffort
*Director of Stillwater National Bank & Trust Company only
BOARD OF DIRECTORS OF SNB BANK OF WICHITA
Robert B. Rodgers, Chairman of the Board President, Bob Rodgers Motor Company
Rick Green, Vice Chairman of the Board President and Chief Executive Officer
Southwest and Stillwater National
Kerby E. Crowell, CPA Executive Vice President and Chief Financial Officer, Southwest,
Stillwater National, and SNB Bank of Wichita
Steven N. Hadley President, SNB Bank of Wichita
Anthony W. Martin Dentist/Owner, Martin & Frankenberry D.D.S.P.A.
69
EXECUTIVE OFFICERS
The following table sets forth information regarding the executive officers of
Southwest, Stillwater National, and SNB Wichita who are not directors.
NAME AGE POSITION
- ---------------------------------- --- ----------------------------------------------------------------
Robert H. Beuttas................. 50 President, SNB Bank of Dallas-Preston Center Division of
Stillwater National
Kerby E. Crowell.................. 56 Executive Vice President, Chief Financial Officer, and Secretary
of Southwest and Stillwater National; Director, Chief Financial
Officer, and Secretary of SNB Wichita
Allen Glenn....................... 36 President, Business Consulting Group, Inc., Senior Vice
President, Stillwater National
Steven M. Gobel................... 54 Executive Vice President and Associate Chief Financial Officer
of Stillwater National
Steven N. Hadley.................. 48 President, SNB Wichita
Rex E. Horning.................... 54 President, Stillwater Division of Stillwater National
Jerry L. Lanier................... 57 Executive Vice President and Chief Lending Officer of
Stillwater National
Len McLaughlin.................... 53 President, SNB Bank of Dallas-Frisco Division of Stillwater
National
J. Randall Mills.................. 51 President, Healthcare Strategic Support, Inc.
Jason D. Osborn................... 35 President, Oklahoma City Division of Stillwater National
Steven M. Peterson................ 41 President, SNB Bank of Austin Division of Stillwater National
Kimberly G. Sinclair.............. 50 Executive Vice President and Chief Administrative Officer of
Stillwater National
Charles H. Westerheide............ 57 Executive Vice President and Treasurer of Stillwater National
David L. York..................... 59 President, Tulsa Division of Stillwater National
The principal occupations and business experience of each executive officer of
Southwest are shown below.
ROBERT H. BEUTTAS joined Stillwater National in October 2005 as President, SNB
Bank of Dallas-Preston Center Division of Stillwater National. Prior to joining
Stillwater National, Mr. Beuttas was Senior Vice President and Texas State
Manager for Commercial Real Estate of SouthTrust Bank and its successor,
Wachovia Bank, from December 1995 to October 2005. He previously served as an
Oversight Manager with the Resolution Trust Company from 1990 to 1995. From 1977
to 1990, he served as an officer of Lomas & Nettleton Co., a national mortgage
banking company.
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KERBY E. CROWELL joined Stillwater in 1969; has served as Executive Vice
President and Chief Financial Officer of Southwest and Stillwater National since
1986; became Secretary of Southwest and Stillwater National in 2000; and was
named Director, Chief Financial Officer, and Secretary of SNB Wichita in 2003.
He is currently a Board member of MetaFund Corporation (an Oklahoma Community
Development Financial Institution) and a member of Independent Community Bankers
of America's ("ICBA") Large Bank Advisory Committee and the Oklahoma City
Chapter of the Financial Executives Institute. He is a past Board member of
ICBA's Credit Card Subsidiary. Mr. Crowell is also past President and Board
member of the Oklahoma City Chapter of the Financial Executives Institute, and
has served on the Federal Reserve's Industry Advisory Group on Electronic Check
Presentment. In 1996, Mr. Crowell was recognized by the Oklahoma Society of
Certified Public Accountants as the Outstanding Certified Public Accountant in
Business and Industry.
ALLEN GLENN serves as President of the Business Consulting Group, Inc. ("BCG"),
a management consulting subsidiary of Southwest Bancorp, Inc., and as a Senior
Vice President of Stillwater National. Mr. Glenn previously served as Vice
President of BCG, beginning in January 2002. From 2000 until joining BCG, Mr.
Glenn was President of Glenn Solutions, Inc., a management consulting firm that
specialized in developing strategic and operational solutions for national
retailers to improve their profitability and service levels. From 1995 to 2000,
Mr. Glenn was a manager with Kurt Salmon Associates, an international management
consulting firm to the retail consumer products and healthcare industries.
STEVEN M. GOBEL serves as Executive Vice President, Audit Facilitator, and
Associate Chief Financial Officer of Stillwater National. From 1990 until
joining Stillwater National in September 2000, Mr. Gobel served as Senior Vice
President Finance and in other positions with Bank of America and predecessor
institutions in Oklahoma and Kansas (previous institutions included NationsBank,
Boatmen's Bank of St. Louis, Bank IV of Wichita, Kansas, and Fourth National
Bank of Tulsa). Mr. Gobel is a past member of the Board of Directors of the YMCA
of Greater Tulsa and a past member and Chairman of the Board of Managers for the
Downtown Branch of the YMCA of Greater Tulsa. From 1987 to 1990, Mr. Gobel
served as a Vice President and Manager of Financial Reporting and Financial
Planning for Sooner Federal Savings and Loan of Oklahoma. He is a Certified
Public Accountant and prior to 1987 spent twelve years working for International
Public Accounting Firms (previously Touche Ross and Coopers & Lybrand) in Tulsa,
Oklahoma, New York City, New York, and Milwaukee, Wisconsin.
STEVEN N. HADLEY was named President and CEO of SNB Bank of Wichita in October
2004. Mr. Hadley has over twenty-three years of banking experience. Prior to
joining SNB Bank of Wichita, Mr. Hadley spent four years with Commerce Bank in
their Wichita and Garden City, Kansas markets. Before that, Mr. Hadley was with
Bank of America in Garden City, Kansas. Mr. Hadley holds a bachelors degree in
Agricultural Economics from Kansas State University. Mr. Hadley is a member of
the booster club for the Kapaun Mt. Carmel High School and is involved in the
Wichita Swim Club and the St. Thomas Aquinas Catholic Church.
REX E. HORNING was appointed President of the Stillwater Division of Stillwater
National in May 2001. Mr. Horning has 31 years of banking experience. Prior to
joining Stillwater National, he most recently served as Senior Vice President of
Central National Bank and Commerce Bank in Wichita, Kansas from 1998 to May
2001, and as President and Chief Executive Officer of First State Bank and Trust
Company, Pittsburg, Kansas, from 1991 to 1998. Mr. Horning currently serves as
Executive Director of the Oklahoma State University Alumni Association, is a
Trustee for the Oklahoma State University Foundation, is a recent past president
of the OSU Spears College of Business Associates and is a board member of the
OSU Center for Research and Economic Development. Mr. Horning is a past chairman
of the Stillwater Chamber of Commerce and also serves on the Board of Directors
of the Oklahoma Chamber of Commerce.
JERRY L. LANIER was appointed Executive Vice President and Chief Lending Officer
of Stillwater National in 2001. Mr. Lanier previously served as Executive Vice
President-Credit Administration beginning in December 1999, supervising this
area company-wide, and from January 1998 to December 1999, served as Senior Vice
President in Credit Administration. From 1992 until joining Stillwater National
in 1998, Mr. Lanier was a consultant specializing in loan review. During this
same period he also served as court-appointed receiver for a number of
Oklahoma-based insurance companies. From 1982-1992, Mr. Lanier served as
President of American National
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Bank and Trust Co. of Shawnee, Oklahoma including service as Chief Executive
Officer from 1987-92. From 1970-1981, he was a National Bank Examiner for the
OCC in Oklahoma City, Oklahoma and Dallas, Texas, and, while an examiner, served
as Regional Director of Special Surveillance from 1979 to 1981. Mr. Lanier has
served as United Way Drive Chairman and President; Chairman of the Shawnee
Advisory Board of Oklahoma Baptist University; Director of the Shawnee Chamber
of Commerce; Director and Chairman of the Youth and Family Resource Center; and
President and Trustee of the Shawnee Educational Foundation.
LEN MCLAUGHLIN was appointed as President of SNB Bank of Dallas, the Texas
Division of Stillwater National, in May, 2002. Mr. McLaughlin previously served
as President and CEO of First Independent National Bank in Plano, Texas, and as
President/CEO of Preston National Bank in Dallas, Texas. From 1989 to 1998, Mr.
McLaughlin was with Compass Bancshares, serving as President of a subsidiary
bank, Central Bank N.A. in Anniston, Alabama; and later as Chief Retail
Executive for Compass Bank in Dallas, Texas. Mr. McLaughlin began his banking
career with First National Bank of Boston's Dallas, Texas office. He has served
as Chairman of the March of Dimes fund drive, United Way Fund Drive Chairman,
President of the local chapter of the American Cancer Society, Director of the
Little Light House, and is Honorary Co-Chairman of the Business Advisory Council
of the National Republican Congressional Committee.
J. RANDALL MILLS was appointed President of Healthcare Strategic Support, Inc.
("HSSI") in 2003. Mr. Mills holds a Bachelor of Science degree in Accounting
from Southwest Missouri State University; a Master of Health Administration from
the University of Colorado; and a PhD in Sociology from Oklahoma State
University. Prior to his employment with HSSI, he was a Partner and Healthcare
Consultant for Madole & Wagner, PLLC, responsible for marketing, administration,
and client services for individual physicians, medical groups, and hospital
clients on medical group practice, managed care, marketing, networking,
strategic planning, and development issues. Before that, he was a senior
executive with Saint Francis Health System for ten years, responsible for
development of a 160 physician medical group, development of a start-up HMO,
management of two affiliated small or rural hospitals, physician joint venture
development, and managed care strategic planning and network development. He is
a fellow of the American College of Healthcare Executives, and a member of the
Medical Group Management Association, American Society of Certified Public
Accountants, and Oklahoma Society of Certified Public Accountants.
JASON D. OSBORN was appointed President of the Oklahoma City Division in
September 2005. Prior to that, he was Senior Vice President in
Healthcare/Commercial Lending in the Oklahoma City Division and Leader of the
Healthcare Business Development Group. Mr. Osborn holds a Bachelor of Science
degree in Finance from Oklahoma State University and a Master of Business
Administration from the University of Oklahoma. Mr. Osborn joined Stillwater
National in 1996, coming from Bank of Oklahoma where he had spent three years in
the Retail Banking department in the Oklahoma City metro area. Mr. Osborn is
currently President of the Board of Directors at Infant Crisis Services, a
non-profit organization in Oklahoma City.
STEVEN M. PETERSON was appointed President of SNB Bank of Austin in September
2004. Mr. Peterson previously served as City President for Compass Bank in
Williamson County, Texas, and Commerce Bank in Wichita, Kansas from 1998 to
August of 2004. Mr. Peterson began his banking career with Fourth Financial
Holding Company in Wichita, Kansas. Mr. Peterson currently serves as a Board
Member of the Georgetown Symphony and Director of the Chamber of Commerce. He
has served as the Chairman of The 100,000 Economic Committee.
KIMBERLY G. SINCLAIR was appointed Chief Administrative Officer in 1995 and has
been Executive Vice President of Stillwater National since 1991. Prior to 1991,
she had been Senior Vice President and Chief Operations Officer of Stillwater
National since 1985. Ms. Sinclair joined Stillwater National in 1975. She is a
member of the Stillwater Junior Service Sustainers, and serves on the Executive
Board of Directors for the Stillwater United Way, and chaired the 2005 Day of
Caring. She is past Treasurer of the Board of Trustees of the Stillwater Public
Education Foundation, and a graduate of the Leadership Stillwater Class IX. She
has been an Ambassador with the Stillwater Chamber of Commerce and active with
various organizations throughout Stillwater.
CHARLES H. WESTERHEIDE was appointed Executive Vice President and Treasurer of
Stillwater National in 2000. Prior to that, he served as Senior Vice President
and Treasury Manager. He joined Stillwater National in 1997, coming from Bank of
America (previously Bank IV and NationsBank), Wichita, Kansas, where he served
as
72
Treasury/Funding Manager. Prior to joining BankIV, Mr. Westerheide served as
Executive Vice President and Chief Financial Officer of Security Bank and Trust
Co., Ponca City, Oklahoma. Mr. Westerheide has held a number of community
leadership positions including Chairman of the Ponca City Chamber of Commerce,
President of the Ponca City Foundation for Progress, Inc., and a director and
officer of numerous community foundations and clubs. Mr. Westerheide is a
graduate of Leadership Oklahoma, Class II.
DAVID L. YORK was appointed President of the Tulsa Division in March 2004. Mr.
York came to Stillwater National with over thirty years in the Tulsa banking
market, most recently serving as Senior Vice President and Manager of the
Professional Banking Group of The F&M Bank & Trust Company in Tulsa from 1989 to
2004. From 1983 to 1989, Mr. York previously served in various management and
senior lending positions with Utica National Bank & Trust Company, which was
acquired by F&M Bank. Mr. York began his banking career with the First National
Bank and Trust Company of Tulsa in 1973 and served there until 1983 in various
commercial lending and management capacities. Currently, Mr. York serves on the
Board of Trustees of St. Simeon's Episcopal Home, Inc., where he was President
of the Board for four years, has served as Vice President and is currently
Treasurer of its Foundation. Additionally, Mr. York has served on the Board of
Trustees of Holland Hall School as its Treasurer. Mr. York is also an Advisory
Director of the Tulsa Metro Chamber of Commerce.
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RISK FACTORS
Investing in our common stock involves risks. You should carefully consider the
following risk factors before you decide to make an investment decision
regarding our stock. The risk factors may cause our future earnings to be lower
or our financial condition to be less favorable than we expect. In addition,
other risks of which we are not aware, or which we do not believe are material,
may cause earnings to be lower, or may hurt our financial condition. You should
also consider the other information in this Annual Report on Form 10-K, as well
as in the documents incorporated by reference into it.
WE MAY BE UNABLE TO EXECUTE OUR GROWTH STRATEGY.
We have pursued, and intend to continue to pursue, an internal growth strategy,
the success of which will depend primarily on generating an increasing level of
loans and funding at acceptable risk and expense. There can be no assurance that
we will be successful in continuing our growth strategy, however, since it
depends upon economic conditions, our ability to identify appropriate markets
for expansion, our ability to recruit and retain qualified personnel, our
ability to fund growth at reasonable cost, sufficient capital, competitive
factors, banking laws, and other factors described in this prospectus.
We intend to increase the level of our assets and deposits and the number of our
offices, including offices in new markets that may be considerable distances
from our current markets and executive headquarters. We cannot be certain as to
our ability to manage increased levels of assets and liabilities, or offices in
these new markets, without increased expenses and higher levels of non
performing assets. We may be required to make additional investments in
equipment and personnel to manage higher asset levels and loan balances, which
may adversely affect earnings, shareholder returns, and our efficiency ratio.
Increases in operating expenses or non-performing assets may decrease the value
of our common stock.
In addition, in the future we may acquire banks, branches of other financial
institutions, or other businesses. We cannot assure you that we will be able to
adequately or profitably manage any such acquisitions. The acquisition of banks,
bank branches, and other businesses involves risks, including exposure to
unknown or contingent liabilities, the uncertainties of asset quality
assessment, the difficulty and expense of integrating the operations and
personnel of the acquired companies with ours, the potential negative effects on
our other operations of the diversion of management's time and attention, and
the possible loss of key employees and customers of the banks, businesses, or
branches we acquire. Our failure to execute our internal growth strategy or our
acquisition strategy could adversely affect our business, results of operations,
financial condition, and future prospects.
CHANGES IN INTEREST RATES AND OTHER FACTORS BEYOND OUR CONTROL MAY ADVERSELY
AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
Our net income depends to a great extent upon the level of our net interest
income. Changes in interest rates can increase or decrease net interest income
and net income. Net interest income is the difference between the interest
income we earn on loans, investments and other interest-earning assets, and the
interest we pay on interest-bearing liabilities, such as deposits and
borrowings. Net interest income is affected by changes in market interest rates,
because different types of assets and liabilities may react differently, and at
different times, to market interest rate changes. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest
income. Similarly, when interest-earning assets mature or reprice more quickly
than interest-bearing liabilities, falling interest rates could reduce net
interest income.
Changes in market interest rates are affected by many factors beyond our
control, including inflation, unemployment, money supply, international events,
and events in world financial markets. We attempt to manage our risk from
changes in market interest rates by adjusting the rates, maturity, repricing,
and balances of the different types of interest-earning assets and
interest-bearing liabilities, but interest rate risk management techniques are
not exact. As a result, a rapid increase or decrease in interest rates could
have an adverse effect on
74
our net interest margin and results of operations. Changes in the market
interest rates for types of products and services in our various markets also
may vary significantly from location to location and over time based upon
competition and local or regional economic factors. The results of our interest
rate sensitivity simulation model depend upon a number of assumptions which may
not prove to be accurate. There can be no assurance that we will be able to
successfully manage our interest rate risk.
CHANGES IN LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our commercial and commercial real estate lending operations are concentrated in
the metropolitan areas of Stillwater, Oklahoma City, and Tulsa, Oklahoma;
Dallas, Austin, and San Antonio, Texas; and Wichita and Kansas City, Kansas. Our
success depends in part upon economic conditions in these markets. Adverse
changes in economic conditions in these markets could reduce our growth in loans
and deposits, impair our ability to collect our loans, increase our problem
loans and charge-offs, and otherwise negatively affect our performance and
financial condition.
ADVERSE CHANGES IN HEALTHCARE-RELATED BUSINESSES COULD LEAD TO SLOWER LOAN
GROWTH AND HIGHER LEVELS OF PROBLEM LOANS AND CHARGE-OFFS.
We have a substantial amount of loans to individuals and businesses involved in
the healthcare industry, including business and personal loans to physicians,
dentists, and other healthcare professionals, and loans to for-profit hospitals,
nursing homes, suppliers and other healthcare-related businesses. Our strategy
calls for continued growth in healthcare lending. This concentration exposes us
to the risk that adverse developments in the healthcare industry could hurt our
profitability and financial condition as a result of increased levels of
nonperforming loans and charge-offs, and reduced loan demand and deposit growth.
INCOME FROM OUR SECONDARY MARKET ACTIVITIES CAN VARY SIGNIFICANTLY FROM YEAR TO
YEAR. OUR ABILITY TO CONDUCT STUDENT LENDING ACTIVITIES AND THE PROFITABILITY OF
OUR STUDENT LENDING OPERATIONS ARE HIGHLY DEPENDENT ON SALLIE MAE AND FEDERAL
LAW. SALLIE MAE RECENTLY CREATED A BANK, WHICH MAY ADVERSELY AFFECT OUR STUDENT
LENDING OPERATIONS.
Our secondary market activities, which consist of student lending to
post-secondary students and residential mortgage lending, contribute a
significant portion of our consolidated net income. The volume of residential
mortgage and mortgage loans and profits depend on market interest rates,
economic conditions in our markets, and competition, and can vary significantly
from year to year. A significant increase in interest rates would be likely to
reduce residential lending loan volume and profits.
Our student lending activities include government guaranteed loans and private
student loans. Our ability to conduct our student lending operations depends
significantly on the SLM Corporation, which we refer to as Sallie Mae. Sallie
Mae provides substantially all of the servicing for government guaranteed and
private student loans; provides liquidity through its purchases of student loans
and lines of credit; and guarantees substantially all of our private student
loans. Future changes in servicing fees or in our ability to generate government
guaranteed private loans from private lenders may adversely affect our net
income.
The volume and profitability of our government guaranteed student loans depends
upon our ability to generate loans from schools and individuals and upon federal
laws and regulations that authorize government guaranteed student loans made by
banks and other lenders and establish their terms. Although they are not
possible to predict, adverse changes in these laws and regulations may reduce,
or even eliminate our ability to make government guaranteed student loans, and
adversely affect our net income.
In October 2005, Sallie Mae received approval to establish Sallie Mae Bank, an
FDIC-insured Utah industrial bank. The establishment of Sallie Mae Bank is
intended to reduce Sallie Mae's reliance on independent financial institutions,
such as Stillwater National, in origination of student loans. The effects of the
establishment of Sallie Mae Bank on Stillwater National's future student lending
operations are not known.
75
OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER OUR ACTUAL LOAN
LOSSES, WHICH COULD ADVERSELY AFFECT OUR EARNINGS.
We maintain an allowance for loan losses in an amount which we believe is
adequate to provide for losses inherent in the portfolio. While we strive to
carefully monitor credit quality and to identify loans that may become
nonperforming, at any time there are loans included in the portfolio that will
result in losses, but that have not been identified as nonperforming or
potential problem loans. We cannot be sure that we will be able to identify
deteriorating loans before they become nonperforming assets, or that we will be
able to limit losses on those loans that are identified. As a result, future
additions to the allowance may be necessary. Additionally, future additions may
be required based on changes in the loans comprising the portfolio and changes
in the financial condition of borrowers, such as may result from changes in
economic conditions, or as a result of incorrect assumptions by management in
determining the allowance. Additionally, federal banking regulators, as an
integral part of their supervisory function, periodically review our allowance
for loan losses. These regulatory agencies may require us to increase our
provision for loan losses or to recognize further loan charge-offs based upon
their judgments, which may be different from ours. Any increase in the allowance
for loan losses could have a negative effect on our financial condition and
results of operations.
Our loan portfolio contains a high percentage of commercial and commercial real
estate loans in relation to our total loans and total assets. Commercial and
commercial real estate loans generally are viewed as having more risk of default
than residential real estate loans or other loans or investments. These types of
loans also typically are larger than residential real estate loans and other
consumer loans. Because the loan portfolio contains a significant number of
commercial and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in
nonperforming assets. An increase in nonperforming loans could result in: a loss
of earnings from these loans, an increase in the provision for loan losses, or
an increase in loan charge-offs, which could have an adverse impact on our
results of operations and financial condition.
UNSEASONED LOANS MAY INCREASE THE RISK OF CREDIT DEFAULTS IN THE FUTURE.
Due to our rapid growth over the past several years, a large portion of the
loans in our loan portfolio and of our lending relationships are of relatively
recent origin. In general, loans do not begin to show signs of credit
deterioration or default until they have been outstanding for some period of
time, a process referred to as "seasoning." As a result, a portfolio of older
loans may behave more predictably than a newer portfolio. Because a significant
portion of our loan portfolio is relatively new, the current level of
delinquencies and defaults may not be representative of the level that will
prevail when the portfolio becomes more seasoned, which may be higher than
current levels. If delinquencies and defaults increase, we may be required to
increase our provision for loan losses, which would adversely affect our results
of operations and financial condition.
WE USE WHOLESALE FUNDING SOURCES TO SUPPLEMENT OUR CORE DEPOSITS, WHICH EXPOSES
US TO LIQUIDITY RISK AND POTENTIAL EARNINGS VOLATILITY OR OTHER ADVERSE EFFECTS
IF WE ARE UNABLE TO SECURE ADEQUATE FUNDING.
We rely on wholesale funding, including Federal Home Loan Bank borrowings and
brokered deposits, to supplement core deposits to fund our business. At December
31, 2005, these wholesale funding sources constituted approximately 28% of our
total deposits and other borrowings. Wholesale funding sources are affected by
general market conditions and the condition and performance of the borrower, and
the availability of funding from wholesale lenders may be dependent on the
confidence these investors have in our operations. The continued availability to
us of these funding sources cannot be assured, and we may find it difficult to
retain or replace them at attractive rates as they mature. Our liquidity will be
constrained if we are unable to renew our wholesale funding sources or if
adequate financing is not available to us in the future at acceptable rates of
interest or at all. We may not have sufficient liquidity to continue to fund new
loans, and we may need to liquidate loans or other assets unexpectedly in order
to repay obligations as they mature. If we do not have adequate sources of
liquidity at attractive rates, we may have to restrain the growth of assets or
reduce our asset size, which may adversely affect shareholder value.
76
WE RELY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY OF THEM
MAY ADVERSELY AFFECT OUR OPERATIONS.
We are and will continue to be dependent upon the services of our executive
management team. In addition, we will continue to depend on our ability to
retain and recruit key commercial loan officers. The unexpected loss of services
of any key management personnel, or the inability to recruit and retain
qualified personnel in the future, could have an adverse effect on our business
and financial condition.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
The overall market and the price of our common stock may continue to be
volatile. There may be a significant impact on the market price for our common
stock due to, among other things:
o Variations in our anticipated or actual operating results or the
results of our competitors;
o Changes in investors' or analysts' perceptions of the risks and
conditions of our business;
o The size of the public float of our common stock;
o Regulatory developments;
o The announcement of acquisitions or new branch locations by us or
our competitors;
o Market conditions; and
o General economic conditions.
COMPETITION MAY DECREASE OUR GROWTH OR PROFITS.
We compete for loans, deposits, and investment dollars with other banks and
other financial institutions and enterprises, such as securities firms,
insurance companies, savings associations, credit unions, mortgage brokers, and
private lenders, many of which have substantially greater resources than ours.
Credit unions have federal tax exemptions, which may allow them to offer lower
rates on loans and higher rates on deposits than taxpaying financial
institutions such as commercial banks. In addition, non-depository institution
competitors are generally not subject to the extensive regulation applicable to
institutions that offer federally insured deposits. Other institutions may have
other competitive advantages in particular markets or may be willing to accept
lower profit margins on certain products. These differences in resources,
regulation, competitive advantages, and business strategy may decrease our net
interest margin, may increase our operating costs, and may make it harder for us
to compete profitably.
GOVERNMENT REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS.
The banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Stillwater National is subject to regulation and supervision by
the Office of the Comptroller of the Currency. SNB Wichita is subject to
regulation and supervision by the Office of Thrift Supervision. Southwest is
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System. The burden imposed by federal and state regulations puts banks
at a competitive disadvantage compared to less regulated competitors such as
finance companies, mortgage banking companies and leasing companies. Changes in
the laws, regulations, and regulatory practices affecting the banking industry
may increase our costs of doing business or otherwise adversely affect us and
create competitive advantages for others. Regulations affecting banks and
financial services companies undergo continuous change, and we cannot predict
the ultimate effect of these changes, which could have a material adverse effect
on our profitability or financial condition. Federal economic and monetary
policy may also affect our ability to attract deposits and other funding
sources, make loans and investments, and achieve satisfactory interest spreads.
OUR ABILITY TO PAY DIVIDENDS IS LIMITED BY LAW AND CONTRACT.
Our ability to pay dividends to our shareholders largely depends on Southwest's
receipt of dividends from Stillwater National. SNB Wichita does not currently
pay dividends, and is not expected to do so during the next
77
several years. The amount of dividends that Stillwater National may pay to
Southwest is limited by federal laws and regulations. We also may decide to
limit the payment of dividends even when we have the legal ability to pay them
in order to retain earnings for use in our business. We also are prohibited from
paying dividends on our common stock if the required payments on our
subordinated debentures have not been made.
RESTRICTIONS ON UNFRIENDLY ACQUISITIONS COULD PREVENT A TAKEOVER.
Our certificate of incorporation and bylaws contain provisions that could
discourage takeover attempts that are not approved by the board of directors.
The Oklahoma General Corporation Act includes provisions that make an
acquisition of Southwest more difficult. These provisions may prevent a future
takeover attempt in which our shareholders otherwise might receive a substantial
premium for their shares over then-current market prices.
These provisions include supermajority provisions for the approval of certain
business combinations and certain provisions relating to meetings of
shareholders. Our certificate of incorporation also authorizes the issuance of
additional shares without shareholder approval on terms or in circumstances that
could deter a future takeover attempt.
In addition, we have adopted a shareholder rights plan designed to protect our
shareholders against acquisitions that our board of directors believes are
unfair or otherwise not in the best interests of Southwest and its shareholders.
Under the rights plan, adopted in 1999 and expiring in 2009, each holder of
record of our common stock, subject to the limits of the rights plan, has
received, or will receive, one right per common share. The rights generally
become exercisable if an acquiring party accumulates, or announces an offer to
acquire, 10% or more of our voting stock. Each right entitles the holder (other
than the acquiring party) to buy, under specified circumstances, shares of our
common stock or equivalent securities, or shares of the acquiror's securities,
having a value of twice the right's exercise price. Under the rights plan, we
also may exchange each right, other than rights owned by an acquiring party, for
a share of our common stock or equivalent securities.
FUTURE SALES OF OUR COMMON STOCK OR OTHER SECURITIES MAY DILUTE THE VALUE OF OUR
COMMON STOCK.
In many situations, our board of directors has the authority, without any vote
of our shareholders, to issue shares of our authorized but unissued stock,
including shares authorized and unissued under our stock option plans. In the
future, we may issue additional securities, through public or private offerings,
in order to raise additional capital. Any such issuance would dilute the
percentage of ownership interest of existing shareholders and may dilute the per
share book value of the common stock. In addition, option holders may exercise
their options at a time when we would otherwise be able to obtain additional
equity capital on more favorable terms.
The sale, or availability for sale, of a substantial number of shares of common
stock in the public market could adversely affect the price of our common stock
and could impair our ability to raise additional capital through the sale of
equity securities.
78
AVAILABILITY OF FILINGS
Southwest provides internet access to Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, through its Investor Relations website, at www.oksb.com (This site also
is accessible through Stillwater National's website at www.banksnb.com, the
metropolitan Dallas division's website at www.snbdallas.com, and SNB Wichita's
website at www.snbwichita.com.). Access to these reports is provided by means of
a link to a third party vendor that maintains a database of such filings. In
general, Southwest intends that these reports be available a soon as reasonably
practicable after they are filed with or furnished to the SEC. However,
technical and other operational obstacles or delays caused by the vendor may
delay their availability. The SEC maintains a website (www.sec.gov) where these
filings also are available through the SEC's EDGAR system. There is no charge
for access to these filings through either Southwest's site or the SEC's site,
although users should understand that there may be costs associated with
electronic access, such as usage charges from Internet access providers and
telephone companies, that they may bear. The public also may read and copy
materials filed by Southwest with the SEC at the SEC's Public Reference Room at
100 F Street, N.E., Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
79
PROPERTIES
The locations of Southwest and its subsidiaries are shown below:
SOUTHWEST BANCORP, INC.
CORPORATE HEADQUARTERS
608 S. Main Street
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
www.oksb.com
BUSINESS CONSULTING GROUP, INC.*
1624 Cimarron Plaza
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
HEALTHCARE STRATEGIC SUPPORT, INC.*
2431 E. 61st, Suite 170
P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3690
SNB BANK OF WICHITA*
CORPORATE HEADQUARTERS
8415 E. 21st Street North, Suite 150 Wichita, Kansas 67206 316-315-1660
www.snbwichita.com
STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS
CORPORATE HEADQUARTERS
608 S. Main Street
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
www.banksnb.com
DRIVE-IN FACILITY
308 S. Main Street
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
OPERATIONS CENTER*
1624 Cimarron Plaza
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
WATERFORD BRANCH*
6301 Waterford Blvd., Suite 101 Oklahoma City, Oklahoma 73118 405-427-3100
CHICKASHA BRANCH
500 W. Grand Avenue Chickasha, Oklahoma 73018 405-427-3100
TULSA UTICA BRANCH
1500 S. Utica Avenue
P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3750
TULSA 61ST BRANCH*
2431 E. 61st, Suite 170
P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3750
80
SNB BANK OF DALLAS*
5300 Town and Country Blvd., Suite 100 Frisco, Texas 75034 972-624-2960
SNB BANK OF DALLAS-PRESTON CENTER*
5950 Berkshire Lane, Suite 350 Dallas, Texas 75225 972-624-2960
SNB BANK OF AUSTIN*
3600 Bee Cave Road, Suite 100 Austin, Texas 78746 512-314-6741
SNB BANK OF SAN ANTONIO*
777 E. Sonterra Blvd., Suite 190 San Antonio, Texas 78258 210-442-6141
STILLWATER NATIONAL BANK LOAN PRODUCTION OFFICE*
11350 Tomahawk Creek Parkway
Suite 100 Leawood, Kansas 66211 913-906-4400
OSU CAMPUS BRANCH BANK*
1102 W. Hall of Fame Avenue
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
OUHSC LOAN OFFICE*
1106 N. Stonewall Oklahoma City, Oklahoma 73190 405-427-3100
OSU-STILLWATER MARKETING OFFICE*
Student Union, Room 150
P.O. Box 1988 Stillwater, Oklahoma 74076 405-372-2234
*Leased from third parties. Other properties are owned.
81
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are filed as a part
of this report:
Independent Registered Public Accounting Firm's Report for the Years
Ended December 31, 2005 and 2004
Consolidated Statements of Financial Condition at December 31, 2005 and
2004
Consolidated Statements of Operations for the Years Ended December 31,
2005, 2004, and 2003
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2005, 2004, and 2003
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the Years Ended December 31,
2005, 2004, and 2003
Notes to Consolidated Financial Statements for the Years Ended December
31, 2005, 2004, and 2003
(2) Financial Statement Schedules. All schedules for which provision is made in
the applicable accounting regulations of the SEC are omitted because of the
absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this Annual
Report on Form 10-K.
No. Exhibit
---- --------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Southwest
Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
3.2 Bylaws of Southwest Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-71168))
4.1 Rights Agreement, dated as of April 22, 1999, between
Southwest Bancorp, Inc. and Harris Trust & Savings Bank, as
rights agent and Form of Certificate of Designations setting
forth terms of Class B, Series 1 Preferred Stock of Southwest
Bancorp, Inc. referred to in the rights agreement
(incorporated by reference to Exhibits 1 and 2 to Current
Report on Form 8-K dated April 22, 1999)
* 10.1 Southwest Bancorp, Inc. Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4.1 to Registration
Statement on Form S-8 (File No. 33-97850))
* 10.2 Severance Compensation Plan (incorporated by reference from
Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.)
* 10.3 Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated
by reference from Exhibit 10.3 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1993)
* 10.4 Southwest Bancorp, Inc. 1999 Stock Option Plan (incorporated
by reference from Exhibit 4 to Registration Statement on Form
S-8 (File No. 333-92143))
* 10.5 Stillwater National Bank and Trust Company 2002 and 2003
Deferred Compensation Plans (incorporated by reference from
Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.)
* 10.6 Stillwater National Bank and Trust Company Supplemental Profit
Sharing Plan for Rick Green (incorporated by reference from
Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.)
82
* 10.7 Stillwater National Bank and Trust Company Supplemental Profit
Sharing Plan for Kerby E. Crowell (incorporated by reference
from Exhibit 10.7 to Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.)
* 10.8 Stillwater National Bank and Trust Company Supplemental Profit
Sharing Plan for Jerry L. Lanier (incorporated by reference
from Exhibit 10.8 to Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.)
10.9 Indemnification Agreements dated December 14 and 15, 2005 by
and between Southwest Bancorp, Inc. and James E. Berry II,
Thomas D. Berry, Joe Berry Cannon, J. Berry Harrison, Erd M.
Johnson, David P. Lambert, Linford R. Pitts, Robert B.
Rodgers, Russell W. Teubner, John Cohlmia, and Anthony W.
Martin.
10.10 Indemnification Agreements dated December 14 and 15, 2005 by
and between Southwest Bancorp, Inc. and Rick Green, Kerby E.
Crowell, David Dietz, Allen Glenn, Steve Gobel, Steven N.
Hadley, Jerry L. Lanier, Randy Mills, Kimberly Sinclair, Kay
Smith, and Charles H. Westerheide.
10.11 Selling Shareholder Agreement dated May 13, 2005 by and among
certain shareholders, Betty B. Kerns, and Southwest Bancorp,
Inc. (incorporated by reference from Exhibit 10.1 to Current
Report on Form 8-K dated May 16, 2005).
21 Subsidiaries of the Registrant
23 Consent of Registered Public Accounting Firm
24 Power of Attorney
31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications
32(a), (b) 18 U.S.C. Section 1350 Certifications
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHWEST BANCORP, INC.
March 10, 2006 By: /s/ Rick Green
-----------------------
Rick Green
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Rick Green March 10, 2006
- -----------------------
Rick Green
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Kerby E. Crowell March 10, 2006
- ----------------------------------
Kerby E. Crowell
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
A majority of the directors of Southwest executed a power of attorney appointing
Rick Green as their attorney-in-fact, empowering him to sign this report on
their behalf. This power of attorney has been filed with the Securities and
Exchange Commission under Part IV, Exhibit 24 of this Annual Report on Form 10-K
for the year ended December 31, 2005. This report has been signed below by such
attorney-in-fact as of March 10, 2006.
By: /s/ Rick Green
-----------------------
Rick Green
Attorney-in-Fact for Majority of the
Directors of Southwest
84