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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2003
Commission File Number 0-23064
SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1136584
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
608 South Main Street, Stillwater, Oklahoma 74074
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (405) 372-2230.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by a check mark if the registrant is an accelerated filer.
YES X NO
- ---- ---
The registrant's Common Stock is traded on the NASDAQ National Market under the
symbol OKSB. The aggregate market value of approximately10,895,232 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
June 30, 2003, the last day of the registrant's most recently completed second
fiscal quarter, was approximately $149.4 million based on the closing sales
price of $13.71 per share of the registrant's Common Stock on that date. Solely
for purposes of this calculation, it is assumed that directors, officers and 10%
stockholders of the registrant are affiliates. As of the close of business on
March 5, 2004, 12,031,651 shares of the registrant's Common Stock were
outstanding.
Documents Incorporated by Reference
Parts I and II: Portions of the Annual Report to Shareholders for the year
ended December 31, 2003 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual
Meeting of Shareholders to be held on April 22, 2004 (the
"Proxy Statement").
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Southwest Bancorp, Inc. ("Southwest") makes forward-looking statements
in this Form 10-K that are subject to risks and uncertainties. These
forward-looking statements include: statements of Southwest's goals, intentions,
and expectations; estimates of risks and of future costs and benefits;
assessments of loan quality, probable loan losses, liquidity, off-balance sheet
arrangements, contractual obligations, and market or interest rate risk; and
statements of Southwest's ability to achieve financial and other goals. These
forward-looking statements are subject to significant uncertainties because they
are based upon: the amount and timing of future changes in interest rates and
other economic conditions; future laws, regulations and accounting principles;
and a variety of other matters. Because of these uncertainties, the actual
future results may be materially different from the results indicated by these
forward-looking statements. In addition, Southwest's past growth and performance
do not necessarily indicate its future results.
PART I
ITEM 1. BUSINESS
General
Southwest is a financial holding company headquartered in Stillwater,
Oklahoma. Southwest provides commercial and consumer banking services through
its banking subsidiaries, Stillwater National Bank & Trust Company ("Stillwater
National") and SNB Bank of Wichita ("SNB Wichita") and management consulting
services through Business Consulting Group, Inc. and Healthcare Strategic
Support, Inc. Southwest was organized in 1981 as the holding company for
Stillwater National, which was chartered in 1894. Southwest is registered as a
bank holding company pursuant to the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). As such, Southwest is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). Southwest became a financial holding company
during 2000 pursuant to the Holding Company Act. Stillwater National is a
national bank subject to supervision and regulation by the Office of the
Comptroller of the Currency (the "OCC"). SNB Wichita, headquartered in Wichita,
Kansas, is a federal savings bank chartered in November 2003 and subject to
supervision and regulation by the Office of Thrift Supervision ("OTS"). The
deposit accounts of Southwest's banking subsidiaries are insured by the by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by
law.
Products and Services
Southwest offers a wide variety of commercial and consumer lending and
deposit services. Southwest has developed internet banking services, called SNB
DirectBanker(R), for consumer and commercial customers, a highly automated
lockbox, imaging and information service for commercial customers called
"Business Mail Processing," and a deposit product that automatically sweeps
excess funds from commercial demand deposit accounts and invests them in
short-term borrowings ("Sweep Repurchase Agreements"). The commercial loans
offered by Southwest include (i) commercial real estate loans, (ii) working
capital and other commercial loans, (iii) construction loans, and (iv) Small
Business Administration ("SBA") guaranteed loans. Consumer lending services
include (i) government-guaranteed student loans, (ii) residential real estate
loans and mortgage banking services, and (iii) personal lines of credit and
other installment loans. Southwest also offers deposit and personal banking
services, including (i) commercial deposit services such as Business Mail
Processing, commercial checking, money market, and other deposit accounts, and
(ii) retail deposit services such as certificates of deposit, money market
accounts, checking accounts, NOW accounts, savings accounts and automatic teller
machine ("ATM") access. Trust services, personal brokerage and credit cards are
offered through independent institutions.
Strategic Focus
Southwest's banking philosophy is to provide a high level of customer
service, a wide range of financial services, and products responsive to customer
needs. This philosophy has led to the development of a line of deposit and
lending products that responds to customer needs for speed, efficiency, and
information. These include Southwest's Sweep Repurchase Agreements, Business
Mail Processing, and SNB DirectBanker(R) and other internet banking products,
which complement Southwest's more traditional banking products. Southwest also
emphasizes marketing to highly educated, professional and business persons in
its markets. Southwest seeks to build close relationships with businesses,
professionals and their principals and to service their banking needs throughout
their business development and professional lives.
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Organization
Southwest's business operations are conducted through four operating
segments that include Oklahoma banking, Other states banking re, Secondary
market segment consisting of student lending and residential mortgage lending
services, and an "Other" segment that includes support, control, , and funding.
The organizational structure is designed to facilitate high customer service,
prompt response, efficiency, and appropriate, uniform credit standards and other
controls.
Regional Divisions. The regional operating segments include Oklahoma
Banking, which includes the Stillwater division, the Central Oklahoma division,
based in Oklahoma City, and the Tulsa division; and Other States Banking, which
includes the Texas division, based in metropolitan Dallas, and the Kansas
Division, based in Wichita. The Stillwater division serves the Stillwater market
as a full-service community bank emphasizing both commercial and consumer
lending. The other four divisions pursue a more focused marketing strategy,
targeting managers, professionals, and businesses for lending, and offering more
specialized services. All of the regional divisions focus on commercial and
consumer financial services to local businesses and their senior employees and
to other managers and professionals living and working in Southwest's market
areas. Southwest has a high-service philosophy. Loan officers often meet at the
customer's home or place of business to close loans. Third-party courier
services often are used to collect commercial deposits.
Secondary Market Segment. Southwest manages its mortgage and student
lending operations through its home office. Southwest markets its student
lending program directly to financial aid directors at colleges and universities
throughout the United States. Southwest also originates first mortgage loans for
sale to the Federal National Mortgage Association ("FNMA") or private investors.
Servicing on these loans may be released in connection with the sale.
Support and Control Functions. Support and control functions are
centralized, although each regional division has support and control personnel.
Southwest's philosophy of customer service extends to its support and control
functions. Southwest manages and offers products that are technology based, or
that otherwise are more efficiently offered centrally, through its home office.
These include products that are marketed through the regional offices, such as
Southwest's internet banking product for commercial and retail customers (SNB
DirectBanker(R)), commercial information and item processing services (Business
Mail Processing), , and products marketed and managed directly by central staff,
such as cash dispensing machines. Southwest's technology products are marketed
both to existing customers and to help develop new customer relationships. Use
of these products by customers enables Southwest to serve its customers more
effectively, use its resources more efficiently, and increase fee income.
For additional information regarding Southwest's operating segments,
please see "Note 16. Operating Segments" to the Consolidated Financial
Statements on page 45-46 of the Annual Report.
Banking Offices
Banking Offices. Southwest has nine full-service banking offices, three
located in Stillwater, two located in Tulsa, Oklahoma, and one each in Oklahoma
City and Chickasha, Oklahoma, Frisco, Texas, and Wichita, Kansas; loan
production offices on the campuses of the University of Oklahoma Health Sciences
Center and Oklahoma State University-Tulsa; a marketing presence in the Student
Union at Oklahoma State University-Stillwater; and on the Internet, through SNB
DirectBanker(R). See "Item 2. Properties." Before 1999, laws of the State of
Oklahoma limited the number and location of de novo branches that a financial
institution could establish. Southwest has developed and continues to pursue a
business strategy that does not rely on an extensive branch network. National
banks in Oklahoma now have broad ability to establish de novo branches anywhere
in the state. Southwest established its interstate offices in Frisco, Texas and
Wichita, Kansas in 2002. SNB Wichita opened on the site of the Wichita loan
production office in 2003.
Regulation, Supervision, and Governmental Policy
Following is a brief summary of certain statutes and regulations that
significantly affect Southwest and its banking subsidiaries. A number of other
statutes and regulations affect Southwest, Stillwater National, and SNB Wichita
but are not summarized below. Although Stillwater National and SNB Wichita have
different primary federal banking regulators, many of the rules that govern them
are substantially the same. Where practical, the rules for both banks are
discussed together below. For ease of reference the term "banks" is used below
to include national banks and state chartered banks ("commercial banks") and
federal savings banks and saving associations, unless other wise indicated.
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Bank Holding Company Regulation. Southwest is registered as a bank
holding company under the Holding Company Act and, as such, is subject to
supervision and regulation by the Federal Reserve. As a bank holding company,
Southwest is required to furnish to the Federal Reserve annual and quarterly
reports of its operations and additional information and reports. Southwest is
also subject to regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the
prior approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any commercial bank or
bank holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (2) acquiring
all or substantially all of the assets of another commercial bank or bank
holding company; or (3) merging or consolidating with another bank holding
company.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve prior to acquiring control of Southwest or its banking
subsidiaries. For purposes of the Holding Company Act, "control" is defined as
ownership of more than 25% of any class of voting securities, the ability to
control the election of a majority of the directors, or the exercise of a
controlling influence over management or policies.
The federal Change in Bank Control Act and the related regulations of
the Federal Reserve require any person or persons acting in concert (except for
companies required to make application under the Holding Company Act), to file a
written notice with the Federal Reserve before the person or persons acquire
control of Southwest or its banking subsidiaries. The Change in Bank Control Act
defines "control" as the direct or indirect power to vote 25% or more of any
class of voting securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also limits the investments and activities of
bank holding companies. In general, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling commercial banks, providing services for its
subsidiaries, non-bank activities that are closely related to banking (including
ownership and control of a savings bank or savings association), and other
financially related activities. However, bank holding companies such as
Southwest that qualify as financial holding companies under the Holding Company
Act also may engage in a broad range of additional non-bank activities.
Southwest qualified as a financial holding company in 2000.
The activities of Southwest are subject to these legal and regulatory
limitations under the Holding Company Act and Federal Reserve regulations.
Non-bank and financially related activities of bank holding companies, including
companies that become financial holding companies, also may be subject to
regulation and oversight by regulators other than the Federal Reserve.
The Federal Reserve also has the power to order a holding company or
its subsidiaries to terminate any activity, or to terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness, or stability of any banking subsidiary
of that holding company.
The Federal Reserve has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "Regulatory Capital Requirements."
The Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the company's capital
needs, asset quality, and overall financial condition.
National Bank Regulation. As a national bank, Stillwater National is
subject to the primary supervision of the OCC under the National Bank Act. The
prior approval of the OCC is required for a national bank to establish or
relocate an additional branch office or to engage in any merger, consolidation,
or significant purchase or sale of assets.
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Before 1999, laws of the State of Oklahoma severely limited the number
and location of de novo branches that a national bank could establish. National
banks in Oklahoma now have broad ability to establish de novo branches anywhere
in the state as a result of changes in state laws enacted in 1999, and
interpretations of those laws by the OCC.
The OCC regularly examines the operations and condition of Stillwater
National, including but not limited to its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of Stillwater National's depositors and the deposit insurance funds administered
by the FDIC. In addition, Stillwater National is required to furnish quarterly
and annual reports to the OCC. The OCC's enforcement authority includes the
power to remove officers and directors and the authority to issue
cease-and-desist orders to prevent a national bank from engaging in unsafe or
unsound practices or violating laws or regulations governing its business.
No national bank may pay dividends from its paid-in capital. All
dividends must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a dividend on its shares of common stock until the surplus fund equals
the amount of capital stock or, if the surplus fund does not equal the amount of
capital stock, until one-tenth of a national bank's net profits for the
preceding half year in the case of quarterly or semi-annual dividends, or the
preceding two half-year periods in the case of annual dividends, are transferred
to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend
if the total of all dividends declared by a national bank in any calendar year
would exceed the total of its net profits for that year combined with its
retained net profits for the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred stock. In addition,
Stillwater National is prohibited by federal statute from paying dividends or
making any other capital distribution that would cause Stillwater National to
fail to meet its regulatory capital requirements. Further, the OCC also has
authority to prohibit the payment of dividends by a national bank when it
determines that their payment would be an unsafe and unsound banking practice.
Federal Savings Bank Regulation. As a federal savings bank, SNB Wichita
is subject to the primary supervision of the OTS. The prior approval of the OTS
is required for SNB Wichita to establish or relocate a branch office or to
engage in any merger, consolidation, or significant purchase or sale of assets.
The OTS examines the operations and condition of SNB Wichita, including, but not
limited to, its capital adequacy, reserves, loans, investments, and management
practices. These examinations are for the protection of SNB Wichita's depositors
and the deposit insurance funds administered by the FDIC. In addition, SNB
Wichita is required to furnish quarterly and annual reports to the OTS. The OTS
enforcement authority includes the power to remove officers and directors and
the authority to issue cease-and-desist orders to prevent a federal savings bank
from engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
In general, OTS regulations permit federal savings banks to branch in
any state or states of the United States and its territories.
A federal savings bank that does not meet the Qualified Thrift Lender
("QTL") test must either convert to a national bank charter or comply with the
following restrictions on its operations: (i) the institution may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; and
(iii) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and a
federal savings bank. To qualify as a QTL, a federal savings bank must either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" in Qualified Thrift
Investments. Portfolio assets are defined as total assets less intangibles, the
value of property used by a federal savings bank in its business and liquidity
investments in an amount not exceeding 20% of assets. Qualified Thrift
Investments consist of (i) loans, equity positions or securities related to
domestic, residential real estate or manufactured housing and educational, small
business and credit card loans; and (ii) subject to an aggregate 20% of
portfolio assets limit, shares of stock in the FHLMC and the FNMA, loans for
personal, family, household purposes, 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination, and 200% of a
federal savings bank's investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the federal savings bank must maintain a weekly
4
average percentage of Qualified Thrift Investments to portfolio assets equal to
65% on a monthly average basis in nine out of 12 months. A federal savings bank
that fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. At December 31,
2003, approximately 83.23% of SNB Wichita's assets were invested in Qualified
Thrift Investments, which were in excess of the percentage required to qualify
it under the QTL test.
Under regulations of the OTS, federal savings banks must submit notice
to the OTS prior to making a capital distribution (which includes dividends,
stock repurchases and amounts paid to stockholders in another institution in a
cash merger) if (a) they would not be well capitalized after the distribution,
(b) the distribution would result in the retirement of any of the federal
savings bank's common or preferred stock or debt counted as its regulatory
capital, or (c) the federal savings bank is a subsidiary of a holding company. A
federal savings bank must make application to the OTS to pay a capital
distribution if (x) the federal savings bank would not be adequately capitalized
following the distribution, (y) the federal savings bank's total distributions
for the calendar year exceed the federal savings bank's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS. Under the OTS'
prompt corrective action regulations, SNB Wichita is also prohibited from making
any capital distributions if after making the distribution, SNB Wichita would
have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%.
Limits on Loans to One Borrower. National banks and federal savings
banks generally are subject to the same loan to one borrower limits. With
certain limited exceptions, loans and extensions of credit outstanding to any
borrower (including certain related entities of the borrower) at any one time
may not exceed 15% of the unimpaired capital and surplus of the institution. A
national bank or federal savings bank may lend an additional amount, equal to
10% of unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Federal savings banks are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the federal savings bank is in
compliance with its regulatory capital requirements; (iii) the loans comply with
applicable loan-to-value requirements, and; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of unimpaired capital and
surplus. The lending limits generally do not apply to purchase money mortgage
notes taken from the purchaser of real property acquired by federal savings
banks in satisfaction of debts previously contracted if no new funds are
advanced to the borrower and the federal savings bank is not placed in a more
detrimental position as a result of the sale. Certain types of loans are
exempted from the lending limits, including loans secured by in-bank deposits.
Transactions with Affiliates. Banks are subject to restrictions imposed
by federal law on extensions of credit to, and certain other transactions with,
Southwest and other affiliates, and on investments in their stock or other
securities. These restrictions prevent Southwest and its nonbanking subsidiaries
from borrowing from Stillwater National or SNB Wichita unless the loans are
secured by specified collateral, and require those transactions to have terms
comparable to terms of arms-length transactions with third persons. In addition,
secured loans and other transactions and investments by Stillwater National or
SNB Wichita are generally limited in amount as to Southwest and as to any other
affiliate to 10% of Stillwater National's or SNB Wichita's capital and surplus
and as to Southwest and all other affiliates together to an aggregate of 20% of
the Stillwater National's or SNB Wichita's capital and surplus. Certain
exemptions to these limitations apply to extensions of credit by, and other
transactions between, Stillwater National or SNB Wichita and their subsidiaries.
These regulations and restrictions may limit Southwest's ability to obtain funds
from Stillwater National and SNB Wichita for its cash needs, including funds for
acquisitions and for payment of dividends, interest, and operating expenses.
Real Estate Lending Guidelines. Under federal banking regulations,
banks must adopt and maintain written policies that establish appropriate limits
and standards for extensions of credit secured by liens or interests in real
estate or are made for the purpose of financing permanent improvements to real
estate. These policies must establish loan portfolio diversification standards;
prudent underwriting standards, including loan-to-value limits, that are clear
and measurable; loan administration procedures; and documentation, approval, and
reporting requirements. A bank's real estate lending policy must reflect
consideration of the Guidelines for Real Estate Lending Policies (the
"Guidelines") adopted by the federal banking regulators. The Guidelines, among
other things, call for internal loan-to-value limits for real estate loans that
are not in excess of the limits specified in the Guidelines. The Guidelines
state, however, that it may be appropriate in individual cases to originate or
purchase loans with loan-to-value ratios in excess of the supervisory
loan-to-value limits.
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Federal Deposit Insurance. The FDIC has established a risk-based
deposit insurance premium assessment system for banks. Under the system, the
assessment rate for an insured depository bank depends on the assessment risk
classification assigned to the bank by the FDIC, based upon the bank's capital
level and supervisory evaluations. Banks are assigned to one of three capital
groups -- well-capitalized, adequately capitalized, or undercapitalized -- based
on the data reported to regulators. Well-capitalized banks are banks satisfying
the following capital ratio standards: (i) total risk-based capital ratio of
10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and
(iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized banks are
banks that do not meet the standards for well-capitalized banks but that satisfy
the following capital ratio standards: (i) total risk-based capital ratio of
8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and
(iii) Tier 1 leverage ratio of 4.0% or greater. Banks that do not qualify as
either well-capitalized or adequately capitalized are deemed to be
undercapitalized. Within each capital group, banks are assigned to one of three
subgroups on the basis of supervisory evaluations by the bank's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the bank's financial condition and the risk it poses to the deposit
insurance fund. Subgroup A consists of financially sound banks with only a few
minor weaknesses. Subgroup B consists of banks with demonstrated weaknesses
that, if not corrected, could result in significant deterioration of the bank
and increased risk of loss to the deposit insurance fund. Subgroup C consists of
banks that pose a substantial probability of loss to the deposit insurance fund
unless effective corrective action is taken. Stillwater National has been
informed that it is in the lowest-cost/best risk assessment category for the
first assessment period of 2004. SNB Wichita has not yet been assessed.
Regulatory Capital Requirements. Federal regulators have established
guidelines for maintenance of appropriate levels of capital by bank holding
companies and banks. The regulations impose two sets of capital adequacy
requirements: minimum leverage rules, which require bank holding companies and
banks to maintain a specified minimum ratio of capital to total assets, and
risk-based capital rules, which require the maintenance of specified minimum
ratios of capital to "risk-weighted" assets.
Federal banking regulations require bank holding companies and banks to
maintain a minimum leverage ratio of "Tier 1 capital" (as defined in the
risk-based capital guidelines discussed in the following paragraphs) to total
assets of 3.0%. The capital regulations state, however, that only the strongest
bank holding companies and banks, with composite examination ratings of 1 under
the rating system used by the federal banking regulators, would be permitted to
operate at or near this minimum level of capital. All other bank holding
companies and banks are expected to maintain a leverage ratio of at least 1% to
2% above the minimum ratio, depending on the assessment of an individual
organization's capital adequacy by its primary regulator. A bank holding company
or bank experiencing or anticipating significant growth is expected to maintain
capital well above the minimum levels. In addition, the Federal Reserve has
indicated that it also may consider the level of an organization's ratio of
tangible Tier 1 capital (after deducting all intangibles) to total assets in
making an overall assessment of capital. Under OTS capital regulations, federal
savings banks also must maintain "tangible" capital equal to 1.5% of adjusted
total assets. Tangible capital for OTS purposes is Tier 1 capital reduced by the
amount of all the federal savings bank's intangible assets except for limited
amounts of mortgage servicing rights.
The federal risk-based capital rules of the require bank holding
companies and banks, to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a core capital (Tier 1)
requirement and a supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock (noncumulative perpetual preferred stock with respect to national banks),
and minority interests in the equity accounts of consolidated subsidiaries; less
all intangible assets, except for certain mortgage servicing rights and
purchased credit card relationships. Supplementary capital elements include,
subject to certain limitations, the allowance for losses on loans and leases;
perpetual preferred stock that does not qualify as Tier 1 capital; long-term
preferred stock with an original maturity of at least 20 years from issuance;
hybrid capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to 45%
of pre-tax net unrealized gains on available for sale equity securities.
The risk-based capital regulations assign balance sheet assets and
credit equivalent amounts of off-balance sheet obligations to one of four broad
risk categories based principally on the degree of credit risk associated with
the obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all bank holding companies
and banks to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan losses that may be included in capital to 1.25% of total risk-weighted
assets.
6
The federal banking regulatory agencies have established a joint policy
regarding the evaluation of banks' capital adequacy for interest rate risk.
Under the policy, the assessment of a national bank's capital adequacy includes
an assessment of exposure to adverse changes in interest rates. The OCC has
determined to rely on its examination process for such evaluations rather than
on standardized measurement systems or formulas. A federal savings bank's
interest rate risk is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. A federal savings bank with more than
normal interest rate risk is required to deduct an interest rate risk component
equal to one-half of the excess of its measured interest rate risk over the
normal level from its total capital for purposes of determining its compliance
with the OTS risk-based capital guidelines. The federal banking regulators may
require federal savings banks that are found to have a high level of interest
rate risk exposure or weak interest rate risk management systems to take
corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are adequate.
Federal banking regulations also require banks with significant trading
assets or liabilities to maintain supplemental risk-based capital based upon
their levels of market risk. Neither Stillwater National nor SNB Wichita had any
trading assets or liabilities during 2003, 2002 or 2001, and were not required
to maintain such supplemental capital.
The federal banking regulators have established regulations that
classify banks by capital levels and provide for various "prompt corrective
actions" to resolve the problems of any bank that fails to satisfy the capital
standards. Under these regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has a total risk-based capital ratio of 10% or more, a Tier 1
risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An
adequately capitalized bank is one that does not qualify as well-capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank that does not meet these standards is categorized as
undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A f bank that falls within
any of the three undercapitalized categories established by the prompt
corrective action regulation is subject to severe regulatory sanctions. As of
December 31, 2003, Stillwater National and SNB Wichita were well-capitalized as
defined in applicable banking regulations.
For information regarding Southwest's, Stillwater National's, and SNB
Wichita's compliance with their respective regulatory capital requirements, see
"Management's Discussion and Analysis -- Capital Resources" on page 15 of the
Annual Report, and, in the Notes to Consolidated Financial Statements in the
Annual Report "Note 6-Subordinated Debentures" on page 38 and "Note 9- Capital
Requirements" on pages 41-43.
Supervision and Regulation of Mortgage Banking Operations. Southwest's
mortgage banking business is subject to the rules and regulations of the U.S.
Department of Housing and Urban Development ("HUD"), the Federal Housing
Administration ("FHA"), the Veterans' Administration ("VA"), and FNMA with
respect to originating, processing, selling and servicing mortgage loans. Those
rules and regulations, among other things, prohibit discrimination and establish
underwriting guidelines, which include provisions for inspections, and
appraisals, require credit reports on prospective borrowers, and fix maximum
loan amounts. Lenders such as Southwest are required annually to submit to FNMA,
FHA and VA financial statements, and each regulatory entity has its own
financial requirements. Southwest's affairs are also subject to examination by
the Federal Reserve, FNMA, FHA and VA at all times to assure compliance with the
applicable regulations, policies and procedures. Mortgage origination activities
are subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National
Flood Insurance Act, and the Real Estate Settlement Procedures Act and related
regulations that prohibit discrimination and require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs.
Southwest's mortgage banking operations also are affected by various state and
local laws and regulations and the requirements of various private mortgage
investors.
Other Laws and Regulations. Some of the aspects of the lending and
deposit business of Stillwater National and SNB Wichita that are subject to
regulation by the Federal Reserve and the FDIC include reserve requirements and
disclosure requirements in connection with personal and mortgage loans and
deposit accounts. In addition, Stillwater National and SNB Wichita are subject
to numerous federal and state laws and regulations that include specific
restrictions and procedural requirements with respect to the establishment of
branches, investments, interest rates on loans, credit practices, the disclosure
of credit terms, and discrimination in credit transactions.
7
Competition
Southwest encounters competition in seeking deposits and in obtaining
loan, cash management, investment and other customers. The level of competition
for deposits is high. Southwest's principal competitors for deposits are other
financial institutions, including other national banks, federal savings banks,
and credit unions. Competition among these institutions is based primarily on
interest rates and other terms offered, service charges imposed on deposit
accounts, the quality of services rendered, and the convenience of banking
facilities. Additional competition for depositors' funds comes from U.S.
Government securities, private issuers of debt obligations and suppliers of
other investment alternatives for depositors, such as securities firms.
Competition from credit unions has intensified in recent years as historic
federal limits on membership have been relaxed. Because federal law subsidizes
credit unions by giving them a general exemption from federal income taxes,
credit unions have a significant cost advantage over national banks and federal
savings banks, which are fully subject to federal income taxes. Credit unions
may use this advantage to offer rates that are highly competitive with those
offered by national banks and federal savings banks.
Southwest also competes in its lending activities with other financial
institutions such as securities firms, insurance companies, credit unions, small
loan companies, finance companies, mortgage companies and other sources of
funds. Many of Southwest's nonbank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and
federally-insured banks. As a result, such nonbank competitors have advantages
over Southwest in providing certain services. A number of the financial
institutions with which Southwest competes in lending, deposit, investment, cash
management and other activities are larger than Southwest or have a
significantly larger market share. The new offices in metropolitan Dallas and
Wichita compete for loans, deposits and other services against local and
nationally based financial institutions, many of which have much larger market
shares and widespread office networks. In recent periods, competition has
increased in Southwest's Oklahoma market areas as new entrants and existing
competitors have sought to more aggressively expand their loan and deposit
market share.
The business of mortgage banking is highly competitive. Southwest
competes for loan originations with other financial institutions, such as
mortgage bankers, state and national banks, federal savings banks, credit unions
and insurance companies. Many of Southwest's competitors have financial
resources that are substantially greater than those available to Southwest.
Southwest competes principally by providing competitive pricing, by motivating
its sales force through the payment of commissions on loans originated, and by
providing high quality service to builders, borrowers, and realtors.
The Holding Company Act permits the Federal Reserve to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a commercial bank located in a state other than that holding company's home
state. The Federal Reserve may not approve the acquisition of a commercial bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Holding Company Act
also prohibits the Federal Reserve from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target commercial bank's home state or in any state in which the
target commercial bank maintains a branch. The Holding Company Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a commercial bank or bank
holding company to the extent such limitation does not discriminate against
out-of-state commercial banks or bank holding companies. The State of Oklahoma
allows out-of-state financial institutions to establish branches in Oklahoma,
subject to certain limitations. Federal savings banks generally may establish
branches in any state, and bank holding companies may acquire federal savings
banks in any state, without regard to state law
Financial holding companies may engage in banking as well as types of
securities, insurance, and other financial activities that had been prohibited
for bank holding companies under prior law. Financial institutions with or
without holding companies also are authorized to establish and operate financial
subsidiaries that may engage in most financial activities in which financial
holding companies may engage. Competition may increase as bank holding companies
and other large financial service companies take advantage of the new activities
and provide a wider array of products.
Employees
As of December 31, 2003, Southwest employed 345 persons on a full-time
equivalent basis, including executive officers, loan and other banking officers,
branch personnel, and others. No employees of Southwest or any of its
consolidated subsidiaries are represented by a union or covered under a
collective bargaining agreement. Management of Southwest considers their
employee relations to be excellent.
8
Executive Officers
The following table sets forth information regarding the executive
officers of Southwest, Stillwater National and SNB Wichita who are not
directors.
Name Age Position
- ---- --- ---------
Kerby E. Crowell......................... 54 Executive Vice President, Chief Financial Officer and
Secretary of Southwest and Stillwater National; Director
and Secretary of SNB Wichita
John M. Frazee........................... 47 President, SNB Wichita
Steve Gobel.............................. 51 Executive Vice President, Stillwater National
Rex E. Horning........................... 52 President, Stillwater Division of Stillwater National
Jerry L. Lanier.......................... 53 Executive Vice President and Chief Lending Officer of
Stillwater National
Len McLaughlin........................... 51 President, Texas Division of Stillwater National
J. Randall Mills......................... 49 President, Healthcare Strategic Support, Inc.
Joseph P. Root........................... 39 President, Central Oklahoma Division of Stillwater National
Kimberly G. Sinclair..................... 48 Executive Vice President and Chief Administrative Officer
of Stillwater National
Charles H. Westerheide................... 55 Executive Vice President and Treasurer of Stillwater National
The principal occupations and business experience of each executive
officer of Southwest are shown below.
Kerby E. Crowell has served as Executive Vice President, Treasurer and
Chief Financial Officer of Southwest and Stillwater National since 1986, became
Secretary of Southwest and Stillwater National in 2000, and was named Director
and Secretary of SNB Wichita in 2003. Mr. Crowell joined Stillwater National in
1969. He is a Past President and Board member of the Oklahoma City Chapter of
the Financial Executives Institute, and a Board member of the Independent
Community Bankers of America's ("ICBA") credit card subsidiary and the Federal
Reserve's Industry Advisory Group on Electronic Check Presentment. He is past
President and Director of the Oklahoma 4-H Foundation, Inc., Director and past
President of the Payne County Affiliate of the American Diabetes Association,
past President of the Stillwater Breakfast Kiwanis Club, the Bank Administration
Institute's Northern Oklahoma Chapter, and the North Central Chapter of
Certified Public Accountants, a past member of the Payments and Technology
Committee of the ICBA and past Vice Chairman of the ICBA's Bank Services
Committee. Mr. Crowell is also a graduate of the Leadership Stillwater Class XI.
John M. Frazee serves as President of SNB Wichita, and previously
served as President of Stillwater National's Kansas Loan Production Office.
Prior to joining Stillwater National in April 2002, Mr. Frazee served as Senior
Vice President-Commercial Lending and in other positions with Commerce Bank,
Wichita, Kansas from 1996. Previously Mr. Frazee served in a variety of credit
and operational capacities with Bank of America (formerly BANK IV) from 1983 to
1996. Mr. Frazee currently serves as Vice President of Rainbows United,
secretary/treasurer of the Wichita Public Building Commission, President of the
Maize USD 266 Board of Education, and serves on the boards of the YMCA, Wichita
Area Builders Association and the Certified Commercial Investment Member (CCIM)
Institute. He is a member of the Wichita Area Chamber of Commerce.
Steven M. Gobel serves as Executive Vice President and Associate Chief
Financial Officer of Stillwater National. From 1990 until joining Stillwater
National in September 2000, Mr. Gobel served as Senior Vice President Finance
and in other positions with Bank of America and predecessor institutions in
Oklahoma and Kansas (previous institutions included NationsBank, Boatmen's Bank
of St. Louis, Bank IV of Wichita, Kansas and Fourth National Bank of Tulsa). Mr.
Gobel is a past member of the Board of Directors of
9
the YMCA of Greater Tulsa and a past member and Chairman of the Board of
Managers for the Downtown Branch of the YMCA of Greater Tulsa. From 1987 to
1990, Mr. Gobel served as a Vice President and Manager of Financial Reporting
and Financial Planning for Sooner Federal Savings and Loan of Oklahoma. He is a
Certified Public Accountant and prior to 1987 spent twelve years working for
International Public Accounting Firms (previously Touche Ross and Coopers &
Lybrand) in Tulsa, Oklahoma, New York City, New York, and Milwaukee, Wisconsin.
Rex E. Horning was appointed President of the Stillwater Division of
Stillwater National in May 2001. Mr. Horning previously served as Senior Vice
President of Central National Bank and Commerce Bank in Wichita, Kansas from
1998 to May 2001, and as President and Chief Executive Officer of First State
Bank and Trust Company, Pittsburg, Kansas, from 1991 to 1998. Mr. Horning
currently serves on the Board of Directors of the Oklahoma State University
Alumni Association, the Executive Committee of the Stillwater Chamber of
Commerce and is president-elect of the Oklahoma State University College of
Business Associates.
Jerry L. Lanier was appointed Executive Vice President and Chief
Lending Officer of Stillwater National in 2001. Mr. Lanier previously served as
Executive Vice President-Credit Administration beginning in December 1999,
supervising this area Company-wide, and from January 1998 to December 1999,
served as Senior Vice President in Credit Administration. From 1992 until
joining Stillwater National in 1998, Mr. Lanier was a consultant specializing in
loan review. During this same period he also served as court-appointed receiver
for a number of Oklahoma-based insurance companies. From 1982-1992, Mr. Lanier
served as President of American National Bank and Trust Co. of Shawnee, Oklahoma
including service as Chief Executive Officer from 1987-92. From 1970-1981, he
was a National Bank Examiner for the OCC in Oklahoma City, Oklahoma and Dallas,
Texas, and, while an examiner, served as Regional Director of Special
Surveillance from 1979 to 1981. Mr. Lanier has served as United Way Drive
Chairman and President; Chairman of the Shawnee Advisory Board of Oklahoma
Baptist University; Director of the Shawnee Chamber of Commerce; Director and
Chairman of the Youth and Family Resource Center; and President and Trustee of
the Shawnee Educational Foundation.
Len McLaughlin was appointed as President of SNB Bank of Dallas, the
Texas Division of Stillwater National, in May, 2002. Mr. McLaughlin previously
served as President and CEO of First Independent National Bank in Plano, Texas,
and as President/CEO of Preston National Bank in Dallas, Texas. From 1989 to
1998, Mr. McLaughlin was with Compass Bancshares, serving as President of a
subsidiary bank, Central Bank N.A. in Anniston, Alabama; and later as Chief
Retail Executive for Compass Bank in Dallas, Texas. Mr. McLaughlin began his
banking career with First National Bank of Boston's Dallas, Texas office. He has
served as Chairman of the March of Dimes fund drive, United Way Fund Drive
Chairman, President of the local chapter of the American Cancer Society,
Director of the Little Light House, and is Honorary Co-Chairman of the Business
Advisory Council of the National Republican Congressional Committee.
J. Randall Mills was appointed President of Healthcare Strategic
Services, Inc. ("HSSI") in 2003. Mr. Mills holds a Bachelor of Science degree in
Accounting from Southwest Missouri State University; a Master of Health
Administration from the University of Colorado; and a PhD in Sociology from
Oklahoma State University. Prior to his employment with HSSI, he was a
Healthcare Consultant for Madole & Wagner, PLLC where he was responsible for
marketing, administration, and client services for individual physicians,
medical groups, and hospital clients on medical group practice, managed care,
marketing, networking, strategic planning, and development issues. He is a
member of the American College of Healthcare Executives, Medical Group
Management Association, Healthcare Financial Management Association, American
Society of Certified Public Accountants, and Oklahoma Society of Certified
Public Accountants.
Joseph P. Root was appointed President of the Central Oklahoma Division
of Stillwater National in 1997. Previously, Mr. Root was Senior Vice President
in the Central Oklahoma division. Prior to joining Stillwater National in 1992,
Mr. Root served as Credit Analyst from November 1987 to April 1989 and Private
Banking Officer from May 1989 to July 1992 with Comerica Bank in Dallas, Texas.
He is a member of the Advisory Board of the Greater Oklahoma City Chamber of
Commerce, a member of the State Chamber of Commerce of Oklahoma and the Oklahoma
City Men's Dinner Club and is a Director and President Elect of Infant Crisis
Services, Inc., a local charitable organization that provides basic necessities
to underprivileged children.
Kimberly G. Sinclair was appointed Chief Administrative Officer in 1995
and has been Executive Vice President of Stillwater National since 1991. Prior
to 1991, she had been Senior Vice President and Chief Operations Officer of
Stillwater National since 1985. Ms. Sinclair joined Stillwater National in 1975.
She is a member of the Stillwater Junior Service Sustainers, and serves on the
Board of Directors for the Stillwater United Way. She is past Treasurer of the
Board of Trustees of the Stillwater Public Education Foundation, and a graduate
of the Leadership Stillwater Class IX. She has been an Ambassador with the
Stillwater Chamber of Commerce and active with the Pioneer Booster Club and
Stillwater PTA.
10
Charles H. Westerheide was appointed Executive Vice President and
Treasurer of Stillwater National in 2000. Prior to that he served as Senior Vice
President and Treasury Manager. He joined Stillwater National in 1997, coming
from Bank of America (previously NationsBank and BankIV), Wichita, Kansas, where
he served as Treasury/Funding Manager. Prior to joining BankIV, Mr. Westerheide
served as Executive Vice President and Chief Financial Officer of Security Bank
and Trust Co., Ponca City, Oklahoma. Mr. Westerheide has held a number of
community leadership positions including Chairman of the Ponca City Chamber of
Commerce, President of the Ponca City Foundation for Progress, Inc., and a
director and officer of numerous community foundations and clubs. Mr.
Westerheide is a graduate of Leadership Oklahoma, Class II.
Tabular Financial Information
The following tabular financial information should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and Notes
thereto included in the Annual Report and incorporated by reference in Items 7
and 8 of this Form 10-K.
11
Rate/Volume Analysis
The following table analyzes changes in interest income and interest
expense of Southwest for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to: (i) changes in volume (changes in volume multiplied
by the prior period's rate); and (ii) changes in rates (changes in rate
multiplied by the prior period's volume). Changes in rate-volume (changes in
rate multiplied by the changes in volume) are allocated between changes in rate
and changes in volume in proportion to the relative contribution of each.
------------------------------------ -----------------------------------
Year ended Year ended
December 31, 2003 December 31, 2002
Compared to Compared to
December 31, 2002 December 31, 2001
--------------------------------------------------------------------------
Increase (decrease) attributable to change in:
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
------------------------------------ -----------------------------------
(dollars in thousands)
Interest earned on:
Loans receivable (1) $ 15,722 $ (5,110) $ 10,612 $ 5,759 $(17,106) $(11,347)
Investment securities (775) (2,219) (2,994) (1,366) (1,195) (2,561)
Other interest-earning assets (20) (14) (34) 33 (30) 3
-- -------- -------- -------- -------- -------- --------
Total interest income 14,927 (7,343) 7,584 4,426 (18,331) (13,905)
Interest paid on:
NOW accounts 27 (44) (17) 50 (487) (437)
Money market accounts 2,094 (1,162) 932 2,062 (2,143) (81)
Savings accounts 3 (11) (8) 5 (59) (54)
Time deposits 693 (4,406) (3,713) (1,481) (13,267) (14,748)
Short-term borrowings 908 (850) 58 (784) (2,157) (2,941)
Subordinated Debentures 1,273 (592) 681 -- -- --
-------------------------------- ----------------------------------
Total interest expense 4,998 (7,065) (2,067) (148) (18,113) (18,261)
-------------------------------- ----------------------------------
Net interest income $ 9,929 $ (278) $ 9,651 $ 4,574 $ (218) $ 4,356
================================ ==================================
(1) Average balances include nonaccrual loans. Fees included in interest
income on loans receivable are not considered material. Interest on
tax-exempt loans and securities is not shown on a tax-equivalent basis
because it is not considered material.
12
Investment Portfolio Composition
At December 31,
------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
U.S. Government and agency obligations $153,344 $104,409 $105,423
Obligations of states and political subdivisions 14,997 27,679 36,842
Mortgage-backed securities 19,681 41,751 70,657
Other securities 16,244 14,850 14,424
-------- -------- --------
Total investment securities $204,266 $188,689 $227,346
======== ======== ========
Available for sale (fair value) $177,074 $148,476 $167,545
Held to maturity (amortized cost) 15,916 31,154 49,893
Federal Reserve Bank and Federal Home
Loan Bank Stock 11,276 9,059 9,908
-------- -------- --------
Total investment securities $204,266 $188,689 $227,346
======== ======== ========
Southwest does not have any material amounts of investment securities
or other interest-earning assets, other than loans, that would have been
classified as nonperforming if such assets were loans, or which were recognized
by management as potential problem assets based upon known information about
possible credit problems of the borrower or issuer.
13
Investment Portfolio Maturity
The following table shows the maturities, carrying value (amortized
cost for investment securities being held to maturity or estimated fair value
for investment securities available for sale), estimated fair market values and
average yields for Southwest's investment portfolio at December 31, 2003. Yields
are not presented on a tax-equivalent basis. Maturities of mortgage-backed
securities are based on expected maturities. Expected maturities will differ
from contractual maturities due to scheduled repayments and because borrowers on
the underlying mortgages may have the right to call or prepay obligations with
or without prepayment penalties. The securities of no single issuer (other than
the United States or its agencies), or in the case of securities issued by state
and political subdivisions, no source or group of sources of repayment,
accounted for more than 10% of shareholders' equity of Southwest at December 31,
2003.
One Year or Less Two through Five Years Five through Ten Years More than Ten Years
----------------- ---------------------- ---------------------- -------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- ---------- ------- --------- ------- --------- --------
(Dollars in thousands)
Held to Maturity:
U.S. government and agency
obligations $ 3,999 6.13% $ 1,048 2.51% $ -- --% $ -- --%
Obligations of states and
political subdivisions 9,400 4.34 1,469 4.98 -- -- -- --
------- -------- ---- -------
Total 13,399 4.88 2,517 3.95 -- -- -- --
------- -------- ---- -------
Available for Sale:
U.S. government and agency
obligations 14,708 4.67 133,294 3.60 -- -- -- --
Obligations of states and
political subdivisions -- -- 3,930 4.42 -- -- -- --
Mortgage-backed securities 6,382 3.60 13,199 2.47 -- -- -- --
Other securities -- - 13,947 3.12 -- -- 2,286 6.31
------- -------- ---- -------
Total 21,090 4.34 164,370 3.48 -- -- 2,286 6.31
------- -------- ---- -------
Total investment securities $34,489 $166,887 $ -- $ 2,286
======= ======== ==== =======
Total Investment Securities
-----------------------------
Amortized Market Average
Cost Value Yield
-------- ------- --------
Held to Maturity:
U.S. government and agency -- -- --
obligations $ 5,047 $ 5,104 5.38%
Obligations of states and
political subdivisions 10,869 11,040 4.43
-------- -------
Total 15,916 16,144 4.73
-------- -------
Available for Sale:
U.S. government and agency
obligations 148,002 148,297 3.70
Obligations of states and
political subdivisions 3,930 4,128 4.42
Mortgage-backed securities 19,581 19,681 2.84
Other securities 16,233 16,244 3.57
-------- -------
Total 187,746 188,350 3.62
-------- -------
Total investment securities $203,662 $204,494
======== ========
14
Loan Portfolio
The following table presents the composition of Southwest's loan
portfolio, net of unearned interest:
LOAN PORTFOLIO
At December 31,
2003 2002 2001 2000 1999
------------------ ------------------ ------------------- ------------------- -------------------
Amount % Amount % Amount % Amount % Amount %
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
(Dollars in thousands)
Real estate mortgage -
Commercial $402,596 30.76% $ 374,999 34.06% $ 301,578 32.39% $ 276,525 30.30% $ 263,216 30.86%
One to four family residential 83,250 6.36 102,423 9.30 106,206 11.41 107,360 11.76 102,973 12.07
Real estate construction 230,292 17.60 130,001 11.81 91,897 9.87 103,951 11.39 85,511 10.03
Commercial 355,965 27.20 348,879 31.68 312,577 33.58 311,953 34.19 296,415 34.77
Installment and consumer -
Government-guaranteed
student loans 211,546 16.16 119,064 10.81 91,841 9.86 77,846 8.53 69,873 8.19
Other 25,187 1.92 25,746 2.34 26,947 2.89 34,915 3.83 34,820 4.08
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- -----
1,308,836 100.00% 1,101,112 100.00% 931,046 100.00% 912,550 100.00% 852,808 100.00%
====== ====== ====== ====== ======
Less: Allowance for loan loss (15,848) (11,888) (11,492) (12,125) (11,190)
---------- ---------- ---------- ---------- ----------
Total $1,292,988 $1,089,224 $ 919,554 $ 900,425 $ 841,618
========== ========== ========== ========== ==========
Potential Nonperforming Loans. Those performing loans considered
potential nonperforming loans, loans which are not included in the past due,
nonaccrual or restructured categories, but for which known information about
possible credit problems cause management to be uncertain as to the ability of
the borrowers to comply with the present loan repayment terms over the next six
months, amounted to approximately $37.8 million at December 31, 2003, compared
to $28.9 million at December 31, 2002, and $55.8 million at December 31, 2001.
Loans may be monitored by management and reported as potential nonperforming
loans for an extended period of time during which management continues to be
uncertain as to the ability of certain borrowers to comply with the present loan
repayment terms. These loans are subject to continuing management attention and
are considered by management in determining the level of the allowance for loan
losses.
15
Allocation of the Allowance for Loan Losses
Southwest's methodology for assessing the appropriateness of the
allowance includes determination of a formula allowance, specific allowances and
a general allowance. Additional information regarding this methodology, the
allowance for loan losses, and the related provision for loan losses is included
in the Annual Report on pages 10 and 11 under the caption "Provision for Loan
Losses," and in Note 1 on page 30 and Note 3 on page 34 . The following table
presents a five-year history for the allocation of the allowance for loan losses
along with the percentage of total loans and leases in each category (dollars in
thousands).When measured against the total allowance, the general allowance
decreased to 8.2% from 11.3% at December 31, 2002, and was 7.7% at December 31,
2001.
ALLOCATION OF THE LOAN LOSS ALLOWANCE
At December 31,
2003 2002 2001
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------------------- --------------------- ---------------------
(Dollars in thousands)
Real estate mortgage -
Commercial $ 4,980 30.76% $ 4,076 34.06% $ 2,277 32.39%
One to four family residential 291 6.36 509 9.30 557 11.41
Real estate construction 1,538 17.60 1,405 11.81 750 9.87
Commercial 7,318 27.20 4,271 31.68 6,680 33.58
Installment and consumer -
Government-guaranteed
student loans 105 16.16 59 10.81 46 9.86
Other 319 1.92 225 2.34 298 2.89
General 1,297 1,343 884
------- ------ ------- ------ ------- ------
Total $15,848 100.00% $11,888 100.00% $11,492 100.00%
======= ====== ======= ====== ======= ======
At December 31,
2000 1999
--------------------- ---------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
--------------------- ---------------------
(Dollars in thousands)
Real estate mortgage -
Commercial $ 916 30.30% $ 1,128 30.86%
One to four family residential 546 11.76 602 12.07
Real estate construction 3,003 11.39 1,893 10.03
Commercial 4,286 34.19 4,028 34.77
Installment and consumer -
Government-guaranteed
student loans -- 8.53 56 8.19
Other 347 3.83 491 4.08
General 3,027 2,992
------- ------ ------- ------
Total $12,125 100.00% $11,190 100.00%
======= ====== ======= ======
16
Management believes that the allowance for loan losses is adequate.
However, its determination requires significant judgment, and estimates of
probable losses inherent in the loan portfolio can vary significantly from the
amounts actually observed. While management uses available information to
recognize probable losses, future additions to the allowance may be necessary
based on changes in the assets comprising the loan and lease portfolio and
changes in the financial condition of borrowers, such as may result from changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, and independent consultants engaged by
Southwest, periodically review the loan portfolio and allowance for loan losses.
Such review may result in recognition of additional provisions based on their
judgments of information available at the time of each examination.
Certificates of Deposit of $100,000 or More
The following table indicates the amount of Southwest's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2003:
Maturity Period Amount
------------------------------------- ------
(Dollars in thousands)
Three months or less (1) $113,857
Over three through six months (1) 64,959
Over six through 12 months (1) 139,285
Over 12 months 40,029
--------
Total $358,130
========
(1) The amount of certificates of deposit that mature within 12 months is $318.1
million. The Company does not have any liquidity concerns as a result of the
volume of these maturities.
Other Material
The Letter to Shareholders from the CEO on pages 2 and 3 of the Annual
Report, the information set forth on pages 4 through 21 of the Annual Report,
Note 1-"Summary of Significant Accounting and Reporting Policies" on pages 29
through 33 of the Annual Report, Note 3-"Loans" on pages 34 through 36 of the
Annual Report, and Note 5-"Other Borrowed Funds" on pages 37 and 38 of the
Annual Report are incorporated herein by reference.
Availability of filings through Southwest's Website
Southwest provides internet access to annual reports on form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports, through its Investor Relations website, at www.oksb.com (This
site also is accessible through Stillwater National's website at
www.banksnb.com, the metropolitan Dallas division's website at
www.snbdallas.com, and SNB Wichita's website at www.snbwichita.com.). Access to
these reports is provided by means of a link to a third party vendor that
maintains a database of such filings. In general, Southwest intends that these
reports be available a soon as reasonably practicable after they are filed with
or furnished to the SEC. However, technical and other operational obstacles or
delays caused by the vendor may delay their availability. The SEC maintains a
website (www.sec.gov) where these filings also are available through the SEC's
EDGAR system. There is no charge for access to these filings through either
Southwest's site or the SEC's site, although users should understand that there
may be costs associated with electronic access, such as usage charges from
Internet access providers and telephone companies, that they may bear.
17
ITEM 2. PROPERTIES
Page 50 of the Annual Report (listing executive and other offices) is
hereby incorporated by reference. The Corporate Headquarters, Drive-in Facility,
Chickasha Branch, and Tulsa Utica Branch are owned. Other facilities are held
under lease or similar arrangement.
ITEM 3. LEGAL PROCEEDINGS
Note 14--"Commitments and Contingencies" on page 45 of the Annual
Report is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2003, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table presents disclosure regarding equity compensation
plans in existence at December 31, 2003, consisting only of the 1994 stock
option plan (expired but having outstanding options that may still be exercised)
and the 1999 stock option plan, both of which were approved by the shareholders
(described further under the caption "Stock Option Plan" in Note 1 to the
consolidated financial statements).
Equity Compensation Plan Information
- ----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(a) (b) excluding securities
reflected in column
(c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,034,483 $8.43 214,218
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Total 1,034,483 $8.43 214,218
- ----------------------------------------------------------------------------------------------------------------------
As of March 5, 2004, there were approximately 1,800 holders of record
of Southwest's Common Stock. The section titled "Stock Information" on page 50
of the Annual Report is hereby incorporated by reference.
For information regarding regulatory restrictions on Southwest's
payment of dividends, see Note 9 -- "Capital Requirements" on pages41 through 43
of the Annual Report, which is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The table titled "Selected Consolidated Financial Data" on pages 4 and
5 of the Annual Report is hereby incorporated by reference.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 6 through 21 of the Annual Report are hereby incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section titled "Asset/Liability Management and Quantitative and
Qualitative Disclosures about Market Risk" on pages 17 through 18 of the Annual
Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 23 through 48 of the Annual Report are hereby incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable. During the past two years or any subsequent period
there has been no change in or reportable disagreement with the certifying
accountants for Southwest or any of its subsidiaries.
ITEM 9A. CONTROLS AND PROCEDURES
Southwest's management, under the supervision and with the
participation of it Chief Executive Officer and the Chief Financial Officer,
evaluated as of the last day of the period covered by this report, the
effectiveness of the design and operation of Southwest's disclosure controls and
procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that Southwest's disclosure controls and procedures were
adequate. There were no significant changes in Southwest's internal controls
over financial reporting (as defined in Rule 13a-15 under the Securities Act of
1934) during the quarter ended December 31, 2003, that have materially effected,
or are reasonably likely to materially affect, the Southwest's internal control
over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of Southwest
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
included under the captions titled "Proposal I--Election of Directors" on pages
2 through 6 of the Proxy Statement, "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 15 of the Proxy Statement, and "Code of Ethics" on
page 24 of the Proxy statement, and is hereby incorporated by reference.
Information concerning the executive officers of Southwest is included
under the caption titled "Item 1. Business -- Executive Officers" of this report
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Southwest's directors and
executive officers is included under the captions "Director Compensation," on
page 7 and "Executive Compensation and Other Benefits," and "Stock Performance
Comparisons" on pages 10 through 14 of the Proxy Statement, and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Southwest's common stock
by certain beneficial owners and directors and executive officers of Southwest
is included under the caption "Common Stock Owned by Directors and Executive
Officers" on pages 8 and 9 of the Proxy Statement and is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with management is included under the caption "Certain Transactions" on page 14
of the Proxy Statement and is hereby incorporated by reference.
19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding fees and services of Southwest's principal
accountant is included under the caption, "Audit and Non-Audit Fees" on page 22
of the Proxy Statement and is hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
------------------------------------------
(1) Financial Statements. The consolidated financial statements of
Southwest included in the Annual Report to Shareholders for the year
ended December 31, 2003, are incorporated herein by reference in Item 8
of this Report. The remaining information appearing in the Annual
Report to Shareholders is not deemed to be filed as part of this
Report, except as expressly provided herein.
The following financial statements are filed as a part of this report:
Independent Auditors' Report for the Years Ended December 31, 2003 and
2002
Consolidated Statements of Financial Condition at December 31, 2003 and
2002
Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002, and 2001
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002, and 2001
Notes to Consolidated Financial Statements for the Years Ended December
31, 2003, 2002, and 2001
(2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the SEC are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements and related
notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K.
No. Exhibit
- ---- -------
3.1 Amended and Restated Certificate of Incorporation of Southwest
Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
3.2 Bylaws of Southwest Bancorp, Inc. (incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-71168))
4.1 Rights Agreement, dated as of April 22, 1999, between Southwest
Bancorp, Inc. and Harris Trust & Savings Bank, as rights agent and
Form of Certificate of Designations setting forth terms of Class
B, Series 1 Preferred Stock of Southwest Bancorp, Inc. referred to
in the rights agreement (incorporated by reference to Exhibits 1
and 2 to Current Report on Form 8-K dated April 22, 1999)
* 10.1 Southwest Bancorp, Inc. Employee Stock Purchase Plan (incorporated
by reference from Exhibit 4.1 to Registration Statement on Form
S-8 (File No. 33-97850))
* 10.2 Severance Compensation Plan (incorporated by reference as Exhibit
10.2 to Registration Statement on Form S-1 (File No. 33-71168))
* 10.3 Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated by
reference from Exhibit 10.3 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
* 10.4 Southwest Bancorp, Inc. 1999 Stock Option Plan (incorporated by
reference from Exhibit 4 to Registration Statement on Form S-8
(File No. 333-92143))
* 10.5 Stillwater National Bank and Trust Company 2002 and 2003 Deferred
Compensation Plans (incorporated by reference from Exhibit 10.5 to
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.)
20
* 10.6 Stillwater National Bank and Trust Company Supplemental Profit
Sharing Plan and Agreement dated December 19, 2002 (incorporated
by reference from Exhibit 10.6 to Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.)
13 Annual Report to Shareholders for the Year Ended December 31, 2003
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
24 Power of Attorney
31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications
32(a), (b) 18 U.S.C. Section 1350 Certifications
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
------------------------
Southwest filed a report on Form 8-K, dated October 16, 2003,
announcing, under items 5, 9 and 12 of that form, earnings for the third quarter
of 2003.
(c) Exhibits. See (a)(3) above for all exhibits filed herewith and the
Exhibit Index.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST BANCORP, INC.
March 12, 2004 By: /s/ Rick Green
-----------------------
Rick Green
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Rick Green March 12, 2004
- ----------------------------------
Rick Green
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Kerby E. Crowell March 12, 2004
- ----------------------------------
Kerby E. Crowell
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
A majority of the directors of Southwest executed a power of attorney
appointing Rick Green as their attorney-in-fact, empowering him to sign this
report on their behalf. This power of attorney has been filed with the
Securities and Exchange Commission under Part IV, Exhibit 24 of this Form 10-K
for the year ended December 31, 2003. This report has been signed below by such
attorney-in-fact as of March 12, 2004.
By: /s/ Rick Green
-----------------------
Rick Green
Attorney-in-Fact for Majority of the
Directors of Southwest
22