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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, 2004
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
---------------------------------------
(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. [ ]
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 approximately 10,421,628 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
June 30, 2004, the last day of the registrant's most recently completed second
fiscal quarter, was approximately $190.2 million based on the closing sales
price of $18.25 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 4, 2005, 12,189,527 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 28, 2005 (the
"Proxy Statement").
SOUTHWEST BANCORP, INC.
INDEX
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Forward-Looking Statements................................................................................................1
Form 10-K Cross Reference Sheet...........................................................................................1
Southwest Bancorp, Inc. ..................................................................................................3
About This Report.........................................................................................................4
Five Year Summary of Selected Financial Data..............................................................................5
Securities Listing, Prices, and Dividends.................................................................................6
Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................8
Controls and Procedures..................................................................................................29
Reports of Independent Registered Public Accounting Firm.................................................................30
Consolidated Financial Statements........................................................................................32
Notes to the Consolidated Financial Statements...........................................................................37
Other Material Required by Form 10-K.....................................................................................63
Description of Business..............................................................................................63
Board of Directors...................................................................................................75
Executive Officers...................................................................................................76
Other Material.......................................................................................................80
Availability of Filings..............................................................................................81
Properties...........................................................................................................82
Exhibits, Financial Statement Schedules..............................................................................84
Signatures...........................................................................................................86
i
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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.
- --------------------------------------------------------------------------------
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 1,
"Southwest Bancorp, Inc." on page 3, "About this
Report" on page 4, and "Business" on pages 63
through 79.
Item 2. Properties "Properties" on page 82.
Item 3. Legal Proceedings Note 14 "Commitments and Contingencies" on
page 56.
Item 4. Submission of Matters to a Vote of Not applicable. No matter was submitted to a Security
Holders vote of security holders during the fourth quarter of
2004.
PART II
Item 5. Market for Registrant's Common Equity, "Securities Listing, Prices, and Dividends" on pages
Related Stockholder Matters, and 6 and 7.
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data "Five Year Summary of Selected Financial Data"
on pages 5 and 6.
1
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 8 through 28.
Item 7A. Quantitative and Qualitative Disclosures The section titled "Asset/Liability Management
About Market Risk Quantitative and Qualitative Disclosures about
Market Risk" on pages 24 through 26.
Item 8. Financial Statements and Supplementary Pages 30 through 62.
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 29.
Item 9B. Other Information "Certain Changes in Executive Compensation
Plans" on page 80.
PART III.
Item 10. Directors and Executive Officers The material labeled "Election of Directors" on
pages 2 through 8 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 81 through 85 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 Directors and Executive Officers" and "Ownership
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 Accountant Fees and Services The material labeled "Fees" on pages 17 and 18 of the
Proxy Statement incorporated by reference in this
Report.
2
ITEM OF FORM 10-K LOCATION
PART IV.
Item 15. Exhibits, Financial Statement Schedules "Exhibits, Financial Statement Schedules" on pages
84 and 85.
SIGNATURES "Signatures" on page 94.
SOUTHWEST BANCORP, INC.
Southwest Bancorp, Inc. ("Southwest") is the financial holding company for
Stillwater National Bank and Trust Company ("Stillwater National") and SNB Bank
of Wichita ("SNB Wichita"), and Southwest's management consulting subsidiaries,
Business Consulting Group, Inc. ("BCG") and Healthcare Strategic Support, Inc.
("HSSI"). Southwest is an independent company, not controlled by other
organizations or individuals. Southwest pursues an established strategy of
independent operation for the benefit of all of its shareholders.
A substantial portion of Southwest's current business and focus for the future
are services for local businesses, their primary employees, healthcare
facilities and professionals, and other managers and professionals. Southwest
seeks to be the premier financial services company for its selected markets.
Information regarding Southwest can be retrieved via the Internet at
www.oksb.com. Southwest, Stillwater National, and SNB Wichita offer commercial
and consumer lending, deposit, and investment services, and specialized cash
management, consulting, and other financial services from offices in Stillwater,
Tulsa, Oklahoma City, and Chickasha, Oklahoma, Wichita, Kansas, and metropolitan
Dallas, Austin, and San Antonio, Texas; loan production offices in Kansas City,
Kansas, and on the campuses of Oklahoma State University-Tulsa and the
University of Oklahoma Health Sciences Center-Oklahoma City; a marketing
presence in the Student Union at Oklahoma State University-Stillwater; and on
the Internet. Information regarding products and services of Stillwater National
and SNB Wichita, including SNB DirectBanker(R), Southwest's online banking
product, can be retrieved via the Internet, at www.banksnb.com and
www.snbwichita.com. The Stillwater National and SNB Wichita websites and online
banking technology are frequently updated in response to the changing needs of
the large base of Internet banking customers.
Southwest was organized in 1981 as the holding company for Stillwater National,
which was chartered in 1894. Southwest became a public company in late 1993 with
assets of approximately $434.0 million. At December 31, 2004, Southwest had
total assets of $1.9 billion, deposits of $1.5 billion, and shareholders' equity
of $126.0 million.
3
ABOUT THIS REPORT
This report comprises the entire 2004 Form 10-K, other than exhibits, as filed
with the SEC. The 2004 annual report to shareholders, including this report, and
the annual proxy materials for the 2005 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.
4
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table presents Southwest's selected consolidated financial
information for each of the five years in the period ended December 31, 2004.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of Southwest, including the accompanying
Notes, presented elsewhere in this report.
For the Year Ended December 31,
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(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Interest income $ 104,723 $ 84,079 $ 76,495 $ 90,400 $ 97,274
Interest expense 32,246 28,611 30,678 48,939 57,227
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Net interest income 72,477 55,468 45,817 41,461 40,047
Provision for loan losses 12,982 8,522 5,443 4,000 3,550
Gain on sales of loans and securities 3,185 4,139 3,498 3,346 1,753
Other income 10,900 10,361 9,220 7,467 6,808
Other expenses 44,412 38,448 33,319 31,165 29,615
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 29,168 22,998 19,773 17,109 15,443
Taxes on income 10,539 8,106 6,354 5,357 5,238
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,629 $ 14,892 $ 13,419 $ 11,752 $ 10,205
====================================================================================================================================
DIVIDENDS DECLARED
Common stock $ 3,380 $ 2,959 $ 2,533 $ 1,826 $ 1,678
Ratio of total dividends declared to net income 18.14% 19.87% 18.87% 15.52% 16.44%
PER SHARE DATA (1)
Basic earnings per common share $ 1.54 $ 1.26 $ 1.17 $ 1.03 $ 0.89
Diluted earnings per common share 1.48 1.22 1.11 1.00 0.88
Common stock cash dividends 0.28 0.25 0.22 0.16 0.15
Book value per common share (2) 10.41 9.20 8.35 7.47 6.44
Weighted average common shares outstanding:
Basic 12,060,842 11,798,810 11,490,166 11,386,258 11,467,248
Diluted 12,548,059 12,159,620 12,052,118 11,728,844 11,585,704
FINANCIAL CONDITION DATA (2)
Investment securities $ 220,051 $ 204,266 $ 188,689 $ 227,346 $ 229,792
Total loans (3) 1,623,875 1,308,836 1,101,112 931,046 912,550
Interest-earning assets 1,845,401 1,514,314 1,292,232 1,160,478 1,142,945
Total assets 1,912,834 1,580,725 1,350,554 1,217,281 1,204,352
Interest-bearing deposits 1,316,320 1,036,793 885,812 777,600 825,370
Total deposits 1,500,058 1,204,125 1,021,757 904,796 945,102
Other borrowings 200,065 183,850 199,282 195,367 150,498
Subordinated debentures 72,180 72,180 25,787 25,787 25,787
Total shareholders' equity (4) 125,984 109,935 96,372 85,125 73,239
Mortgage servicing portfolio 125,353 124,366 107,733 91,120 94,545
SELECTED RATIOS
Return on average assets 1.03% 0.99% 1.05% 0.96% 0.87%
Return on average equity 15.80 14.59 14.94 14.87 14.89
Net interest margin 4.16 3.80 3.75 3.53 3.57
Efficiency ratio (5) 51.31 54.95 56.92 59.62 60.93
Average assets per employee (6) $ 5,098 $ 4,382 $ 3,938 $ 3,919 $ 3,783
5
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
At December 31,
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(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans (2) 1.23% 1.21% 1.08% 1.23% 1.33%
Nonperforming loans to total loans (2)(7) 1.43 1.22 1.17 0.99 1.32
Allowance for loan losses to nonperforming loans
loans (2)(7) 86.12 99.59 92.11 124.56 100.71
Nonperforming assets to total loans and other real
estate owned (2)(8) 1.72 1.34 1.24 1.06 1.45
Net loan charge-offs to average total loans 0.58 0.36 0.50 0.49 0.29
CAPITAL RATIOS
Average total shareholders' equity to average assets 6.51 6.75 7.04 6.44 5.81
Tier I capital to risk-weighted assets (2) 10.88 11.13 10.38 11.15 10.36
Total capital to risk-weighted assets (2) 13.92 14.90 11.42 12.34 11.68
Leverage ratio (2) 8.61 9.32 8.99 8.84 8.08
(1) All share and per share information has been restated to reflect the
three-for-two stock split effected in the form of a stock dividend paid
August 29, 2001, and the two-for-one stock split effected in the form of a
stock dividend paid August 29, 2003.
(2) At period end.
(3) Net of unearned discounts but before deduction of allowance for loan
losses.
(4) Reflects the repurchases of common shares in 2000, 2001, and 2002. Please
see note 8 to the consolidated financial statements.
(5) The efficiency ratio = other expenses/(net interest income + total other
income) as shown on the consolidated statements of operations. This ratio
has not been adjusted to remove any income or expense recorded under
accounting principles generally accepted in the United States.
(6) Ratio = year-to-date average assets divided by the number of FTE employees
at year-end.
(7) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms.
(8) Nonperforming assets consist of nonperforming loans and foreclosed assets.
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. Trust
Preferred securities of SBI Capital Trust are traded on the NASDAQ National
Market under the symbol OKSBO.
TRANSFER AGENT AND REGISTRAR
For Southwest Bancorp, Inc.:
Computershare Investor Services, LLC
2 North LaSalle St.
Chicago, IL 60602
For SBI Capital Trust:
U.S. Bank, Corporate Trust Services
P.O. Box 778 Boston, MA 02102-0778
6
RECENT STOCK PRICES AND DIVIDENDS
Shareholders received quarterly cash dividends totaling $3.3 million in 2004 and
$2.8 million in 2003. 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 57 of
this report.
Shares issued under the employee stock purchase plan, which commenced on January
1, 1996, totaled 3,642 in 2004 and 4,257 in 2003, while issuances pursuant to
the stock option plans were 140,726 and 398,713 in the respective years.
Southwest has a stock repurchase program that permits the repurchase of up to 5%
(approximately 600,000 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, 2005, 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, 2004.
No shares were repurchased during 2004.
As of March 4, 2005, there were approximately 2,494 holders of record of
Southwest's common stock. The following table sets forth the common stock
dividends declared for each quarter during 2004 and 2003, and the range of high
and low closing trade prices for the common stock for those periods.
2004 2003
----------------------------- -----------------------------
DIVIDEND Dividend
HIGH LOW DECLARED High Low Declared
------- ------- -------- ------- ------- --------
For the Quarter Ending:
March 31 $ 18.94 $ 16.11 $ 0.07 $ 13.36 $ 11.07 $0.0625
June 30 18.75 15.75 $ 0.07 13.71 11.18 $0.0625
September 30 22.21 17.70 $ 0.07 17.83 13.63 $0.0625
December 31 27.10 21.50 $ 0.07 18.91 14.37 $0.0625
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Southwest Bancorp, Inc.'s ("Southwest") net income, diluted earnings per share,
loans, deposits, and assets reached their highest levels in our history. The
earnings growth was driven by a substantial (24%) increase in total loans, which
contributed to an improved margin, offset in part by a 52% higher provision for
loan losses, a 3% decrease in noninterest income, due to reduced gains on sales
of loans as the demand for mortgage refinancings declined, and greater operating
expenses (up 16%), and income taxes (up 30%).
o Net income for 2004 was $18.6 million, up from $14.9 million
in 2003 and $13.4 million in 2002.
o Diluted earnings per common share increased to $1.48 in 2004,
compared to $1.22 in 2003 and $1.11 in 2002.
o Total assets at year-end 2004 increased 21%, ending the year
at $1.91 billion compared to $1.58 billion at year-end 2003
and $1.35 billion at year-end 2002.
o Total loans grew to $1.62 billion at December 31, 2004,
compared to $1.31 billion at December 31, 2003, and $1.10
billion for 2002.
o Total shareholders' equity at year-end increased 15% to $126.0
million for 2004 compared to $109.9 million for 2003 and $96.4
million for 2002.
On August 29, 2003, Southwest effected a 2:1 stock split of its common stock in
the form of a dividend of 6,121,521 shares. All share and per share amounts in
this annual report have been retroactively restated to reflect this stock split.
RESULTS OF OPERATIONS
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.
Significant growth in loans, which was funded by growth in deposits and other
borrowings, was the primary factor contributing to Southwest's performance in
2004. In an increasing interest rate environment, Southwest was able to price
its loans and deposits and negotiate other borrowings to result in an increase
in net interest margin from 3.80% in 2003 to 4.16% in 2004.
For the year ended December 31, 2003, Southwest reported net income of $14.9
million, a $1.5 million, or 11%, increase over the $13.4 million earned in 2002.
Basic earnings per common share increased by 8% to $1.26 per share for 2003 from
$1.17 per share for 2002. Diluted earnings per common share increased by 10% to
$1.22 per share for 2003 from $1.11 per share for 2002.
These factors are discussed in more detail in the sections that follow.
8
CRITICAL ACCOUNTING POLICIES
Southwest's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and follow general practices within the industry in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements may reflect
different estimates, assumptions, and judgments. Certain policies inherently
rely more on the use of estimates, assumptions, and judgments, and as such have
a greater possibility of producing results that could be materially different
than originally reported. Estimates, assumptions, and judgments are necessary
when assets and liabilities are required to be recorded at fair value, when a
decline in the value of an asset not carried on the financial statements at fair
value warrants an impairment write-down or valuation allowance to be
established, or when an asset or liability must be recorded contingent upon a
future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.
The 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 (dollars in thousands).
At December 31,
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(Dollars in thousands) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage -
Commercial $ 4,687 32% $ 4,980 31% $ 4,076 34% $ 2,277 32% $ 916 30%
One to four family
residential 313 5 291 6 509 9 557 11 546 12
Real estate construction
construction 1,434 15 1,538 18 1,405 12 750 10 3,003 11
Commercial 9,644 24 7,318 27 4,271 32 6,680 34 4,286 34
Installment and consumer -
Guaranteed student loans 175 22 105 16 59 11 46 10 -- 9
Other 583 2 319 2 225 2 298 3 347 4
General 3,108 1,297 1,343 884 3,027
------- --- ------- --- ------- --- ------- --- ------- ---
Total $19,944 100% $15,848 100% $11,888 100% $11,492 100% $12,125 100%
======= === ======= === ======= === ======= === ======= ===
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 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.
9
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 actually observed. 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. Such review may result in additional provisions
based on their judgments of information available at the time of each
examination. Because the loan portfolio contains a significant number of
commercial and commercial real estate loans with relatively large balances, the
unexpected deterioration of one or a few of such loans may cause a significant
increase in nonperforming assets, and may lead to a material increase in
charge-offs and the provision for loan losses in future periods.
Southwest's systematic methodology for assessing the appropriateness of the
allowance includes determination of a formula allowance, specific allowances,
and an unallocated allowance, as described in "Provision for Loan Losses" on
page 18 and in Note 1 to the Consolidated Financial Statements on page 42. The
formula and specific allowances comprised 84.41% of the total allowance at
December 31, 2004. 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 $588,000 in
the recommended allowance, assuming no change in other elements considered in
the methodology.
10
COMPARISON SUMMARY 2004 CHANGE 2003 Change
(Dollars in thousands, except per share data) 2004 FROM 2003 2003 From 2002 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Interest income $ 104,723 $ 20,644 $ 84,079 $ 7,584 $ 76,495
Interest expense 32,246 3,635 28,611 (2,067) 30,678
- --------------------------------------------------------------------------------------------------------------------
Net interest income 72,477 17,009 55,468 9,651 45,817
Provision for loan losses 12,982 4,460 8,522 3,079 5,443
Gain on sales of loans and securities 3,185 (954) 4,139 641 3,498
Other income 10,900 539 10,361 1,141 9,220
Other expenses 44,412 5,964 38,448 5,129 33,319
- --------------------------------------------------------------------------------------------------------------------
Income before taxes 29,168 6,170 22,998 3,225 19,773
Taxes on income 10,539 2,433 8,106 1,752 6,354
- --------------------------------------------------------------------------------------------------------------------
Net income $ 18,629 $ 3,737 $ 14,892 $ 1,473 $ 13,419
====================================================================================================================
PER SHARE DATA
Basic earnings per common share $ 1.54 $ 0.28 $ 1.26 $ 0.09 $ 1.17
Diluted earnings per common share 1.48 0.26 1.22 0.11 1.11
FINANCIAL CONDITION DATA - AVERAGES
Investment securities $ 214,988 $ 23,712 $ 191,276 $ (16,739) $ 208,015
Total loans 1,527,935 258,719 1,269,216 256,729 1,012,487
Interest-earning assets 1,743,986 282,402 1,461,584 238,418 1,223,166
Total assets 1,809,924 298,185 1,511,739 235,795 1,275,944
Interest-bearing deposits 1,180,970 159,655 1,021,315 159,156 862,159
Total deposits 1,355,336 194,960 1,160,376 179,816 980,560
Other borrowings 252,131 51,658 200,473 34,728 165,745
Subordinated debentures 72,180 30,138 42,042 16,255 25,787
Total shareholders' equity 117,912 15,866 102,046 12,201 89,845
SELECTED RATIOS
Return on average assets 1.03% 0.04% 0.99% (0.06)% 1.05%
Return on average equity 15.80 1.21 14.59 (0.35) 14.94
Net interest margin 4.16 0.36 3.80 0.05 3.75
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.23% 0.02% 1.21% 0.13% 1.08%
Nonperforming loans to total loans 1.43 0.21 1.22 0.05 1.17
Allowance for loan losses to nonperforming loans 86.12 (13.47) 99.59 7.48 92.11
Nonperforming assets to total loans and
other real estate 1.72 0.38 1.34 0.10 1.24
Net loan charge-offs to average total loans 0.58 0.22 0.36 (0.14) 0.50
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 and money market deposits.
The changes in the composition of interest-earning assets and their funding
sources reflect market demand and management's efforts to maximize net interest
margin while controlling interest rate, credit and other risks.
11
AVERAGE BALANCES, YIELDS & RATES
For the Year Ended December 31,
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE(1) Balance Interest Rate(1) Balance Interest Rate(1)
------------------------------ ------------------------------ ----------------------------
ASSETS
Total loans and leases $1,527,935 $ 96,832 6.34% $1,269,216 $76,115 6.00% $1,012,487 $65,503 6.47%
Investment securities 214,988 7,881 3.67 191,276 7,954 4.16 208,015 10,948 5.26
Other interest-earning assets 1,063 10 0.94 1,092 10 0.92 2,664 44 1.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,743,986 104,723 6.00 1,461,584 84,079 5.75 1,223,166 76,495 6.25
Other assets 65,938 50,155 52,778
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,809,924 $1,511,739 $1,275,944
====================================================================================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 58,375 $ 291 0.50% $ 56,011 $ 355 0.63% $ 52,096 $ 372 0.71%
Money market accounts 405,116 6,118 1.51 336,274 5,237 1.56 211,883 4,305 2.03
Savings accounts 7,819 19 0.24 6,608 17 0.26 5,702 25 0.44
Time deposits 709,660 15,350 2.16 622,422 15,036 2.42 592,478 18,749 3.16
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,180,970 21,778 1.84 1,021,315 20,645 2.02 862,159 23,451 2.72
Other borrowings (2) 252,131 5,979 2.37 200,473 4,887 2.44 165,745 4,829 2.91
Subordinated debentures 72,180 4,489 6.22 42,042 3,079 7.22 25,787 2,398 9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,505,281 32,246 2.14 1,263,830 28,611 2.26 1,053,691 30,678 2.91
---------------- --------------- --------------
Noninterest-bearing demand deposits 174,366 139,061 118,401
Other liabilities 12,365 6,802 14,007
Shareholders' equity 117,912 102,046 89,845
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,809,924 $1,511,739 $1,275,944
====================================================================================================================================
Net interest income $ 72,477 $55,468 $45,817
====================================================================================================================================
Interest rate spread 3.86% 3.49% 3.34%
====================================================================================================================================
Net interest margin (3) 4.16% 3.80% 3.75%
====================================================================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 115.86% 115.65% 116.08%
====================================================================================================================================
(1) Yields, net interest spreads, and net interest margins are calculated
using income recorded in accordance with accounting principals
generally accepted in the United States ("GAAP"), and are not shown on
the higher, non-GAAP tax-equivalent basis.
(2) The fluctuation in other borrowings resulted mainly from changes in
Federal Home Loan Bank borrowings.
(3) Net interest margin = net interest income / total interest-earning
assets.
12
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.
2004 VS. 2003 2003 vs. 2002
- --------------------------------------------------------------------------------------------------------
INCREASE DUE TO CHANGE Increase Due to Change
OR IN AVERAGE: Or In Average:*
(Dollars in thousands) (DECREASE) VOLUME RATE (Decrease) Volume Rate
- --------------------------------------------------------------------------------------------------------
Interest earned on:
Loans receivable (1) $ 20,717 $ 16,206 $ 4,511 $ 10,612 $ 15,722 $ (5,110)
Investment securities (73) 827 (900) (2,994) (775) (2,219)
Other interest-earning assets -- -- -- (34) (20) (14)
--------------------------------------------------------------------
Total interest income 20,644 17,033 3,611 7,584 14,927 (7,343)
Interest paid on:
Interest-bearing demand (64) 12 (76) (17) 27 (44)
Money market accounts 881 1,054 (173) 932 2,094 (1,162)
Savings accounts 2 3 (1) (8) 3 (11)
Time deposits 314 1,850 (1,536) (3,713) 693 (4,406)
Other borrowings 1,092 1,236 (144) 58 908 (850)
Subordinated debentures 1,410 1,880 (470) 681 1,273 (592)
--------------------------------------------------------------------
Total interest expense 3,635 6,035 (2,400) (2,067) 4,998 (7,065)
--------------------------------------------------------------------
Net interest income $ 17,009 $ 10,998 $ 6,011 $ 9,651 $ 9,929 $ (278)
====================================================================
(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.
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 84% of
total revenue in 2004. 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 2004 was $72.5 million, an increase of $17.0 million, or
31%, from the $55.5 million earned in 2003. The net interest margin was 4.16%
for the year ended December 31, 2004, an increase of thirty-six basis points
from 2003.
The 2004 increase in net interest income and net interest margin from 2003 is
the result of the significant increase in interest-earning assets, the increase
in net interest margin due to the slightly increasing interest rate environment
experienced during 2004, and an increased use of noninterest-bearing funding.
13
Net interest income for 2003 was $55.5 million, an increase of $9.7 million, or
21%, from the $45.8 million earned in 2002. The net interest margin was 3.80%
for the year ended December 31, 2003, an increase of five basis points from
2002.
Interest rate spread, which represents the difference between the rate earned on
interest-earning assets and the rates paid out on interest-bearing liabilities,
was 3.86% for 2004 compared to 3.49% for 2003 and 3.34% for 2002.
Southwest has also seen significant growth in money market deposit accounts
which are a low rate funding source compared to time deposits and other
borrowings. The average balance of money market deposit accounts increased to
$405.1 million in 2004 from $336.3 million in 2003 and $211.9 million in 2002.
PROVISION FOR LOAN LOSSES
Southwest makes provisions for loan losses in amounts necessary to maintain the
allowance for loan losses at the level Southwest determines is appropriate based
on a systematic methodology. The allowance is based on careful, continuous
review and evaluation of the loan portfolio and ongoing, quarterly assessments
of the probable losses inherent in the loan and lease portfolio and unused
commitments to provide financing. Southwest's systematic methodology for
assessing the appropriateness of the allowance includes determination of a
formula allowance, specific allowances and 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, which is based on discounted cash flows
using each loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. All of Southwest's nonaccrual
loans are considered to be impaired loans. The unallocated allowance is based
upon management's evaluation of various factors that are not directly measured
in the determination of the formula and specific allowances. These factors may
include general economic and business conditions affecting lending areas, credit
quality trends (including trends in delinquencies and nonperforming loans
expected to result from existing conditions), loan volumes and concentrations,
specific industry conditions within portfolio categories, recent loss experience
in particular loan categories, duration of the current business cycle, bank
regulatory examination results, findings of internal credit examiners, and
management's judgment with respect to various other conditions including credit
administration and management and the quality of risk identification systems.
Management reviews these conditions quarterly. Based upon this review,
management established an allowance of $19.9 million, or 1.23% of total loans,
at December 31, 2004 compared to an allowance of $15.8 million, or 1.21% of
total loans, at December 31, 2003. This represents an annual increase in the
allowance of $4.1 million, or 26%, from year-end 2003. At December 31, 2004,
total nonperforming loans were $23.2 million, or 1.43% of total loans, compared
to $15.9 million, or 1.22% of total loans, at December 31, 2003. The
government-guaranteed portions of year-end nonperforming loans were $1.5 million
for 2004 and $2.7 million for 2003. The allowance for loan losses equaled 86.12%
of nonperforming loans at December 31, 2004 compared to 99.59% at December 31,
2003. During 2004, 2003, and 2002, the provisions for loan losses were $13.0
million, $8.5 million, and $5.4 million, respectively, while net charge-offs
were $8.9 million, $4.6 million, and $5.0 million, respectively.
14
Both the dollar amount and the percentage of the allowance to loans increased
during 2004. The increase was primarily the result of increases in nonperforming
loans, increased allocations on impaired loans, and increases in portfolio
loans. At December 31, 2004, the unallocated allowance totaled $3.1 million, a
$1.8 million increase from year-end 2003, and accounted for 16% of the total
allowance, up from 8% the prior year. The increase in the unallocated allowance
related primarily to changes in general economic conditions, including
increasing interest rates, and on the level of growth in the Other states
banking segment portfolio loans and the resulting increase in relatively
unseasoned loans.
Management strives to carefully monitor credit quality and to identify loans
that may become nonperforming. At any time, however, there are loans included in
the portfolio that will result in losses to Southwest, but that have not been
identified as nonperforming or potential problem loans. Because the loan
portfolio contains a significant number of commercial and commercial real estate
loans with relatively large balances, the unexpected deterioration of one or a
few of such loans may cause a significant increase in nonperforming assets, and
may lead to a material increase in charge-offs and the provision for loan losses
in future periods.
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 $25.6
million at December 31, 2004, compared to $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.
The following table shows the amounts of nonperforming assets at the end of the
periods indicated.
At December 31,
- -----------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------
Total nonaccrual $22,230 $14,530 $11,455 $ 7,291 $ 3,138
Total past due 90 days or more 929 1,384 1,452 1,935 208
Total restructured -- -- -- -- 8,694
- -----------------------------------------------------------------------------------------
Total nonperforming loans 23,159 15,914 12,907 9,226 12,040
Other real estate owned 4,937 1,699 747 640 1,225
- -----------------------------------------------------------------------------------------
Total nonperforming assets $28,096 $17,613 $13,654 $ 9,866 $13,265
=========================================================================================
Nonperforming loans to total loans 1.43% 1.22% 1.17% 0.99% 1.32%
Allowance for loan losses to
nonperforming loans 86.12% 99.59% 92.11% 124.56% 100.71%
Government-guaranteed portion of
nonperforming loans $ 1,458 $ 2,694 $ 1,017 $ 905 $ 200
15
At December 31, 2004, three credit relationships accounted for approximately
$16.3 million, or 71%, of total nonperforming loans. All of these credits were
identified as problem or potential problem credits in previous quarters or
years. Management continues to actively manage these relationships, and
anticipates they will be significantly reduced within the next six months.
The following table analyzes Southwest's allowance for loan losses for the
periods indicated.
For the Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Balance at beginning of period $15,848 $11,888 $11,492 $12,125 $11,190
LOANS CHARGED-OFF:
Real estate mortgage 812 717 777 445 563
Real estate construction 275 3 -- 99 1,083
Commercial 8,382 3,915 4,248 4,364 1,170
Installment and consumer 565 442 371 621 474
- --------------------------------------------------------------------------------------------------------
Total charge-offs 10,034 5,077 5,396 5,529 3,290
- --------------------------------------------------------------------------------------------------------
RECOVERIES:
Real estate mortgage 151 173 93 54 155
Real estate construction -- -- -- 22 --
Commercial 907 230 107 574 360
Installment and consumer 90 112 149 246 160
- --------------------------------------------------------------------------------------------------------
Total recoveries 1,148 515 349 896 675
- --------------------------------------------------------------------------------------------------------
Net loans charged-off 8,886 4,562 5,047 4,633 2,615
Provision for loan losses 12,982 8,522 5,443 4,000 3,550
- --------------------------------------------------------------------------------------------------------
Balance at end of period $19,944 $15,848 $11,888 $11,492 $12,125
========================================================================================================
Ratio of allowance for loan losses to total loans:
Average 1.31% 1.25% 1.17% 1.22% 1.35%
End of period 1.23 1.21 1.08 1.23 1.33
Ratio of net charge-offs to average total loans
during the period 0.58 0.36 0.50 0.49 0.29
OTHER INCOME
Other income was $14.1 million for 2004, down 3% when compared with 2003. Other
income increased by 14% in 2003. Fluctuations in other income for the periods
presented in the table below occurred primarily in two areas: service charges
and fees on deposit accounts and gain on sales of loans.
COMPARISON SUMMARY-OTHER INCOME 2004 Change 2003 Change
(Dollars in thousands) 2004 From 2003 2003 From 2002 2002
- --------------------------------------------------------------------------------------------------
Service charges and fees $ 9,898 $ 605 $ 9,293 $ 1,077 $ 8,216
Gain on sales of loans 3,247 (864) 4,111 941 3,170
Other noninterest income 1,002 (66) 1,068 64 1,004
Gain (loss) on sales of
investment securities (62) (90) 28 (300) 328
- --------------------------------------------------------------------------------------------------
Total other income $ 14,085 $ (415) $ 14,500 $ 1,782 $ 12,718
==================================================================================================
16
Service charges and fees increased $605,000, or 7%, due to increased fees
received on overdrawn deposit accounts and increased servicing fees received on
participated loans. Service charges and fees on deposit accounts increased $1.1
million, or 13%, in 2003 as compared to the prior year due to increased volumes
in consumer deposit accounts and higher revenues on commercial deposit accounts.
The higher revenue from commercial deposit accounts resulted primarily from a
lower earnings credit rate. The earnings credit rate is the value given to
deposits maintained by commercial customers. In a lower rate environment,
deposit balances are not as valuable because of a lower earnings credit rate.
This results in customers paying for most of their services through fees rather
than through the use of deposit balances.
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.
Proceeds from sales of guaranteed student loans increased to $537.2 million in
2004 from $278.1 million in 2003.
Gain on sale of loans increased $941,000, or 30%, in 2003. Proceeds from sales
of guaranteed student loans increased to $278.1 million in 2003 from $117.7
million in 2002. This dramatic increase in student loan volumes was attributed
to the escalation of loans produced through agreements with the Student Loan
Marketing Association ("SLMA"). These loans have typically been sold at the time
the student withdraws from school, however, an increasing number of student
loans are now being sold at the time the loan becomes fully disbursed, which
could be within 90 to 180 days of origination.
Proceeds from sales of residential mortgage loans declined to $87.5 million in
2004 after an increase to $177.4 million in 2003 from $133.2 million in 2002.
Sales of residential mortgages increased in 2002 and 2003 as a result of reduced
interest rates, which increased refinancings and overall originations. Southwest
typically sells residential mortgages within thirty days of origination.
OTHER EXPENSE
Other expense was $44.4 million for 2004, an increase of $6.0 million, or 16%,
from 2003. Other expense increased $5.1 million, or 15%, from 2002.
COMPARISON SUMMARY-OTHER EXPENSE 2004 Change 2003 Change
(Dollars in thousands) 2004 From 2003 2003 From 2002 2002
- ------------------------------------------------------------------------------------------
Salaries and employee benefits $22,599 $ 2,807 $19,792 $ 2,624 $17,168
Occupancy 9,223 1,116 8,107 988 7,119
FDIC and other insurance 420 80 340 54 286
Other real estate 242 27 215 213 2
General and administrative 11,928 1,934 9,994 1,250 8,744
- ------------------------------------------------------------------------------------------
Total other expense $44,412 $ 5,964 $38,448 $ 5,129 $33,319
==========================================================================================
Salaries and employee benefits increased $2.8 million, or 14%, in 2004 and $2.6
million, or 15% in 2003 primarily as a result of the cost of employees hired to
staff the offices opened in the Texas and Kansas offices, the hiring of
employees for HSSI, as well as normal increases in salaries and benefits of
existing staff.
17
Occupancy expense increased $1.1 million, or 14%, in 2004 and $988,000, or 14%,
in 2003 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 increased $678,000, in 2004
and $456,000 in 2003, which also contributed to the increase in occupancy
expense. General and administrative expense increased $1.9 million, or 19%, in
2004 and $1.3 million, or 14%, in 2003. Postage and freight expense increased
only $15,000 in 2004 after increasing $228,000 in 2003 due to additional courier
costs required to transport documents between offices and items to be processed
to their respective processing centers. Loan costs incurred in the origination
of loans that are not paid by the customer declined $11,000 in 2004 after
increasing $142,000 in 2003. Fees paid to SLMA for the origination of
government-guaranteed student loans increased $361,000 in 2004 and $268,000 in
2003.
OPERATING SEGMENTS
CONTRIBUTION OF OPERATING SEGMENTS FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands) 2004 2003 2002
- -------------------------------------------------------------------------------------------
Oklahoma banking $ 8,114 $ 10,691 $ 10,608
Other states banking 2,610 1,816 (157)
Secondary market 10,420 5,560 2,984
Other operations (2,515) (3,175) (16)
- -------------------------------------------------------------------------------------------
Consolidated net income $ 18,629 $ 14,892 $ 13,419
===========================================================================================
Oklahoma banking $ 881,682 $ 865,688 $ 878,959
Other states banking 388,002 228,620 91,399
Secondary market 353,812 214,377 130,661
Other operations 379 151 93
- -------------------------------------------------------------------------------------------
Consolidated total loans $ 1,623,875 $ 1,308,836 $ 1,101,112
===========================================================================================
Oklahoma banking $ 889,165 $ 878,627 $ 889,965
Other states banking 386,029 230,977 92,498
Secondary market 368,557 220,346 134,556
Other operations 269,083 250,775 233,535
- -------------------------------------------------------------------------------------------
Consolidated total assets $ 1,912,834 $ 1,580,725 $ 1,350,554
===========================================================================================
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 decreased $2.6 million, or 24%,
in 2004, primarily as a result of greater loan loss provision and increased
operating expenses. This segment's 2003 earnings were approximately the same as
in 2002.
The contribution of the other states banking segment increased by $794,000, or
44%, 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. Other states banking
contributed $1.8 million in 2003, an increase of $2.0 million from the 2002 net
loss incurred in 2002. The 2002 segment loss was primarily a consequence of
initial expansion into new markets.
18
The secondary market segment contributed $10.4 million in 2004, up $4.9 million,
or 87%, from 2003, primarily as a result of growth in guaranteed student
lending, offset in part of lower mortgage banking revenues. This segment's 2003
contribution of $5.6 million increased by $2.6 million, or 86%, primarily as a
result of increased mortgage banking activity and student lending volume. Please
see "Recent Developments" on page 31 of this report for information regarding
reduced yields on certain future student lending activities.
The segment disclosures above and in Note 16 to the Consolidated Financial
Statements show that, although the Oklahoma banking and secondary market
segments provide the significant majority of consolidated interest income and
net income, the new, other states banking segment, consisting of the Texas and
Kansas operations, began to contribute a significant percentage of consolidated
interest income and net income in 2003, and by year-end 2004 accounted for
approximately $386.0 million, or 20%, 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 62 of this report, and "Business-Organization" on page 69 of
this report.
TAXES ON INCOME
Southwest's income tax expense for fiscal years 2004, 2003, and 2002 was $10.5
million, $8.1 million, and $6.4 million, respectively. Southwest's effective tax
rates have been lower than statutory federal and state statutory rates primarily
because of tax-exempt income on municipal obligations and loans and the
organization in July 2001 of a real estate investment trust, as well as tax
credits generated by certain lending and investment activities.
FINANCIAL CONDITION
Southwest's total assets increased by $332.1 million, or 21%, from $1.58 billion
at December 31, 2003 to $1.91 billion at December 31, 2004 after increasing by
$230.2 million, or 17%, between December 31, 2002 and 2003. The growth in assets
in 2004 was primarily attributable to the $315.0 million, or 24%, increase in
total loans.
19
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 after
increasing by $15.6 million, or 8%, in 2002. The increases in both 2004 and 2003
came primarily from U.S. government and federal agency securities, which
increased $24.6 million, or 16%, in 2004 and $48.9 million, or 47%, in 2003.
Southwest's investments in Federal Reserve Bank and Federal Home Loan Bank stock
also increased during both years. Decreases occurred during the same periods in
Southwest's investment in mortgage-backed securities, which decreased $2.1
million, or 11%, in 2004 and $22.1 million, or 53%, in 2003, and tax-exempt
municipal securities, which decreased $9.5 million, or 63%, in 2004 and $12.7
million, or 46%, in 2003.
At December 31,
- ---------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------
U.S. Government and agency obligations $177,953 $153,344 $104,409
Obligations of states and political subdivisions 5,477 14,997 27,679
Mortgage-backed securities 17,565 19,681 41,751
Other securities 19,056 16,244 14,850
-------- -------- --------
Total investment securities $220,051 $204,266 $188,689
======== ======== ========
Available for sale (fair value) $204,092 $177,074 $148,476
Held to maturity (amortized cost) 2,495 15,916 31,154
Federal Reserve Bank and Federal Home
Loan Bank Stock 13,464 11,276 9,059
-------- -------- --------
Total investment securities $220,051 $204,266 $188,689
======== ======== ========
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, 2004. 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 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, 2004.
20
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 $ -- -- % $ 1,028 2.51% $ -- -- % $ -- -- % $ 1,028 $ 1,024 2.51%
Obligations of states and
political subdivisions 1,467 4.98 -- -- -- -- -- -- 1,467 1,485 4.98
------- -------- ------- ------ -------- --------
Total 1,467 4.98 1,028 2.51 -- -- -- -- 2,495 2,509 3.96
------- -------- ------- ------ -------- --------
Available for Sale:
U.S. government and
agency obligations 24,975 3.85 153,355 3.53 -- -- -- -- 178,330 176,925 3.58
Obligations of states and
political subdivisions 2,230 3.35 1,700 4.50 -- -- -- -- 3,930 4,010 3.85
Mortgage-backed securities 1,357 3.79 15,856 3.07 -- -- 399 5.59 17,612 17,565 3.18
Other securities -- -- 16,699 3.23 -- -- 2,286 6.66 18,985 19,056 3.65
------- -------- ------- ------ -------- --------
Total 28,562 3.80 187,610 3.48 -- -- 2,685 6.50 218,857 217,556 3.56
------- -------- ------- ------ -------- --------
Total $30,029 $188,638 $ -- $2,685 $221,352 $220,065
======= ======== ======= ====== ======== ========
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 $4.1 million, or 26%, from December 31, 2003 to December 31, 2004. At
December 31, 2004, the allowance for loan losses was $19.9 million, or 1.23% of
total loans, compared to 15.8 million, or 1.21% of total loans, at December 31,
2003.
Total loans were $1.31 billion at December 31, 2003, an increase of $207.7
million, or 19%, compared to December 31, 2002. All categories of loans
increased, except one-to-four family residential mortgages and consumer loans.
The allowance for loan losses increased by $4.0 million, or 33%, from December
31, 2002 to December 31, 2003. At December 31, 2003, the allowance for loan
losses was $15.8 million, or 1.21% of total loans, compared to $11.9 million, or
1.08% of total loans, at December 31, 2002. (See "Provision for Loan Losses" on
page 18.)
21
This table presents the trends in the composition of the loan portfolio over the
previous five years.
At December 31,
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Real estate mortgage -
Commercial $ 523,358 $ 402,596 $ 374,999 $ 301,578 $ 276,525
One to four family residential 87,858 83,250 102,423 106,206 107,360
Real estate construction 248,278 230,292 130,001 91,897 103,951
Commercial 390,272 355,965 348,879 312,577 311,953
Installment and consumer -
Guaranteed student loans 348,970 211,546 119,064 91,841 77,846
Other 25,139 25,187 25,746 26,947 34,915
----------- ----------- ----------- ----------- -----------
1,623,875 1,308,836 1,101,112 931,046 912,550
Less: Allowance for loan loss (19,944) (15,848) (11,888) (11,492) (12,125)
----------- ----------- ----------- ----------- -----------
Total $ 1,603,931 $ 1,292,988 $ 1,089,224 $ 919,554 $ 900,425
=========== =========== =========== =========== ===========
CAPITAL RESOURCES
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 option plan contributed an additional $2.0 million to
shareholders' equity in 2004, including tax benefits realized by Southwest
relating to option exercises. Under accounting principles generally accepted in
the United States, these tax benefits increase shareholders' equity, but do not
affect net income. Net unrealized holding gains (losses) on investment
securities available for sale (net of tax) decreased to a 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. Repurchases of an additional 603,675 shares may be
made under the repurchase plan adopted in April 2004. Repurchases may be made
from time to time based on market conditions, projected capital needs, and other
factors. During 2004 and 2003, repurchased shares were used to satisfy the
requirements of the employee stock option plan, the employee stock purchase
plan, and the dividend reinvestment plan.
At December 31, 2003, total shareholders' equity was $109.9 million compared to
$96.4 million at December 31, 2002. Earnings, net of common dividends,
contributed $11.9 million to shareholders' equity. Sales of common stock through
the dividend reinvestment plan, the employee stock purchase plan, and the
employee stock option plan contributed an additional $3.5 million to
shareholders' equity in 2003, including tax benefits realized by Southwest
relating to option exercises. Net unrealized holding gains (losses) on
investment securities available for sale (net of tax) decreased to a gain of
$360,000 at December 31, 2003 compared to $2.2 million at December 31, 2002.
Although Southwest had share repurchase plans in place during 2003, no shares
were repurchased during the year.
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, 2004, Southwest
exceeded all applicable capital requirements, having a total risk-based capital
ratio of 13.92%, a Tier 1 risk-based capital ratio of 10.88%, and a leverage
ratio of 8.61%. As of December 31, 2004, 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.
22
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.
Deposits remain the primary source of funding for Southwest. Interest-bearing
demand accounts in particular have shown a positive growth trend over the three
year period, which has been a key factor in Southwest's ability to maintain a
low cost of funds. For 2004, average interest-bearing demand deposits and money
market accounts were 34.2% of total average deposits, up from 33.8% in 2003 and
26.9% in 2002.
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, 2004:
- --------------------------------------------------------------------------------
(Dollars in thousands) Amount
- --------------------------------------------------------------------------------
Three months or less(1) $190,194
Over three through six months(1) 128,069
Over six through 12 months(1) 246,145
Over 12 months 45,262
--------
Total $609,670
========
(1) The amount of certificates of deposit that mature within 12 months is
$564.4 million. The Company does not have any liquidity concerns as a
result of the volume of these maturities.
Loans continue to be the largest component of the earning assets mix and have
shown a positive trend over the three year period.
23
Percentage of Total Average Assets
-----------------------------------------
Sources and uses of funds 2004 2003 2002
- --------------------------------------------------------------------------------------------------------
Sources of Funds:
Deposits:
Noninterest-bearing demand 9.63% 9.20% 9.28%
Interest-bearing demand and money market accounts 25.61 25.95 20.69
Time and savings deposits 39.65 41.61 46.88
Other borrowings 13.93 13.26 12.99
Subordinated debentures 3.99 2.78 2.02
Other liabilities 0.68 0.45 1.10
Equity capital 6.51 6.75 7.04
- --------------------------------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
========================================================================================================
Uses of Funds:
Loans 84.42% 83.96% 79.35%
Investment securities 11.88 12.65 16.30
Other interest-earning assets 0.06 0.07 0.21
Noninterest-earning assets 3.64 3.32 4.14
- --------------------------------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00%
========================================================================================================
Sources and uses of cash are presented in the Consolidated Statements of Cash
Flows. 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 deposits).
Total cash decreased by $866,000, or less than 3%, to $34.0 million in 2003 from
$34.8 million at year-end 2002, as a result of the net effects of a $76.1
million increase in cash used in operating activities (primarily from the
increase in originations of guaranteed student loans, net of sales proceeds); a
$21.2 million increase in cash used in investing activities (primarily from the
increase in purchases of available for sale securities net of the reduction in
loan originations); and a $94.0 million increase in cash provided by financing
activities (primarily from a $65.4 million increase in deposits and the $46.4
million net proceeds from issuance of subordinated debentures).
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.
24
Southwest attempts to manage interest rate risk while enhancing net interest
margin by adjusting its asset/liability position. At times, depending on the
level of general interest rates, the relationship between long-term and other
interest rates, market conditions and competitive factors, Southwest may
determine to increase its interest rate risk position in order to increase its
net interest margin. Southwest monitors interest rate risk and adjusts the
composition of its rate-sensitive assets and liabilities in order to limit its
exposure to changes in interest rates on net interest income over time.
Southwest's asset/liability committee reviews its interest rate risk position
and profitability, and recommends adjustments. The asset/liability committee
also reviews the securities portfolio, formulates investment strategies, and
oversees the timing and implementation of transactions. Notwithstanding
Southwest's interest rate risk management activities, the 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, 2004:
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 $1,093,719 $ 260,832 $ 150,231 $ 119,093 $1,623,875
Investment securities 20,238 26,454 170,640 2,719 220,051
Due from banks 1,475 -- -- -- 1,475
- -------------------------------------------------------------------------------------------------------------------
Total 1,115,432 287,286 320,871 121,812 1,845,401
RATE-SENSITIVE LIABILITIES:
Money market deposit accounts 379,818 -- -- -- 379,818
Time deposits 265,604 471,653 129,152 4,626 871,035
Savings accounts 8,108 -- -- -- 8,108
Interest-bearing demand 57,359 -- -- -- 57,359
Other borrowings 78,565 60,000 30,000 31,500 200,065
Subordinated debentures -- -- -- 72,180 72,180
- -------------------------------------------------------------------------------------------------------------------
Total 789,454 531,653 159,152 108,306 1,588,565
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 325,978 $ (244,367) $ 161,719 $ 13,506 $ 256,836
===================================================================================================================
Cumulative interest sensitivity gap $ 325,978 $ 81,611 $ 243,330 $ 256,836 $ 256,836
===================================================================================================================
Percentage of rate-sensitive assets
to rate-sensitive liabilities 141.29% 54.04% 201.61% 112.47% 116.17%
===================================================================================================================
Percentage of cumulative gap to
total assets 17.04% 4.27% 12.72% 13.43% 13.43%
===================================================================================================================
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.
25
At December 31, 2004, the model projected net income would decrease by 2.28% if
interest rates immediately fell by 100 basis points. It projected an increase in
net income of 9.39% if interest rates immediately rose by 100 basis points. The
model projected net income would decrease by 3.36% if interest rates gradually
fell by 100 basis points over a one-year time horizon. It projected an increase
in net income of 5.99% if interest rates gradually rose by 100 basis points over
a one-year time horizon.
At December 31, 2003, the model projected net income would decrease by 8.11% if
interest rates immediately fell by 100 basis points. It projected an increase in
net income of 0.125% if interest rates immediately rose by 100 basis points. The
model projected net income would decrease by 4.44% if interest rates gradually
fell by 100 basis points over a one-year time horizon. It projected an increase
in net income of 0.599% if interest rates gradually rose by 100 basis points
over a one-year time horizon.
The earnings simulation model uses numerous assumptions regarding the effect of
changes in interest rates on the timing and extent of repricing characteristics,
future cash flows, and customer behavior. These assumptions are inherently
uncertain and, as a result, the model cannot precisely estimate net income.
Actual results 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 footnote
13 on page 60 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 footnote 6 on page 53 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.
26
RECENT DEVELOPMENTS
STUDENT LENDING. Southwest, through its subsidiary, Stillwater National,
maintains a significant portfolio of guaranteed student loans. Stillwater
National has been actively involved in student lending for many years.
SLM Corporation ("Sallie Mae") has informed Stillwater National that it will
significantly increase the servicing fees on new loans made under the Signature
Education Loan Program to students who attend schools owned by Career Education
Corporation. Loans made under this program are insured by HEMAR Insurance
Corporation of America, a subsidiary of Sallie Mae. At year-end 2004, loans in
this program were approximately $190.0 million, or approximately 55% of the
total $349.0 million in student loans outstanding. This increase in servicing
fees will be paid to Sallie Mae through a decrease in interest rates receivable
by Stillwater National on new loans made under the program. This change will
have a negative effect on future interest revenues, net interest margin, and net
income of Southwest and its Secondary Market operating segment. If current
amounts of loan balances were maintained under this program throughout 2005,
interest revenues, less servicing costs, on these loans would be approximately
$5 million less (pre-tax) than Stillwater National earned on loans in this
program during 2004. However, Southwest currently expects an increase in volume
in this program which will offset, in part, the negative effects of the
increased servicing costs. Sallie Mae has agreed to provide an additional $200
million line of credit to support future loans made under this program. This
yield reduction is expected to reduce the future profitability of student
lending and Southwest's secondary market segment, but had no effect on 2004
earnings and will not affect the profitability of Southwest's other operating
segments.
NEW BRANCH OFFICES. In the first quarter of 2005, Stillwater National received
regulatory approval for two additional Texas branches: the second Austin branch
and the new San Antonio branch. The San Antonio branch replaces an existing loan
production office. With the addition of these branches, Southwest's Other States
banking segment has five bank branches in Texas (two each in the Dallas and
Austin metropolitan areas and one in San Antonio), and two Kansas offices (SNB
Bank of Wichita and a Kansas City loan production office).
RECENTLY ADOPTED ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation was to provide guidance on how
to identify a variable interest entity ("VIE") and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a majority of
the VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN 46 also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. The
provisions of this interpretation became effective upon issuance for all
subsequent transactions involving variable interest entities and were required
to be adopted no later than the first interim or annual reporting period
beginning after December 15, 2003 for all VIE transactions that existed as of
the issuance date. On December 24, 2003, the FASB issued a revision of the
Interpretation (the "Revised Interpretation 46"). Revised Interpretation 46
codifies both the proposed modifications and other decisions previously issued
through certain FASB Staff Positions ("FSPs") and supersedes the original FIN 46
to include: (1) deferring the effective date of the Interpretation's provisions
for certain variable interests, (2) providing additional scope exceptions for
certain other variable interests, (3) clarifying the impact of troubled debt
restructurings on the requirement to reconsider (a) whether an entity is a VIE
or (b) which party is the primary beneficiary of a VIE, and (4) revising
Appendix B of the Interpretation to provide additional guidance on what
constitutes a variable interest. FIN 46 and Revised Interpretation 46 required
Southwest to de-consolidate its investments in SBI Capital Trust, OKSB Statutory
Trust I, and SBI Capital Trust II (the "Trusts") in this Annual Report and all
future reports. This de-consolidation has resulted in the replacement of the
Trust Preferred Securities, which were reported as long-term debt in the
consolidated statements of financial condition, with the subordinated debentures
issued by the Trusts to Southwest. In spite of this change in reporting, the
adoption of FIN 46 did not have a material impact on Southwest's results of
operations or financial position.
27
CONTRACTUAL OBLIGATIONS
Southwest has various contractual obligations that require future cash payment.
The following table presents, as of December 31, 2004, 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 $ 183,738 $ -- $ -- $ -- $ 183,738
Interest bearing 445,285 -- -- -- 445,285
Time deposits(2) 745,247 77,052 65,106 5,611 893,016
Other borrowings(2) 142,372 19,622 18,719 33,829 214,542
Subordinated debentures 4,759 9,518 9,518 177,661 201,456
Operating leases 1,494 2,466 1,756 1,146 6,862
- ----------------------------------------------------------------------------------------------------------------
Total $1,522,895 $ 108,658 $ 95,099 $ 218,247 $1,944,899
================================================================================================================
(1) Excludes interest.
(2) Includes interest. Interest on variable rate obligations is shown at
rates in effect at December 31, 2004. 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, 2004, 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 24, "Off-Balance Sheet Arrangements" on page 26, and "Note
5. Other Borrowed Funds" on page 46, "Note 6. Subordinated Debentures" on page
48, "Note 11. Operating Leases" on page 54, "Note 13. Financial Instruments with
Off-Balance Sheet Risk" on page 55, and "Note 14. Commitments and Contingencies"
on page 56, to the Consolidated Financial Statements.
NON-GAAP FINANCIAL MEASURES
None of the financial measures used in this report are defined as non-GAAP
financial measures under federal securities regulations. Other banking
organizations, however, may present such non-GAAP financial measures, which
differ from measures based upon accounting principles generally accepted in the
United States. For example, such non-GAAP measures may exclude certain income or
expense items in calculating operating income or efficiency ratios, or may
increase yields and margins to reflect the benefits of tax-exempt earning
assets. Readers of this report should be aware that non-GAAP ratios and other
measures presented by some banking organizations or financial analysts may not
be directly comparable to similarly named ratios or other measures used by
Southwest or other banking organizations.
28
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, 2004.
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, 2004.
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, 2004.
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, 2004.
The audit 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 31.
FOURTH QUARTER 2004 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change occurred during the fourth quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, Southwest's internal
control over financial reporting.
29
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, 2004 and 2003, 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, 2004. 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, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, 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,
2004, 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 14, 2005 expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 14, 2005
30
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, 2004, 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, 2004, 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, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2004 consolidated financial
statements of Southwest Bancorp, Inc. and our report dated March 14, 2005
expressed an unqualified opinion thereon.
Ernst & Young LLP
Tulsa, Oklahoma
March 14, 2005
31
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 24,097 $ 33,981
Investment securities:
Held to maturity, fair value $2,509 (2004) and $16,144 (2003) 2,495 15,916
Available for sale, amortized cost $205,393 (2004) and $176,470 (2003) 204,092 177,074
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 13,464 11,276
Loans held for sale 354,557 218,422
Loans receivable, net of allowance for loan losses
of $19,944 (2004) and $15,848 (2003) 1,249,374 1,074,566
Accrued interest receivable 15,091 11,321
Premises and equipment, net 19,860 19,818
Other assets 29,804 18,351
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,912,834 $ 1,580,725
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 183,738 $ 167,332
Interest-bearing demand 57,359 53,955
Money market accounts 379,818 376,016
Savings accounts 8,108 6,903
Time deposits of $100,000 or more 609,670 358,130
Other time deposits 261,365 241,789
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,500,058 1,204,125
Accrued interest payable 4,911 3,375
Income tax payable 2,266 2,850
Other liabilities 7,370 4,410
Other borrowings 200,065 183,850
Subordinated debentures 72,180 72,180
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,786,850 1,470,790
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; 20,000,000 shares authorized;
12,243,042 shares issued and outstanding 12,243 12,243
Paid in capital 7,993 6,997
Retained earnings 107,905 92,657
Accumulated other comprehensive gain (loss) (797) 360
Treasury stock, at cost; 138,189 (2004) and 287,410 (2003) (1,360) (2,322)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 125,984 109,935
- -------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $ 1,912,834 $ 1,580,725
===================================================================================================================
The accompanying notes are an integral part of this statement.
32
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 96,832 $ 76,115 $ 65,503
Investment securities:
U.S. Government and agency obligations 6,136 5,485 5,913
Mortgage-backed securities 659 1,036 3,126
State and political subdivisions 407 856 1,355
Other securities 679 577 554
Federal funds sold 10 10 44
- -------------------------------------------------------------------------------------------------------------
Total interest income 104,723 84,079 76,495
INTEREST EXPENSE:
Interest-bearing demand 291 355 372
Money market accounts 6,118 5,237 4,305
Savings accounts 19 17 25
Time deposits of $100,000 or more 9,762 8,520 9,320
Other time deposits 5,588 6,516 9,429
Other borrowings 5,979 4,887 4,829
Subordinated debentures 4,489 3,079 2,398
- -------------------------------------------------------------------------------------------------------------
Total interest expense 32,246 28,611 30,678
- -------------------------------------------------------------------------------------------------------------
Net interest income 72,477 55,468 45,817
Provision for loan losses 12,982 8,522 5,443
OTHER INCOME:
Service charges and fees 9,898 9,293 8,216
Other noninterest income 1,002 1,068 1,004
Gain on sales of loans 3,247 4,111 3,170
Gain (loss) on sales of investment securities (62) 28 328
- -------------------------------------------------------------------------------------------------------------
Total other income 14,085 14,500 12,718
OTHER EXPENSE:
Salaries and employee benefits 22,599 19,792 17,168
Occupancy 9,223 8,107 7,119
FDIC and other insurance 420 340 286
Other real estate 242 215 2
General and administrative 11,928 9,994 8,744
- -------------------------------------------------------------------------------------------------------------
Total other expense 44,412 38,448 33,319
- -------------------------------------------------------------------------------------------------------------
Income before taxes 29,168 22,998 19,773
Taxes on income 10,539 8,106 6,354
- -------------------------------------------------------------------------------------------------------------
Net income $ 18,629 $ 14,892 $ 13,419
=============================================================================================================
Basic earnings per common share (1) $ 1.54 $ 1.26 $ 1.17
Diluted earnings per common share (1) 1.48 1.22 1.11
Cash dividends declared per share (1) 0.28 0.25 0.22
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.
33
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Net income $ 18,629 $ 14,892 $ 13,419
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gain (loss) on available for
sale securities (1,967) (2,703) 42
Reclassification adjustment for (gains) losses
arising during the period 62 (28) (328)
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (1,905) (2,731) (286)
Tax (expense) benefit related to items
of other comprehensive income (loss) 748 890 98
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (1,157) (1,841) (188)
- --------------------------------------------------------------------------------------------------------------
Comprehensive income $ 17,472 $ 13,051 $ 13,231
==============================================================================================================
The accompanying notes are an integral part of this statement.
34
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Total
Other Share-
Common Stock Paid in Retained Comprehensive Treasury holders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2002 12,243,042 $ 12,243 $ 6,387 $ 69,838 $ 2,389 $ (5,732) $ 85,125
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Common, $0.22 per share, and
other dividends -- -- -- (2,533) -- -- (2,533)
Common stock issued:
Employee Stock Option Plan -- -- (515) -- -- 1,913 1,398
Employee Stock Purchase Plan -- -- 24 -- -- 37 61
Dividend Reinvestment Plan -- -- 15 -- -- 35 50
Tax benefit related to exercise
of stock options -- -- 285 -- -- -- 285
Other comprehensive income
(loss), net of tax -- -- -- -- (188) -- (188)
Treasury shares purchased -- -- -- -- -- (1,245) (1,245)
Net income -- -- -- 13,419 -- -- 13,419
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 12,243,042 12,243 6,196 80,724 2,201 (4,992) 96,372
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Common, $0.25 per share, and
other dividends -- -- -- (2,959) -- -- (2,959)
Common stock issued:
Employee Stock Option Plan -- -- (424) -- -- 2,603 2,179
Employee Stock Purchase Plan -- -- 31 -- -- 28 59
Dividend Reinvestment Plan -- -- 41 -- -- 39 80
Tax benefit related to exercise
of stock options -- -- 1,153 -- -- -- 1,153
Other comprehensive income
(loss), net of tax -- -- -- -- (1,841) -- (1,841)
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
====================================================================================================================================
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.
35
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 18,629 $ 14,892 $ 13,419
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 12,982 8,522 5,443
Deferred taxes (626) (1,592) (294)
Depreciation and amortization expense 2,607 2,745 2,510
Amortization of premiums and accretion of
discounts on securities, net 164 227 (59)
Amortization of intangibles 327 398 202
Tax benefit from exercise of stock options 519 1,153 285
(Gain) Loss on sales/calls of securities 62 (28) (328)
(Gain) Loss on sales of loans (3,247) (4,111) (3,170)
(Gain) Loss on sales of premises/equipment (11) (53) --
(Gain) Loss on other real estate owned, net 63 108 (92)
Proceeds from sales of residential mortgage loans 87,512 177,396 133,207
Residential mortgage loans originated for resale (86,838) (169,694) (134,705)
Proceeds from sales of guaranteed student loans 537,246 278,119 117,703
Government-guaranteed student loans originated for resale (672,900) (396,920) (153,938)
Changes in assets and liabilities:
Accrued interest receivable (3,770) (2,038) 874
Other assets (7,167) (7,006) (611)
Income taxes payable (584) 2,850 (195)
Accrued interest payable 1,536 (1,123) 1,016
Other liabilities 2,860 1,440 150
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from operating activities (110,636) (94,715) (18,583)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities 11,040 6,951 18,769
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 13,400 15,210 19,533
Available for sale securities 77,679 86,332 71,707
Proceeds from redemptions of Federal Home Loan Bank stock -- -- 2,378
Purchases of Federal Home Loan Bank stock and Federal Reserve
Bank stock (2,188) (2,217) (1,529)
Purchases of held to maturity securities -- -- (2,093)
Purchases of available for sale securities (117,848) (124,783) (70,008)
Loans originated and principal repayments, net (189,733) (99,996) (135,147)
Purchases of premises and equipment (2,864) (3,523) (2,361)
Proceeds from sales of premises and equipment 226 1,215 67
Proceeds from sales of other real estate owned 734 1,860 922
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from investing activities (209,554) (118,951) (97,762)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 295,933 182,368 116,961
Net increase (decrease) in other borrowings 16,215 (15,432) 3,915
Net proceeds from issuance of common stock 1,439 2,318 1,509
Net proceeds from issuance of subordinated debentures -- 46,393 --
Purchases of treasury stock -- -- (1,245)
Common stock dividends paid (3,281) (2,847) (2,354)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided from financing activities 310,306 212,800 118,786
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (9,884) (866) 2,441
CASH AND CASH EQUIVALENTS,
Beginning of period 33,981 34,847 32,406
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $ 24,097 $ 33,981 $ 34,847
====================================================================================================================================
The accompanying notes are an integral part of this statement.
36
SOUTHWEST BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Southwest Bancorp, Inc. ("Southwest"),
incorporated in 1981, is a financial holding company headquartered in
Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the state of Oklahoma as well as Wichita and Kansas City, Kansas and
the Dallas, Austin, and San Antonio, Texas 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. and SNB REIT, Inc. Stillwater National, BCG, HSSI, and SNB
Wichita are wholly owned, direct subsidiaries of Southwest. All significant
intercompany balances and transactions have been eliminated in consolidation.
MANAGEMENT ESTIMATES - In preparing Southwest's financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
as of the dates shown on the consolidated statements of financial condition and
revenues and expenses during the periods reported. Actual results could differ
significantly from those estimates. Changes in economic conditions could affect
the determination of material estimates such as the allowance for loan losses,
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans, income taxes, and the fair value of financial
instruments.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from depository institutions, and
federal funds sold. Interest-bearing balances held at depository institutions
were $1.5 million at December 31, 2004 and $1.2 million at December 31, 2003.
Federal funds sold are sold for one-to-four day periods.
INVESTMENT SECURITIES - Investments in debt and equity securities are identified
as held to maturity and available for sale based on management considerations of
asset/liability strategy, changes in interest rates and prepayment risk, the
need to increase capital, and other factors. Southwest has the ability and
intent to hold to maturity its investment securities classified as held to
maturity. Southwest had no investments held for trading purposes for any period
presented. Under certain circumstances (including the deterioration of the
issuer's creditworthiness, a change in tax law, or statutory or regulatory
requirements), Southwest may change the investment security classification. The
classifications Southwest utilizes determine the related accounting treatment
for each category of investments. Available for sale securities are accounted
for at fair value with unrealized gains or losses, net of taxes, excluded from
operations and reported as accumulated other comprehensive income or loss. Held
to maturity securities are accounted for at amortized cost.
37
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to operations over the contractual maturity or estimated life of the
individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method. Income earned on
Southwest's investments in state and political subdivisions generally is not
subject to ordinary Federal income tax.
Southwest reviews all individual securities of which the fair values are below
the book values on a regular basis. If it would be determined that Southwest did
not have the ability and intent to hold these securities for a period of time
sufficient for a forecasted market price recovery up to (or beyond) the cost of
the investment, or to maturity when the full cost will be recovered, then an
other than temporary loss would be recognized in the consolidated statements of
operations.
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 $2.3 million and $1.6 million
at December 31, 2004 and 2003, respectively; no deferred loan fees or costs were
recorded prior to 2003 as these amounts were not material. 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 approximating par value of the loans.
Guaranteed student loans have typically been sold at the time the student
withdraws from school, however, an increasing number of student loans are now
being sold at the time the loan becomes fully disbursed, which could be within
90 to 180 days of origination. Real estate mortgage loans held for sale and
guaranteed student loans are carried at the lower of cost or market. Gains or
losses recognized upon the sale of loans are determined on a specific
identification basis.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
a provision for loan losses charged to operations. Loan amounts which are
determined to be uncollectible are charged against this allowance, and
recoveries, if any, are added to the allowance. A loan is considered to be
impaired when, based on current information and events, it is probable that
Southwest will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The allowance for loan losses related to loans that
are evaluated for impairment is based either on the discounted cash flows using
the loan's initial effective interest rate or on the fair value of the
collateral for certain collateral dependent loans. Smaller balance, homogeneous
loans, including mortgage, student, and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. All of
Southwest's nonaccrual loans are considered to be impaired loans.
38
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful life of each asset,
which ranges from three to forty years. Southwest reviews the carrying value of
long-lived assets used in operations when changes in events or circumstances
indicate that the assets might have become impaired. This review initially
includes a comparison of carrying value to the undiscounted cash flows estimated
to be generated by those assets. If this review indicates that an asset is
impaired, Southwest records a charge to operations to reduce the asset's
carrying value to fair value, which is based on estimated discounted cash flows.
Long-lived assets that are held for disposal are valued at the lower of the
carrying amount or fair value less costs to sell.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at the
lesser of the fair value less the estimated costs to sell the asset. Write-downs
of carrying value required at the time of foreclosure are recorded as a charge
to the allowance for loan losses. Costs related to the development of such real
estate are capitalized, and costs related to holding the property are expensed.
Foreclosed property is subject to periodic revaluation based upon estimates of
fair value. In determining the valuation of other real estate owned, management
obtains independent appraisals for significant properties. Valuation adjustments
are provided, as necessary, by charges to operations. Profits and losses from
sales of foreclosed property by Southwest are recognized as incurred.
INTANGIBLES - Intangibles consist of goodwill and mortgage servicing rights and
are included in other assets in the consolidated statements of financial
condition. Goodwill is not amortized, but is reviewed for impairment at least
annually. Southwest's tests have indicated no impairment exists. The remaining
capitalized amount of goodwill is not material. Loan servicing rights are
capitalized based on estimated fair market value at the point of origination.
The servicing rights are amortized on an individual loan by loan basis over the
period of estimated net servicing income. Impairment of loan servicing rights is
assessed based on the fair value of those rights. The capitalized amounts and
amortization of the loan servicing rights is not material. Southwest reviews the
carrying value of intangible assets annually for impairment. Assets are
considered impaired when the balances are not recoverable from estimated future
cash flows. At December 31, 2004 and 2003, Southwest had recorded cumulative
amortization of $3.1 million and $2.8 million, respectively.
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $609.7 million and $358.1 million at December 31,
2004 and 2003, respectively. The total amount of overdrawn deposit accounts that
were reclassified as loans at December 31, 2004 and 2003 was $1.3 million and
$1.9 million, respectively. Time deposit maturities are as follows: $737.2
million in 2005, $49.9 million in 2006, $23.0 million in 2007, $33.9 million in
2008 and $27.0 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 received.
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.
39
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, 2004, 2003, and 2002, Southwest had 2,500, zero, and 28,000
antidilutive options to purchase common shares, respectively. The following is a
reconciliation of the common shares used in the calculations of basic and
diluted earnings per common share:
- -------------------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic earnings per share 12,060,842 11,798,810 11,490,166
EFFECT OF DILUTIVE SECURITIES:
Stock options 487,217 360,810 561,952
- -------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Diluted earnings per share 12,548,059 12,159,620 12,052,118
=======================================================================================================
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 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, 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) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------
Net income, as reported $18,629 $14,892 $13,419
Less: Proforma compensation expense related to options
net of tax effects 288 375 452
- -------------------------------------------------------------------------------------------------------
Net income, proforma $18,341 $14,517 $12,967
=======================================================================================================
Earnings per common share
Basic, as presented $ 1.54 $ 1.26 $ 1.17
Basic, proforma $ 1.52 $ 1.23 $ 1.13
Diluted, as presented $ 1.48 $ 1.22 $ 1.11
Diluted, proforma $ 1.46 $ 1.19 $ 1.08
Weighted average fair value at grant date $ 2.62 $ 2.34 $ 2.41
40
The compensation cost is calculated using the Black-Scholes option pricing model
with the following weighted average assumptions:
For the Years Ended December 31,
----------------------------------
2004 2003 2002
----------------------------------
Expected dividend yield 1.97% 1.78% 1.73%
Expected volatility 25.21% 24.71% 25.40%
Risk-free interest rate 4.74% 5.45% 5.70%
Expected option term (in years) 7.82 8.49 8.87
The Stock Plan's activity follows:
Weighted
Number of Average
Options Exercise Price
---------------------------
Outstanding at December 31, 2001 1,322,802 $ 6.20
- --------------------------------------------------------------------------------
Granted 243,080 10.34
Exercised (259,234) 5.39
Canceled/expired (8,890) 7.64
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 1,297,758 7.12
- --------------------------------------------------------------------------------
Granted 153,588 11.72
Exercised (398,713) 5.46
Canceled/expired (18,150) 8.07
- --------------------------------------------------------------------------------
Outstanding at December 31, 2003 1,034,483 8.43
- --------------------------------------------------------------------------------
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
================================================================================
Total exercisable at December 31, 2002 610,159 $ 6.58
Total exercisable at December 31, 2003 502,612 $ 8.40
Total exercisable at December 31, 2004 623,333 $ 9.44
At December 31, 2004, Southwest had reserved 2,886,566 shares under the Stock
Plans, and had 989,712 shares under option. The following summarizes the
information concerning options outstanding and exercisable at December 31, 2004.
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------
162,870 $ 5.20 - $ 6.49 5.1 $ 5.38 81,870 $ 5.35
204,225 $ 7.10 - $ 7.32 4.6 $ 7.13 117,225 $ 7.13
311,639 $ 8.24 - $ 9.38 3.0 $ 8.93 234,389 $ 9.01
129,576 $10.11 - $11.73 3.1 $11.60 87,285 $11.54
58,000 $12.32 - $13.17 2.2 $12.64 58,000 $12.64
120,902 $16.79 - $18.97 4.1 $16.91 43,730 $16.90
2,500 $25.93 5.0 $25.93 834 $25.93
COMPREHENSIVE INCOME - The Company's comprehensive income (net income plus all
other changes in shareholders' equity from non-equity sources) consists of its
net income and unrealized holding gains (losses) in its available for sale
securities.
41
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 $471,000 and
$413,000 at December 31, 2004 and 2003, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
At December 31, 2004
- ------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
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 $ 2,509
============================================================================================================
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
============================================================================================================
At December 31, 2003
- ------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Held to Maturity:
U.S. Government and agency obligations $ 5,047 $ 57 $ -- $ 5,104
Obligations of state and political subdivisions 10,869 171 -- 11,040
- ------------------------------------------------------------------------------------------------------------
Total $ 15,916 $ 228 $ -- $ 16,144
============================================================================================================
Available for Sale:
U.S. Government and agency obligations $148,002 $ 904 $ 609 $148,297
Obligations of state and political subdivisions 3,930 198 -- 4,128
Mortgage-backed securities 19,581 183 83 19,681
Equity securities 4,957 117 106 4,968
- ------------------------------------------------------------------------------------------------------------
Total $176,470 $1,402 $ 798 $177,074
============================================================================================================
42
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,
2004 are as follows:
Continuous Unrealized Losses
Existing for:
----------------------------
Total
Fair Less Than More Than Unrealized
(Dollars in thousands) Value 12 Months 12 Months Losses
- -----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Government and agency obligations $ 1,024 $ (4) $ -- $ (4)
Obligations of state and political subdivisions 1,485 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,509 $ (4) $ -- $ (4)
===================================================================================================================================
Available for Sale:
U.S. Government and agency obligations $176,925 $ (1,138) $ (361) $ (1,499)
Obligations of state and political subdivisions 4,010 -- -- --
Mortgage-backed securities 17,565 (98) (5) (103)
Equity securities 5,592 (11) (31) (42)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $204,092 $ (1,247) $ (397) $ (1,644)
===================================================================================================================================
Southwest has reviewed all these securities on an individual basis. Southwest
has the ability and intent to hold these securities for a period of time
sufficient for a forecasted market price recovery up to (or beyond) the cost of
the investment, or to maturity when the full cost will be recovered and,
therefore, has determined that none of the losses are other than temporary.
As required by law, investment securities are pledged to secure public and trust
deposits, as well as the Sweep Agreement product and borrowings from the FHLB.
Securities with an amortized cost of $192.9 million and $170.8 million were
pledged to meet such requirements of $75.9 million and $80.1 million at December
31, 2004 and 2003, respectively. Any amount overpledged can be released at any
time.
A comparison of the amortized cost and approximate fair value of Southwest's
debt securities by maturity date at December 31, 2004 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 $ 28,562 $ 28,491 $ 1,467 $ 1,485
Two years through five years 174,146 172,882 1,028 1,024
Five years through ten years -- -- -- --
More than ten years 2,685 2,719 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $205,393 $204,092 $ 2,495 $ 2,509
====================================================================================================================================
Gross realized gains (losses) on sales of investment securities were $(62,000),
$28,000, and $328,000 during 2004, 2003, and 2002, respectively. The gross
proceeds from such sales of investment securities totaled approximately $11.0
million, $7.0 million, and $18.8 million during 2004, 2003, and 2002,
respectively. A portion of the gain on sales of investment securities during
2004, 2003, and 2002 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.
43
3. LOANS
Major classifications of loans are as follows:
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage:
Commercial $ 523,358 $ 402,596
One-to-four family residential 87,858 83,250
Real estate construction 248,278 230,292
Commercial 390,272 355,965
Installment and consumer:
Guaranteed student loans 348,970 211,546
Other 25,139 25,187
- ------------------------------------------------------------------------------------------------------------------------------------
1,623,875 1,308,836
Allowance for loan losses (19,944) (15,848)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net $ 1,603,931 $ 1,292,988
====================================================================================================================================
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, 2004 and 2003,
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 $383.2
million, or 24% of total loans. Southwest does not have any other concentrations
of loans to individuals or businesses involved in a single industry of more than
5% of total loans. In the event of total nonperformance by the borrowers or
guarantors, Southwest's accounting loss would be limited to the recorded
investment in the loans reduced by proceeds received from disposition of the
related collateral.
Southwest had loans which were held for sale of $354.6 million and $218.4
million at December 31, 2004 and 2003, 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 $14.5 million at December
31, 2004 and 2003, 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 $810,000, $802,000, and
$749,000, for 2004, 2003, and 2002, respectively.
The unpaid principal balance of real estate mortgage loans serviced for others
totaled $125.4 million and $124.4 million at December 31, 2004 and 2003,
respectively. Southwest maintained escrow accounts totaling $629,000 and
$468,000 for real estate mortgage loans serviced for others at December 31, 2004
and 2003, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 2004. 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.
44
One year One to Over
(Dollars in thousands) or less five years five years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage:
Commercial $ 63,955 $ 281,986 $ 177,417 $ 523,358
One-to-four family residential 11,548 38,843 37,467 87,858
Real estate construction 98,902 100,903 48,473 248,278
Commercial 148,185 136,626 105,461 390,272
Installment and consumer:
Guaranteed student loans 348,970 -- -- 348,970
Other 10,147 14,208 784 25,139
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 681,707 $ 572,566 $ 369,602 $1,623,875
====================================================================================================================================
The following table sets forth at December 31, 2004 the dollar amount of all
loans due more than one year after December 31, 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Fixed Variable Total
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage:
Commercial $ 25,409 $433,994 $459,403
One-to-four family residential 26,174 50,136 76,310
Real estate construction 8,369 141,007 149,376
Commercial 31,054 211,033 242,087
Installment and consumer 6,640 8,352 14,992
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 97,646 $844,522 $942,168
====================================================================================================================================
The allowance for loan losses is summarized as follows:
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 15,848 $ 11,888 $ 11,492
Provision for loan losses 12,982 8,522 5,443
Loans charged off (10,034) (5,077) (5,396)
Recoveries 1,148 515 349
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 19,944 $ 15,848 $ 11,888
====================================================================================================================================
As of December 31, 2004 and 2003, impaired loans totaled $22.2 million and $14.5
million and had a related allowance for loan loss of $4.7 million and $2.2
million, respectively. The average balance of impaired loans totaled $9.0
million and $12.9 million for the years ended December 31, 2004 and 2003,
respectively. Interest income recognized on impaired loans totaled $58,000,
$11,000, and $241,000, respectively, for the years ended December 31, 2004,
2003, and 2002.
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 $1.4 million, $1.8 million, and $2.6 million at December 31, 2004, 2003
and 2002, respectively. During 2004, $2.0 million of new loans and advances on
existing loans were made to these persons and repayments totaled $2.4 million.
45
4. PREMISES AND EQUIPMENT
These consist of the following:
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 4,530 $ 4,530
Buildings and improvements 11,196 11,188
Furniture, fixtures, and equipment 24,709 22,594
Construction/Remodeling in progress 261 214
- ------------------------------------------------------------------------------------------------------------------------------------
40,696 38,526
Accumulated depreciation and amortization (20,836) (18,708)
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 19,860 $ 19,818
====================================================================================================================================
5. OTHER BORROWED FUNDS
During 2004, the only categories of other borrowings whose averages exceeded 30%
of ending shareholders' equity were repurchase agreements and funds borrowed
from the FHLB.
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNTS OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option $ 2,359 $ 2,490 $ 2,500
Federal funds purchased and securities sold
under repurchase agreements 60,006 61,335 67,895
Borrowed from the Federal Home Loan Bank 137,700 120,025 128,887
Other -- -- --
WEIGHTED AVERAGE RATE OUTSTANDING AT END OF PERIOD:
Treasury, tax and loan note option 1.87% 0.73% 0.99%
Federal funds purchased and securities sold
under repurchase agreements 1.59 0.71 1.25
Borrowed from the Federal Home Loan Bank 3.54 3.36 3.28
Other -- -- --
MAXIMUM AMOUNTS OF BORROWINGS OUTSTANDING
AT ANY MONTH-END:
Treasury, tax and loan note option $ 2,500 $ 2,500 $ 2,500
Federal funds purchased and securities sold
under repurchase agreements 111,359 97,893 77,994
Borrowed from the Federal Home Loan Bank 189,788 166,500 141,500
Other -- -- 250
46
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
APPROXIMATE AVERAGE SHORT-TERM BORROWINGS
OUTSTANDING FOR THE YEAR:
Treasury, tax and loan note option $ 758 $ 752 $ 1,415
Federal funds purchased and securities sold
under repurchase agreements 85,680 64,927 48,608
Borrowed from the Federal Home Loan Bank 165,693 134,794 115,684
Other -- -- 38
APPROXIMATE WEIGHTED AVERAGE RATE FOR THE YEAR:
Treasury, tax and loan note option 1.12% 0.91% 1.46%
Federal funds purchased and securities sold
under repurchase agreements 1.22 0.84 1.22
Borrowed from the Federal Home Loan Bank 2.97 3.22 3.64
Other -- -- 4.38
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, 2004 and
2003, loans pledged under the Agreement were $460.6 million and $454.1 million
and investment securities (at carrying value) were $86.1 million and $48.3
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 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, 2004. 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
$2.4 million at December 31, 2004. Southwest has approved federal funds purchase
lines totaling $325.5 million with five financial entities; the outstanding
balance on these lines totaled $21.5 million at December 31, 2004. In addition,
Southwest has available a $35.0 million line of credit from the SLMA and a
$348.4 million line of credit from the FHLB. Borrowings under the SLMA line
would be secured by student loans. Borrowings under the FHLB line are secured by
all unpledged securities and other loans. The SLMA line expires April 20, 2007;
no amount was outstanding on this line at December 31, 2004. The FHLB line of
credit had an outstanding balance of $137.7 million at December 31, 2004 and
maturities as follows: $76.2 million in 2005, $15.0 million in 2006, $0 in 2007,
$0 in 2008, $15.0 million in 2009, and $31.5 million after 2009. 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 Capital Markets Corp., and
CountryWide Securities that total $1.2 billion. In conjunction with these lines
of credit, $425.4 million in retail certificates of deposit were included in
total deposits at December 31, 2004.
47
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, 2004,
no repurchase agreements to any one entity totaled more than 10% of equity
capital.
6. SUBORDINATED DEBENTURES
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued 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 each
mature on July 31, 2027. If certain conditions are met, the maturity dates of
the SBI Capital Trust Preferred and the SBI Capital Subordinated Debentures may
be shortened to a date as early as within 2004, or extended to a date not later
than July 31, 2036. The SBI Capital Trust Preferred and the SBI Capital
Subordinated Debentures also may be redeemed prior to maturity if certain events
occur. The SBI Capital Trust Preferred is subject to mandatory redemption, in
whole or in part, upon repayment of the SBI Capital Subordinated Debentures at
maturity or their earlier redemption. Southwest also has the right, if certain
conditions are met, to defer payment of interest on the SBI Capital Subordinated
Debentures, which would result in a deferral of dividend payments on the SBI
Capital Trust Preferred, at any time or from time to time for a period not to
exceed 20 consecutive quarters in a deferral period.
On June 26, 2003, OKSB Statutory Trust I, a newly-formed subsidiary of
Southwest, issued 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 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.
48
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 October trust preferred issuance are expected to be used to
retire the $25.0 million in fixed rate trust preferred securities issued in
1997, which became subject to redemption by Southwest in the third quarter of
2002. As of December 31, 2004, the redemption would result in a charge to
expense of approximately $583,000, net of tax benefit, upon retirement, however,
management estimates that the redemption would have a net positive effect on net
income within twelve months from redemption and thereafter. On March 1, 2005,
the Federal Reserve adopted a final rule governing the continued qualification
of trust preferred securities as Tier I capital of bank holding companies.
Southwest is conferring with legal counsel and Federal Reserve staff to ensure
that the OKSB and SBI II Trust Preferred will qualify for inclusion as Tier I
capital under this new rule before redeeming the SBI Capital Trust Preferred
issued in 1997.
Southwest, SBI Capital Trust, OKSB Statutory Trust I and SBI Capital Trust II
believe that, taken together, the obligations of Southwest under the Trust
Preferred Guarantee Agreements, the Amended and Restated Trust Agreements, the
Subordinated Debentures, the Indentures and the Agreements as to Expenses and
Liabilities, entered into in connection with the offering of the Trust Preferred
and the Subordinated Debentures, in the aggregate constitute a full and
unconditional guarantee by Southwest of the obligations of SBI Capital Trust,
OKSB Statutory Trust I and SBI Capital Trust II under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the SBI Trust Preferred and purchasing the SBI Subordinated Debentures,
which are its sole assets. Southwest owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, of SBI Capital Trust.
OKSB Statutory Trust I is a Connecticut statutory trust created for the purpose
of issuing the OKSB Trust Preferred and purchasing the OKSB Subordinated
Debentures, which are its sole assets. Southwest owns all of the 619 outstanding
common securities, liquidation value $1,000 per share, of OKSB Statutory Trust
I.
SBI Capital Trust II is a Delaware statutory trust created for the purpose of
issuing the SBI II Trust Preferred and purchasing the SBI II Subordinated
Debentures, which are its sole assets. Southwest owns all of the 774 outstanding
common securities, liquidation value $1,000 per share, of SBI Capital Trust II.
Each of the Trust Preferred meets the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Trust
Preferred and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 2004, $42.3 million of the Trust Preferred was
included in Tier I capital.
49
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation was to provide guidance on how
to identify a variable interest entity ("VIE") and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. FIN 46 has
required Southwest to de-consolidate its investments in SBI Capital Trust, OKSB
Statutory Trust I, and SBI Capital Trust II (the "Trusts") in this Annual Report
and all future reports. Due to this required de-consolidation, the Trust
Preferred Securities are not presented on the Consolidated Statements of
Financial Condition and the Subordinated Debentures are presented on the
Consolidated Statements of Financial Condition as a separate liability category.
7. INCOME TAXES
The components of taxes on income follow:
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT TAX EXPENSE:
Federal $ 9,921 $ 8,577 $ 6,642
State 1,244 1,121 6
DEFERRED TAX EXPENSE (BENEFIT):
Federal (532) (1,274) (307)
State (94) (318) 13
- ------------------------------------------------------------------------------------------------------------------------------------
Taxes on income $ 10,539 $ 8,106 $ 6,354
====================================================================================================================================
The taxes on income reflected in the accompanying consolidated statements of
operations differs from the expected U.S. Federal income tax rates for the
following reasons:
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Computed tax expense at statutory rates $ 10,209 $ 8,044 $ 6,921
INCREASE (DECREASE) IN INCOME
TAXES RESULTING FROM:
Benefit of income not subject to U.S. Federal
income tax (587) (583) (675)
State income taxes, net of Federal income
tax benefit 747 522 12
Other 170 123 96
- ------------------------------------------------------------------------------------------------------------------------------------
Taxes on income $ 10,539 $ 8,106 $ 6,354
====================================================================================================================================
50
Deferred tax expense (benefit) relating to temporary differences includes the
following components:
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses $(1,593) $ (1,726) $ (138)
Accumulated depreciation 828 347 (37)
Prepaid maintenance 39 239 --
Deferred compensation accrual 65 (73) 36
Mark-to-market adjustments 66 (389) 10
State tax on deferred items -- (225) 28
Other (31) 235 (193)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (626) $ (1,592) $ (294)
====================================================================================================================================
Net deferred tax assets of $6.4 million and $5.0 million at December 31, 2004
and 2003, respectively, are reflected in the accompanying Consolidated
Statements of Financial Condition in other assets. There were no valuation
allowances at December 31, 2004 or 2003. Temporary differences that give rise to
the deferred tax assets (liabilities) include the following:
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses $ 7,758 $ 6,165
Accumulated depreciation (2,839) (2,011)
Prepaid maintenance (278) (239)
Deferred compensation accrual 159 224
Mark-to-market adjustments 750 816
State tax on deferred items 281 281
Other 93 62
- ------------------------------------------------------------------------------------------------------------------------------------
5,924 5,298
Deferred taxes (payable) receivable on
investment securities available for sale 505 (243)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,429 $ 5,055
====================================================================================================================================
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.
The additional repurchases were also to be made in connection with shares
expected to be issued under Southwest's dividend reinvestment, stock option, and
employee benefit plans, and for other corporate purposes. The share repurchases
are expected to be made primarily on the open market from time to time until
March 31, 2005, 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.
51
On April 22, 1999, Southwest adopted a Rights Plan designed to protect its
shareholders against acquisitions that the Board believes are unfair or
otherwise not in the best interests of Southwest and its shareholders. Under the
Rights Plan, each holder of record of Southwest's common stock, as of the close
of business on April 22, 1999, received one right per common share. The rights
generally become exercisable if an acquiring party accumulates, or announces an
offer to acquire, 10% or more of Southwest's voting stock. The rights will
expire on April 22, 2009. Each right will entitle the holder (other than the
acquiring party) to buy, at the right's then current exercise price, Southwest's
common stock or equivalent securities having a value of twice the right's
exercise price. The exercise price of each right was initially set at $36.67. In
addition, upon the occurrence of certain events, holders of the rights would be
entitled to purchase, at the then current exercise price, common stock or
equivalent securities of an acquiring entity worth twice the exercise price.
Under the Rights Plan, Southwest also may exchange each right, other than rights
owned by an acquiring party, for a share of its common stock or equivalent
securities.
Southwest has reserved for issuance 600,000 shares of common stock pursuant to
the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The
Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Company employees to acquire additional
common shares through payroll deductions. Since July 1999, shares issued out of
these plans have come from treasury shares. At December 31, 2004, 80,486 new
shares had been issued and 64,276 treasury shares had been reissued by these
plans.
9. CAPITAL REQUIREMENTS
Southwest, Stillwater National and SNB Wichita are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain 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, 2004 and 2003, that Southwest,
Stillwater National, and SNB Wichita met all capital adequacy requirements to
which they are subject.
As of December 31, 2004 and 2003, 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.
SNB Wichita began operating in November 2003. As of December 31, 2004, the
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.
52
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, 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
AS OF DECEMBER 31, 2003:
Total Capital (to risk-weighted assets)
Southwest $195,254 14.90% N/A N/A $104,828 8.00%
Stillwater National 155,596 12.00 $129,651 10.00% 103,720 8.00
SNB Wichita 5,940 71.02 836 10.00% 669 8.00
Tier I Capital (to risk-weighted assets)
Southwest 145,906 11.13 N/A N/A 52,414 4.00
Stillwater National 139,835 10.79 77,790 6.00 51,860 4.00
SNB Wichita 5,835 69.73 502 6.00 335 4.00
Tier I Leverage (to average assets)
Southwest 145,906 9.32 N/A N/A 62,627 4.00
Stillwater National 139,835 8.96 78,072 5.00 62,458 4.00
SNB Wichita 5,835 119.64 244 5.00 195 4.00
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 $25.7 million at December 31, 2004. Dividends declared by
Stillwater National for the years ended December 31, 2004, 2003, and 2002 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, 2004 and 2003.
53
10. EMPLOYEE BENEFITS
Southwest sponsors a noncontributory, defined contribution profit sharing plan
intended to provide retirement benefits for employees of Southwest. The plan
covers all employees who have completed one year of service and have attained
the age of 21. The plan is subject to the Employee Retirement Income Security
Act of 1974, as amended. Company contributions are made at the discretion of the
Board of Directors; however, the annual contribution may not exceed 15% of the
total annual compensation of all participants. Southwest made contributions of
$1.8 million, $1.4 million, and $1.1 million in 2004, 2003, and 2002,
respectively.
11. OPERATING LEASES
Southwest leases certain equipment and facilities for its operations. Future
minimum annual rental payments required under operating leases, net of sublease
agreements, that have initial or remaining lease terms in excess of one year as
of December 31, 2004 follow:
2005 $1,493,612
2006 1,398,032
2007 1,068,166
2008 908,614
2009 846,724
Thereafter 1,146,437
The total rental expense was $1.4 million, $1.3 million, and $1.1 million in
2004, 2003, and 2002, 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.
54
ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable
estimate of fair value for accrued interest receivable.
DEPOSITS - The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the statement
of financial condition date. The fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
OTHER BORROWINGS - The fair values of other borrowings are the amounts
payable at the statement of financial condition date, as the carrying amount is
a reasonable estimate of fair value. Included in other borrowings are federal
funds purchased, securities sold under agreements to repurchase, and treasury
tax and loan demand notes.
SUBORDINATED DEBENTURES - The fair value of the Subordinated Debentures
is estimated based on quoted market prices or dealer quotes when available,
or current book value when market prices are not available.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair
value of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit,
and financial guarantees written or other items have short maturities and
therefore have no significant fair values.
The carrying values and estimated fair values of Southwest's financial
instruments follow:
AT DECEMBER 31, 2004 At December 31, 2003
- -------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Values Values Values Values
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 24,097 $ 24,097 $ 33,981 $ 33,981
Investment securities:
Held to maturity 2,495 2,509 15,916 16,144
Available for sale 204,092 204,092 177,074 177,074
FRB and FHLB stock 13,464 13,464 11,276 11,276
Total loans 1,603,931 1,603,235 1,292,988 1,297,256
Accrued interest receivable 15,091 15,091 11,321 11,321
Deposits 1,500,058 1,595,711 1,204,125 1,214,780
Accrued interest payable 4,911 4,911 3,375 3,375
Other liabilities 7,370 7,370 4,410 4,410
Short-term borrowings 200,065 200,065 183,850 183,850
Subordinated debentures 72,180 72,891 72,180 72,953
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.
55
The following table provides a summary of Southwest's off-balance sheet
financial instruments:
At December 31,
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands 2004 2003
- ---------------------------------------------------------------------------------------------------------
Commitments to extend commercial and real estate mortgage credit $367,105 $475,151
Standby and commercial letters of credit 9,599 7,151
- ---------------------------------------------------------------------------------------------------------
Total $376,704 $482,302
=========================================================================================================
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 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, 2004, 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 $3.3 million.
56
15. SUPPLEMENTAL CASH FLOWS INFORMATION
For the Years Ended December 31,
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Cash paid for interest $30,710 $29,734 $29,662
Cash paid for taxes on income 8,300 8,681 6,600
Loans transferred to other real estate owned 4,035 2,920 937
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 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 Footnote 1. Expenses for consolidated back-office
operations are allocated to operating segments based on estimated uses of those
services. General overhead expenses such as executive administration,
accounting, and internal audit are allocated based on the direct expense and/or
deposit and loan volumes of the operating segment. Income tax expense for the
operating segments is calculated essentially at the statutory rate. The parent
company records the tax expense or benefit necessary to reconcile to the
consolidated unit.
57
The following table summarizes financial results by operating segment:
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 8,881 4,101 -- -- 12,982
Other income 7,252 867 3,104 2,862 14,085
Other expenses 27,731 7,107 5,483 4,091 44,412
- ------------------------------------------------------------------------------------------------------------------------------------
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 889,165 386,029 368,557 269,083 1,912,834
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 6,271 2,251 -- -- 8,522
Other income 6,642 408 4,206 3,244 14,500
Other expenses 25,617 3,880 5,085 3,866 38,448
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 16,731 2,752 8,800 (5,285) 22,998
Taxes on income 6,040 936 3,240 (2,110) 8,106
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,691 $ 1,816 $ 5,560 $ (3,175) $ 14,892
====================================================================================================================================
Fixed asset expenditures $ 538 $ 1,548 $ 89 $ 1,348 $ 3,523
Total loans at period end 865,688 228,620 214,377 151 1,308,836
Total assets at period end 878,627 230,977 220,346 250,775 1,580,725
For the Year Ended December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Oklahoma Other States Secondary Other Total
(Dollars in thousands) Banking Banking Market Operations Company
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 40,141 $ 283 $ 4,763 $ 630 $ 45,817
Provision for loan losses 4,684 76 -- 683 5,443
Other income 5,840 -- 3,187 3,691 12,718
Other expenses 25,497 440 3,320 4,062 33,319
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 15,800 (233) 4,630 (424) 19,773
Taxes on income 5,192 (76) 1,646 (408) 6,354
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,608 $ (157) $ 2,984 $ (16) $ 13,419
====================================================================================================================================
Fixed asset expenditures $ 825 $ 211 $ 3 $ 1,322 $ 2,361
Total loans at period end 878,959 91,399 130,661 93 1,101,112
Total assets at period end 889,965 92,498 134,556 233,535 1,350,554
58
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) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION
ASSETS:
Cash and due from banks $ 30,459 $ 28,209
Investment in subsidiary bank 157,952 140,475
Investments in other subsidiaries 7,618 8,001
Investment securities, available for sale 2,860 2,875
Loans, net of allowance for loan losses of $0 (2003) and $0 (2002) 151 151
Other assets 3,008 5,467
- ------------------------------------------------------------------------------------------------------------------------------------
Total $202,048 $185,178
====================================================================================================================================
LIABILITIES:
Subordinated debentures $ 72,180 $ 72,180
Other liabilities 3,884 3,063
SHAREHOLDERS' EQUITY:
Common stock and related accounts 125,984 109,935
- ------------------------------------------------------------------------------------------------------------------------------------
Total $202,048 $185,178
====================================================================================================================================
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
INCOME:
Cash dividends from subsidiaries $ 3,335 $ 3,893 $ 4,472
Other income 1,301 1,023 375
Investment income 346 133 43
Interest and fees on loans 18 15 (7)
Security gains (losses) -- -- 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 5,000 5,064 4,884
EXPENSE:
Interest on subordinated debentures 4,489 3,079 2,398
Provision for loan losses -- -- 146
Other expense 1,924 2,015 957
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense 6,413 5,094 3,501
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) before taxes and equity in
undistributed income of subsidiaries (1,413) (30) 1,383
Taxes on income (1,799) (1,488) (1,137)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 386 1,458 2,520
Equity in undistributed income of subsidiaries 18,243 13,434 10,899
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,629 $ 14,892 $ 13,419
====================================================================================================================================
59
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income $ 18,629 $ 14,892 $ 13,419
Equity in undistributed income of subsidiaries (18,243) (13,434) (10,899)
Provision for loan losses -- -- 146
Other, net 3,705 47 (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,091 1,505 2,626
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Available for sale securities:
Purchases -- (2,900) (400)
Sales -- -- --
Maturities -- 900 409
Loans originated and principal repayments, net -- (58) (239)
Capital contribution to Bank -- (11,000) --
Capital contribution to other subsidiaries -- (7,393) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities -- (20,451) (230)
- ------------------------------------------------------------------------------------------------------------------------------------
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 1,439 2,318 1,509
Proceeds from issuance of subordinated debentures -- 46,393 --
Purchases of treasury stock -- -- (1,245)
Cash dividends paid on common stock (3,280) (2,846) (2,353)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,841) 45,865 (2,089)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,250 26,919 307
Cash and cash equivalents,
Beginning of year 28,209 1,290 983
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 30,459 $ 28,209 $ 1,290
====================================================================================================================================
60
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 4,882 3,900 2,551 1,649
Gain on sales of securities and loans 908 963 707 607
Other income 2,855 2,957 2,577 2,511
Other expenses 12,061 11,237 10,602 10,512
- ------------------------------------------------------------------------------------------------------------------------------------
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
For the Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 12-31-03 09-30-03 06-30-03 03-31-03
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Interest income $ 21,791 $ 21,176 $ 21,313 $ 19,799
Interest expense 7,107 6,974 7,308 7,222
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 14,684 14,202 14,005 12,577
Provision for loan losses 2,074 2,726 2,000 1,722
Gain on sales of securities and loans 954 1,159 1,087 939
Other income 2,675 2,632 2,511 2,543
Other expenses 10,360 9,901 9,293 8,894
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 5,879 5,366 6,310 5,443
Taxes on income 1,956 1,943 2,277 1,930
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,923 $ 3,423 $ 4,033 $ 3,513
====================================================================================================================================
PER SHARE DATA (1)
Basic earnings per common share $ 0.33 $ 0.30 $ 0.33 $ 0.30
Diluted earnings per common share 0.32 0.28 0.33 0.29
Dividends declared per common share 0.06 0.06 0.06 0.06
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 11,905,084 11,839,891 11,792,068 11,654,998
Diluted 12,329,963 12,398,000 12,199,100 12,124,972
(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.
61
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.
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 July 1, 2005. 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 July 1, 2005 but has not yet
determined which method will be used. 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.
62
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 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 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 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. 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.
63
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, Business Mail Processing, 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 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
$8.1 million, or 44% of consolidated net income, and $10.5 million in additional
banking assets during 2004. Net income from this segment decreased $2.6 million,
or 24%, primarily as a result of additional provision for loan losses related to
problem loans and growth in other expenses.
OTHER STATES BANKING SEGMENT. During 2002, Southwest first established
offices in Wichita, Kansas and Dallas, Texas. At December 31, 2004, Southwest
had five offices (including LPOs and branches) in Kansas and Texas. During 2004,
these offices produced $2.6 million in net income (14% of the consolidated
total), up 44% from 2003, and $155.1 million in additional banking assets.
During the first quarter of 2005, Southwest received regulatory approval to
expand further in Texas. (See "Banking Offices and Geographic Markets" on page
65).
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SECONDARY MARKET SEGMENT. Southwest has a long history of student and
residential mortgage lending. These operations comprise the Secondary Market
business segment. During 2004, this segment produced $10.4 million in net
income, up $4.9 million, or 87%, from 2003, and $148.2 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, 2004, approximately 90% of private student loans were guaranteed
by insurance provided by HEMAR Insurance Corporation of America, a subsidiary of
Sallie Mae. The remaining $21.6 million in private student loans at year-end
2004 were secured by substantial cash balances held in Stillwater National, but
were not government or HEMAR guaranteed.
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,
2004, approximately 55% of total student loans were private CEC-related loans.
The profitability of these CEC-related loans will decrease significantly,
beginning in 2005, due to an increase in servicing fees. Please see "Recent
Developments" on page 31 of this report for information regarding future yields
on certain private student loans.
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 (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
57 of this report. The total of net income of the segments discussed above
exceeds consolidated net income for 2004 due to losses 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, although it does not have
any specific agreements or understandings for any such acquisition at present.
Southwest also extends loans to borrowers in Oklahoma and neighboring states
through participations with correspondent banks.
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Including the two additional branches approved in the first quarter of 2005 (See
"Recent Developments" on page 31), Southwest has twelve full-service banking
offices, three located in Stillwater, 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 Kansas City, Kansas, and 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.
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 Texas and Kansas offices compete for
loans, deposits, and other services against local and nationally based financial
institutions, many of who 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.
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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.
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 other wise 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.
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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.
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.
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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.
In general, OTS regulations permit federal savings banks to branch in any state
or states of the United States and its territories.
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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, 2004, approximately 98.42% 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 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.
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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
2005.
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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 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.
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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 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, 2004, 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 22 of this
report, and, in the Notes to Consolidated Financial Statements in this report
"Note 6-Subordinated Debentures" on page 48 and "Note 9- Capital Requirements"
on pages 52 through 53.
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.
73
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 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 USA PATRIOT Act of 2001 ("Patriot Act"), enacted in
response to the September 22, 2001, terrorist attacks, requires bank regulators
to consider a financial institution's compliance with the BSA when reviewing
applications. Rules issued under the Patriot Act require banks to follow
customer identification and other "know your customer" procedures.
74
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 Nation'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 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, 2004, Southwest employed 355 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.
BOARD OF DIRECTORS OF SOUTHWEST BANCORP, INC. AND STILLWATER NATIONAL BANK &
TRUST COMPANY
Robert B. Rodgers, Chairman of the Board Owner, 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,
Investments
Joe Berry Cannon 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
Betty B. Kerns Owner, Betty Kerns & Associates
David P. Lambert President, Lambert Construction Company
Linford R. Pitts President, Stillwater Transfer & Storage Co.
Russell W. Teubner Founder, Host Bridge Technology
John Cohlmia * Real Estate Broker, Grubb & Ellis Levy Beffort
*Director of Stillwater National Bank & Trust Company only
75
BOARD OF DIRECTORS OF SNB BANK OF WICHITA
Robert B. Rodgers, Chairman of the Board President, Bob Rodgers Motor Company
Rick Green, Vice Chairman of the Board President and Chief Executive Officer
Southwest and Stillwater National
Kerby E. Crowell, CPA Executive Vice President and Chief Financial Officer,
Southwest and Stillwater National
Steven N. Hadley President, SNB Bank of Wichita
Anthony W. Martin Owner, Martin & Frankenberry D.D.S.P.N.
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......................... 55 Executive Vice President, Chief Financial Officer, and Secretary of
Southwest and Stillwater National; Director, Chief Financial Officer,
and Secretary of SNB Wichita
Allen Glenn.............................. 35 Managing Director, Business Consulting Group, Inc., Vice President,
Stillwater National
Steve Gobel.............................. 53 Executive Vice President, Stillwater National
Steve Hadley............................. 47 President, SNB Bank of Wichita
Rex E. Horning........................... 53 President, Stillwater Division of Stillwater National
Jerry L. Lanier.......................... 56 Executive Vice President and Chief Lending Officer of Stillwater
National
Len McLaughlin........................... 52 President, Dallas Division of Stillwater National
J. Randall Mills......................... 50 President, Healthcare Strategic Support, Inc.
Steve Peterson........................... 40 President, Austin Division of Stillwater National
Joseph P. Root........................... 40 President, Central Oklahoma Division of Stillwater National
Kimberly G. Sinclair..................... 49 Executive Vice President and Chief Administrative Officer of
Stillwater National
Charles H. Westerheide................... 56 Executive Vice President and Treasurer of Stillwater National
David York............................... 58 President, Tulsa Division of Stillwater National
76
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 Chief
Financial Officer, 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 MetaFund Corporation (an Oklahoma Community Development
Financial Institution). 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. He has also served on the Federal Reserve's
Industry Advisory Group on Electronic Check Presentment. Mr. Crowell is a
graduate of the Leadership Stillwater Class XI.
ALLEN GLENN serves as Managing Director of the Business Consulting Group, Inc.
("BCG"), a management consulting subsidiary of Southwest Bancorp, Inc., and as a
Vice President of Stillwater National. Mr. Glenn previously served as Vice
President of BCG, beginning in December 2001. 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 health care 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.
77
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 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 Executive Committee of the Oklahoma State University Alumni Association, is
a Trustee for the Oklahoma State University Foundation, is Board Chairman of the
Stillwater Chamber of Commerce, serves on the Board of Directors of the State
Chamber of Commerce, and is President of Oklahoma State University's William S.
Spears' 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.
78
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 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 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.
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 the
President of the Georgetown Symphony and Director of the Chamber of Commerce. He
has served as the Chairman of the 100,000 economic committee.
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, a graduate of
Leadership Oklahoma City and President 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 Executive
Board of Directors for the Stillwater United Way, and chairs the annual 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
the Pioneer Booster Club and Stillwater PTA.
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 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, as well as serving as Vice President 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.
79
OTHER MATERIAL
CERTAIN CHANGES IN EXECUTIVE COMPENSATION PLANS
At its regular meeting on December 16, 2004, the Board of Directors of
Stillwater National determined to include Kerby E. Crowell, Executive Vice
President, Chief Financial Officer, and Secretary, and Jerry L. Lanier,
Executive Vice President and Chief Lending Officer, in the Bank's Supplemental
Profit Sharing Plan. The Plan previously had been available only to Rick Green,
the President and Chief Executive Officer. Under this plan, Stillwater National
accrues amounts sufficient to ensure that the participants obtain the same
profit sharing contribution as a percentage of compensation as do other officers
and employees of Southwest without regard to limitations of Southwest's
qualified Profit Sharing Plan. Amounts accrued for Mr. Crowell and Mr. Lanier
for 2004 totaled less than $7,000.
At the same meeting, the Board approved an increase in the amounts payable to
Mr. Green, Mr. Crowell, and Mr. Lanier upon a qualifying termination of service
under the Severance Compensation Plan. Under the Severance Compensation Plan,
executive officers are entitled to lump-sum severance compensation upon a
qualifying termination of service equal to a percentage of their respective
total annual base compensation in effect at the date of termination. For
purposes of the Severance Compensation Plan, a qualifying termination of service
is defined as either an involuntary termination of service or a voluntary
termination of service for good reason, in either case within two years
following a change-in-control occurring after the effective date of the
Severance Compensation Plan. Good reason would include: (i) a reduction in their
base salary; (ii) their assignment without their consent to a location outside
of the MSA in which such Participant was assigned or, if participant was not
assigned in an MSA, a location more than 75 miles from the location to which
participant was assigned; (iii) the failure to maintain them in a position of
comparable authority or responsibility; or (iv) a material reduction in their
level of incentive compensation or benefits. A change-in-control is deemed to
occur whenever: (i) any entity or person becomes the beneficial owner of or
obtains voting control over 50% or more of the outstanding shares of common
stock of either Southwest or Stillwater National; (ii) the shareholders of
either Southwest or Stillwater National approve (a) a merger or consolidation in
which Southwest or Stillwater National is not the survivor or pursuant to which
the outstanding shares of either would be converted into cash, securities or
other property of another corporation other than a transaction in which
shareholders maintain the same proportionate ownership interests, or (b) a sale
or other disposition of all or substantially all of the assets of either
Southwest or Stillwater National; or (iii) there shall have been a change in a
majority of the Boards of Directors of either Southwest or Stillwater National
within a twelve-month period unless each new director was approved by the vote
of two-thirds of the directors still in office who were in office at the
beginning of the twelve-month period. Prior to the Board's December action, upon
a qualifying termination of service, the amount payable to Mr. Green, Mr.
Crowell, and Mr. Lanier was 100% of annual base compensation. After the Board
action, the amount payable to Mr. Green is 300% of annual base compensation, and
the amounts payable to Mr. Crowell and Mr. Lanier are 200% of annual base
compensation. This change had no effect on Southwest's 2004 operations or
condition.
80
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
450 Fifth Street, NW, 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.
81
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
82
TULSA 61ST BRANCH*
2431 E. 61st, Suite 170
P.O. Box 521500 Tulsa, Oklahoma 74152 918-523-3750
SNB BANK OF DALLAS*
5300 Town and Country Blvd., Suite 100 Frisco, Texas 75034 972-624-2960
www.snbdallas.com
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 Austin, Texas 78746
SNB BANK OF AUSTIN*
5656 Bee Cave Road Austin, Texas 78746
SNB BANK OF SAN ANTONIO*
8000 IH-10 West, Suite 600 San Antonio, Texas 78230
OSU CAMPUS BRANCH BANK*
1102 W. Hall of Fame Avenue
P.O. Box 1988 Stillwater, Oklahoma 74074 405-372-2234
OSU-TULSA LOAN OFFICE*
North Hall, 700 N. Greenwood Avenue Tulsa, Oklahoma 74135 918-523-3750
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.
83
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, 2004 and 2003
Consolidated Statements of Financial Condition at December 31, 2004 and
2003
Consolidated Statements of Operations for the Years Ended December 31,
2004, 2003, and 2002
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003, and 2002
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2004, 2003, and 2002
(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
84
* 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.)
* 10.7 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan for Kerby E. Crowell
* 10.8 Stillwater National Bank and Trust Company Supplemental Profit Sharing Plan forJerryl L. Lanier
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.
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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 14, 2005 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 14, 2005
- ----------------------------------
Rick Green
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Kerby E. Crowell March 14, 2005
- ----------------------------------
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, 2004. This report has been signed below by such
attorney-in-fact as of March 14, 2005.
By: /s/ Rick Green
---------------------------------------
Rick Green
Attorney-in-Fact for Majority of the
Directors of Southwest
86