<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File No. 0-23064
SOUTHWEST BANCORP, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1136584
- ------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
608 SOUTH MAIN STREET, STILLWATER, OKLAHOMA 74074
- ------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 372-2230
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
9.20% REDEEMABLE, CUMULATIVE PREFERRED STOCK, SERIES A
------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 6, 1998, the aggregate market value of the 2,228,815 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $60.2 million based on the closing sales price of
$27.00 per share of the registrant's Common Stock on March 6, 1998. Solely for
purposes of this calculation, it is assumed that directors, officers and 5%
stockholders of the registrant are affiliates.
Number of shares of Common Stock outstanding as of March 6, 1998: 3,791,147
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the year ended
December 31, 1997. ("The Annual Report)." (Parts I, II and IV)
2. Portions of Proxy Statement for 1998 Annual Meeting of Stockholders
(the "Proxy Statement"). (Part III)
<PAGE>
FORWARD-LOOKING STATEMENTS
Portions of Part I and Part II of this Annual Report on Form 10-K contain
forward-looking statements, including statements of goals, intentions, and
expectations, regarding or based upon general economic conditions, interest
rates, developments in national and local markets, and other matters, and which,
by their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report. Past results are not necessarily indicative of future performance.
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
Southwest Bancorp, Inc. (the "Company") is a one-bank holding company
headquartered in Stillwater, Oklahoma, engaged in providing commercial and
consumer banking services through its subsidiary, Stillwater National Bank and
Trust Company (the "Bank"). The Company has six full-service banking offices,
two of which are located in each of Stillwater and Tulsa, Oklahoma, and one each
in Oklahoma City and Chickasha, Oklahoma. The Company pursues a decentralized
community banking strategy through three regional divisions -- the Stillwater
Division, the Central Oklahoma Division (which includes Oklahoma City and
Chickasha) and the Tulsa Division -- that offer commercial, consumer and real
estate lending services and retail and commercial deposit products in their
market areas. The Stillwater Division of the Bank serves the Stillwater market
as a full-service community bank emphasizing both commercial and consumer
lending. The Central Oklahoma Division and the Tulsa Division each have
followed a more focused marketing strategy, targeting managers and professionals
and Oklahoma-based businesses for lending and offering more specialized
services. Each regional division is managed by a senior officer. As a result of
unusually large loan charge-offs recorded in 1997, management has revised the
Bank's credit and loan review policies and standards, has revised individual and
committee loan authorities, and has committed additional resources to the credit
administration and loan review functions. The Company believes its management
approach, coupled with the continuity of service of its senior officers, its
management information systems, and restructured credit processes should enable
the Company to develop long-term customer relationships, maintain high quality
service and respond quickly to customer needs. In addition to the services
offered through the regional divisions, the Bank offers student and mortgage
lending services throughout the State of Oklahoma.
The Bank was founded in Stillwater and is currently in its 104th year of
operation. The Company became the holding company for the Bank in 1981. On
December 23, 1993, the Company completed a public offering of 866,050 shares of
its common stock, $1.00 par value per share (the "Common Stock"). On July 31,
1995, the Company completed a public offering of 690,000 shares of 9.20%
Redeemable, Cumulative Preferred Stock, Series A (the "Preferred Stock"). On
June 4, 1997, SBI Capital Trust, a wholly owned subsidiary of the Company,
completed a public offering of 1,000,500 of its 9.30% Cumulative Trust Preferred
Securities (the "Trust Preferred Securities"). The proceeds of the Trust
Preferred Securities were used to purchase 9.30% Subordinated Debentures issued
by the Company. The Trust Preferred Securities are shown as "Guaranteed
Preferred Beneficial Interests in the Company's Subordinated Debentures" in the
Company's consolidated financial statements.
The Company began offering loans in Oklahoma City in 1982 and in Tulsa in
1985 by establishing loan production offices in these markets. The Company's
banking strategy includes the offering of multiple commercial and consumer
services to local businesses and their primary employees as well as to other
managers and professionals living and working in the Company's market areas.
Working within the branching limitations imposed by Oklahoma law, the Company
has developed a marketing strategy that does not rely on an extensive branch
network to deliver financial services to its target markets. The Company's high
customer service philosophy includes offering an array
2
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of financial services, loan officers who often meet at the customer's home or
place of business to close loans and the use of third-party courier services to
collect commercial deposits.
The Company offers a wide variety of commercial and consumer lending and
deposit services. The commercial loans offered by the Company include (i)
commercial real estate loans, (ii) working capital and other commercial loans,
(iii) construction loans, and (iv) Small Business Administration ("SBA")
guaranteed loans. Consumer lending services include (i) government-guaranteed
student loans, (ii) residential real estate loans and mortgage banking services,
and (iii) personal lines of credit and installment loans. The Company issues
credit cards throughout the state of Oklahoma, but credit card loans and
accounts are owned and serviced by unrelated parties under agreements with the
Company. The Company also offers deposit and personal banking services,
including (i) commercial deposit services such as lock-box services, and
commercial checking and other deposit accounts, (ii) retail deposit services
such as certificates of deposit, money market accounts, checking accounts, NOW
accounts, savings accounts and Automatic Teller Machine ("ATM") access, and
(iii) personal brokerage and trust services.
The Company is regulated as a bank holding company by the Board of
Governors of the Federal Reserve System ("Federal Reserve") and the Bank is
regulated as a national bank by the Office of the Comptroller of the Currency of
the U.S. Department of Treasury ("OCC"). The deposit accounts of the Bank are
insured to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). The Company's principal executive offices are located at 608 South
Main Street, Stillwater, Oklahoma 74074. The Company's telephone number is
(405) 372-2230.
LENDING ACTIVITIES
Lending. Loans include commercial real estate, commercial, residential
real estate mortgage, construction, student and other consumer loans. Interest
earned on the Bank's loan portfolio is its primary source of income. As of
December 31, 1997, the Bank's loans, net of discount, represented approximately
75% of its total assets. Although the Bank's legal lending limit to any one
borrower was $12.1 million as of December 31, 1997, the Bank's lending policy
generally limits loans to any one borrower to 90% of the Bank's legal lending
limit. The Bank's largest single borrower, net of participation, as of December
31, 1997 had outstanding loans of $9.6 million.
For further information regarding the Bank's loan portfolio, including
information regarding concentrations of credit, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations ("Management's
Discussion") on pages 8 through 21 and "Note 3. Loans Receivable" to the
Consolidated Financial Statements on pages 31 through 33 of the Annual Report.
3
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The following table presents the composition of the Bank's loan portfolio,
net of unearned interest, at each of the dates indicated:
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
------------------- ------------------- ------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage --
Commercial....................... $223,672 31.10% $196,163 30.43% $160,126 30.10% $132,297 32.06%
One-to-four family residential... 79,843 11.10 61,175 9.49 42,988 8.08 33,882 8.21
Real estate construction.......... 72,454 10.08 54,369 8.43 33,159 6.23 20,725 5.02
Commercial........................ 241,007 33.52 218,515 33.90 181,081 34.04 120,781 29.27
Installment and consumer --
Guaranteed student loans......... 64,390 8.95 61,959 9.61 67,388 12.67 61,752 14.97
Credit cards..................... 73 0.01 20,839 3.23 21,869 4.11 20,958 5.08
Other consumer................... 37,674 5.24 31,626 4.91 25,377 4.77 22,219 5.39
------------------------------------------------------------------------------------------
719,113 100.00% 644,646 100.00% 531,988 100.00% 412,614 100.00%
====== ====== ====== ======
Less:
Allowance for loan losses........ (8,282) (7,139) (5,813) (4,959)
-------- -------- -------- --------
Total.......................... $710,831 $637,507 $526,175 $407,655
======== ======== ======== ========
<CAPTION>
-------------------
1993
-------------------
Amount %
-------------------
<S> <C> <C>
Real estate mortgage --
Commercial....................... $ 88,953 27.87%
One-to-four family residential... 31,864 9.98
Real estate construction.......... 9,844 3.08
Commercial........................ 80,732 25.29
Installment and consumer --
Guaranteed student loans......... 69,739 21.84
Credit cards..................... 19,189 6.01
Other consumer................... 18,939 5.93
-------------------
319,260 100.00%
======
Less:
Allowance for loan losses........ (3,960)
--------
Total.......................... $315,300
========
</TABLE>
4
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NONPERFORMING LOANS
Nonperforming loans consist of loans on a nonaccrual basis, loans which are
contractually past due 90 days or more, and loans, the original terms of which
have been restructured. The Bank maintains a loan review department, which
reports directly to the Chief Financial Officer. The loan review department
does not have any lending authority. The Bank has retained, since late 1993, an
outside consultant to advise the loan review department and assist in the loan
review function. The loan review department recommends credits to the Executive
Loan Committee for inclusion on the watch list which is reviewed by the Loan
Quality Assurance Committee of the Board of Directors monthly. With the
concurrence of the Executive Loan Committee, credits also may be recommended to
the Loan Quality Assurance Committee for inclusion on the watch list by the
Chief Lending Officer, loan managers and individual loan officers. The
recognition of interest income on loans receivable is discontinued when, in
management's judgment, the interest will not be collectible in the normal course
of business. Generally, the Bank does not accrue interest on any asset (i) which
is maintained on a cash basis because of deterioration in the financial
condition of the borrower, (ii) for which payment in full of principal or
interest is not expected, or (iii) upon which principal or interest has been in
default for a period of 90 days or more unless the asset is both well secured
and in the process of collection. The Company does not have any material
amounts of interest-earning assets which would have been included in nonaccrual,
past due or restructured loans if such assets were loans.
During the years ended December 31, 1997 and 1996 gross interest income of
$144,000 and $398,000, respectively, would have been recorded on loans accounted
for on a nonaccrual or restructured basis if such loans had been current
throughout the period. Interest on such loans included in income during such
periods amounted to approximately $30,000 and $37,000, respectively.
At December 31, 1997, the Company had $27.0 million of loans which were not
included in the past due, nonaccrual or restructured categories, but for which
known information about possible credit problems caused management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms over the next six months. 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.
No interest-bearing assets disclosed above, other than loans, were
classified as nonperforming at December 31, 1997 or were recognized by
management as potential problem assets based upon known information about
possible credit problems of the borrower or issuer.
For additional information on nonperforming loans, see the table on page 14
of the Annual Report.
LOAN CONCENTRATIONS
The Bank extends commercial and consumer credit primarily to customers in
the State of Oklahoma which subjects the loan portfolio to the general economic
conditions within this area. At December 31, 1997 and 1996, substantially all
of the Bank's loans were collateralized with real estate, inventory, accounts
receivable and/or other assets or guaranteed by agencies of the United States
Government.
Loans to individuals and businesses in the healthcare industry totaled
approximately $71.1 million, or 10% of total loans. Other notable
concentrations of credit within the loan portfolio include $22.4 million in
residential construction loans, $14.8 million in restaurant loans and $17.7
million in hotel/motel loans.
5
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve established by
management in an amount it deems adequate to provide for losses in the loan
portfolio. Management assesses the adequacy of the allowance for loan losses
based upon a number of factors including, among others, analytical reviews of
loan loss experience in relationship to outstanding loans and commitments;
unfunded loan commitments; problem and nonperforming loans and other loans
presenting credit concerns; trends in loan growth, portfolio composition and
quality; use of appraisals to estimate the value of collateral; and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio. The allowance for loan losses is
increased by provisions for loan losses charged to expense. Charge-offs of loan
amounts determined by management to be uncollectible or impaired decrease the
allowance and recoveries of previous charge-offs, if any, are added to the
allowance. Management believes that the allowance for loan losses was adequate
at December 31, 1997.
The amount of the allowance deemed appropriate by management, and the
levels of loan charge-offs and nonperforming loans, are affected by changing
economic conditions and economic prospects and the financial positions of
borrowers. Management strives to carefully monitor credit quality and the
adequacy of the allowance for loan losses, 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 the Company, 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 lead to a
material increase in charge-offs and the provision for loan losses. Since
problems with commercial and commercial real estate loans do not necessarily
appear early in their lives, the Company may experience increased levels of
nonperforming loans and loan charge-offs as the relatively large volume of
recently originated loans mature. In addition, the OCC, as an integral part of
its examination process, periodically reviews the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based upon judgments of the OCC examiners about information available
to them at the time of their examination.
The allowance for loan losses related to loans that are identified for
evaluation in accordance with SFAS No. 114 is based on discounted cash flows
using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. 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. The allowance for loan losses is established
through a provision for loan losses charged to expense. A loan is considered to
be impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All of the Company's nonaccrual loans
have been defined as impaired loans.
Based upon its review, management established an allowance of $8.3 million,
or 1.15% of total loans, at December 31, 1997 compared to an allowance of $7.1
million, or 1.11% of total loans, at December 31, 1996. In establishing this
level of allowance for December 31, 1997, management considered a number of
factors that tended to indicate a potential need for an increased allowance
level, including the continued growth in the loan portfolio, the increased risk
associated with the level of real estate construction loans (10% of the loan
portfolio at December 31, 1997 and 8% of the portfolio at December 31, 1996),
which are viewed as entailing greater risk than certain other categories of
loans, and the increased level of one-to-four family residential mortgage loans
(11% of the loan portfolio at December 31, 1997 versus 9% at December 31, 1996),
which are viewed as entailing less risk than certain other categories of loans.
Relatively low-risk student loans comprised 9% of the portfolio at December 31,
1997 versus 10% at year-end 1996. The level of commercial loans, which comprise
the largest category in the portfolio, remained unchanged at approximately 34%
of the total portfolio at December 31, 1997 and 1996. The level of commercial
mortgage loans increased slightly to 31% of the total loan portfolio at year-
end 1997 from 30% at the previous year-end. Overall, the loan portfolio, before
deduction of the allowance for loan losses, increased by $74.5 million, or 12%,
from year-end 1996 to year-end 1997, while the allowance grew by $1.1 million,
or 16%.
6
<PAGE>
At December 31, 1997, nonperforming loans were $7.1 million, or 0.99% of
the portfolio, compared with $6.6 million, or 1.03% of the portfolio, at
December 31, 1996. The allowance for loan losses equalled 116.08% and 107.37% of
nonperforming loans at December 31, 1997 and 1996, respectively. Large changes
in the ratio of the allowance to nonperforming loans may occur from period to
period because of variations in the amounts of nonperforming loans, which depend
largely on the condition of a small number of individual loans and borrowers
relative to the total loan portfolio.
At December 31, 1997 and 1996, impaired loans totaled $5.5 million and $4.8
million, and had been allocated a related allowance for loan losses of $707,000
and $2.0 million, respectively.
For additional information regarding the Company's allowance for loan
losses, see "Provision for Loan Losses" in the Management's Discussion on pages
12 and 13 of the Annual Report.
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The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------ -------------------- -------------------- ----------------------
Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ ------------- ------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage --
One-to-four family
residential............. $ 488 11.10% $ 294 9.49% $ 176 8.08% $ 178 8.21%
Commercial............... 1,073 31.10 584 30.43 538 30.10 941 32.06
Real estate construction... 732 10.08 457 8.43 310 6.23 195 5.02
Commercial................. 4,477 33.52 4,597 33.90 3,688 34.04 2,616 29.27
Installment and consumer...
Guaranteed student loans. -- 8.95 -- 9.61 9 12.67 6 14.97
Credit cards............. 1 0.01 670 3.23 456 4.11 247 5.08
Other consumer............. 573 5.24 263 4.91 83 4.77 137 5.39
Unallocated................ 938 -- 274 -- 553 -- 639 --
----- ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses......... $ 8,282 100.00% $7,139 100.00% $5,813 100.00% $4,959 100.00%
===== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
----------------
1993
----------------
Percent of
Loans in Each
Category to
Amount Total Loans
------ -------------
<S> <C> <C>
Real estate mortgage --
One-to-four family
residential............. $ 103 9.98%
Commercial............... 519 27.87
Real estate construction... 32 3.08
Commercial................. 1,302 25.29
Installment and consumer...
Guaranteed student loans. 65 21.84
Credit cards............. 747 6.01
Other consumer............. 88 5.93
Unallocated................ 1,104 --
------ ------
Total allowance for
loan losses......... $3,960 100.00%
====== ======
</TABLE>
Management strives to carefully monitor credit quality and the adequacy of
the allowance for loan losses, 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 the Company, 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 lead to a
material increase in charge-offs and the provision for loan losses.
8
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TRUST SERVICES
The Company offers trust services through its relationship with the Trust
Company of Oklahoma, (the "Trust Company"). In December 1996, the Company sold
its investment in the capital stock of the parent corporation of the Trust
Company for a pre-tax gain of approximately $287,000, but continues to offer
trust services through the Trust Company. The strategic importance of this
relationship is that the Company is able to offer high-quality trust services as
part of its complement of financial services. Management believes that offering
trust services in this manner is more attractive than offering services through
a wholly owned trust department within the Company because (i) a wholly owned
trust company would probably be smaller in size than the Trust Company and only
marginally profitable, and (ii) the size and reputation of the Trust Company aid
the Company in competing for new accounts.
INVESTMENT ACTIVITIES
The objectives of the investment portfolio are to provide the Company with
a source of liquidity (from scheduled maturities) as well as a source of
earnings. For further information regarding the Company's investment portfolio,
see "Note 2. Investment Securities" to Consolidated Financial Statements on
pages 30 and 31 of the Annual Report.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government and agency securities.. $154,209 $109,988 $110,785
State and municipal obligations........ 10,953 13,153 11,579
Mortgage-backed securities............. 16,427 23,061 24,222
Other securities....................... 6,151 1,149 1,102
-------- -------- --------
Total investment securities....... $187,740 $147,351 $147,688
======== ======== ========
Available for sale (fair value)........ $100,746 $ 63,762 $ 73,044
Held to maturity (amortized cost)...... 86,994 83,589 74,644
</TABLE>
9
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The following table sets forth the maturities, carrying value (amortized
cost (in the case of investment securities being held to maturity) or estimated
fair value (in the case of investment securities available for sale)), estimated
fair market values and average yields for the Company's investment portfolio at
December 31, 1997. Yields are not presented on a tax-equivalent basis.
Maturities of mortgage-backed securities are based on expected maturities.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers on the underlying mortgages may have the right
to call or prepay obligations with or without prepayment penalties.
The securities of no single issuer (other than the United States or its
agencies), or in the case of securities issued by state and political
subdivisions, no source or group of sources of repayment, accounted for more
than 10% of shareholders' equity of the Company at December 31, 1997.
MATURITY OF INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Total Investment
Years Securities
-------------------- ----------------- ----------------- ----------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Fair
Value Yield Value Yield Value Yield Value Yield Value Value
------------------- ----------------- ---------------- ---------------- ----------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
- ----------------
U.S. government and agency
securities............... $21,933 5.94% $ 55,328 6.26% -- -- -- -- $ 77,261 $ 77,908
State and municipal
obligations.............. 5,986 4.42 3,747 4.17 -- -- -- -- 9,733 9,684
Mortgage-backed securities -- -- -- -- -- -- -- -- -- --
Other securities........... -- -- -- -- -- -- -- -- -- --
------- -------- ------- -------
Total held to maturity... 27,919 5.61 59,075 6.13 -- -- -- -- 86,994 87,592
------- -------- ------- -------
Available for Sale
- ------------------
U.S. government and agency
securities............... 11,144 6.35 57,830 6.49 $7,974 7.02% -- -- 76,948 76,948
State and municipal
obligations.............. 237 3.94 983 5.34 -- -- -- -- 1,220 1,220
Mortgage-backed securities 2,267 6.38 14,160 6.66 -- -- -- -- 16,427 16,427
Other securities........... -- -- 4,151 7.09 -- -- $2,000 7.70% 6,151 6,151
------- -------- -------- -------- ------- -------
Total available for sale. 13,648 6.31 77,124 6.54 7,974 7.02 2,000 7.70 100,746 100,746
------- -------- -------- -------- ------- -------
Total investment
securities. $41,567 5.84 $136,199 6.36 $7,974 7.02 $2,000 7.70 $187,740 $188,338
======= ======== ======== ======== ======== ========
<CAPTION>
<S> <C>
Average
Held to Maturity Yield
- ---------------- --------
U.S. government and agency
securities............... 6.17%
State and municipal
obligations.............. 4.32
Mortgage-backed securities --
Other securities........... --
Total held to maturity... 5.96
Available for Sale
- ------------------
U.S. government and agency
securities............... 5.96
State and municipal
obligations.............. 6.62
Mortgage-backed securities
Other securities........... 7.30
Total available for sale. 6.57
Total investment
securities.............. 6.28
</TABLE>
10
<PAGE>
At December 31, 1997, the Company held mortgage-backed securities with a
book value of $16.4 million, all of which were collateralized by single-family
mortgage loans. It is the Company's policy to purchase mortgage-backed
securities issued by the Federal Home Loan Mortgage Corporation or Freddie Mac
("FHLMC"), Federal National Mortgage Association or Fannie Mae ("FNMA"), or the
Government National Mortgage Association or Ginnie Mae ("GNMA"), when such
securities can be acquired at attractive yields, and where the investment
characteristics of the securities complement the Bank's asset/liability
management objectives, primarily as to interest rate adjustments and terms to
maturity. FHLMC, FNMA and GNMA mortgage-backed securities have lower risk
weightings, and therefore require less capital, than residential mortgage loans.
Mortgage-backed securities also may be used as collateral for borrowings and,
through repayments, as a source of liquidity. At December 31, 1997, 1996, and
1995, the Company had no investments in privately issued mortgage-backed
securities, and had no mortgage-related securities that were rated "high risk"
under regulatory guidelines.
Because they are primarily adjustable rate and have relatively short terms,
the Company's mortgage-backed securities are helpful in limiting interest rate
risk. Prepayments in the Company's mortgage related securities portfolio may be
affected by declining and rising interest rate environments. In a low and
falling interest rate environment, prepayments would be expected to increase.
The Company's floating rate mortgage-backed securities would be expected to
generate lower yields as a result of the effect of falling interest rates on the
indexes for determining payment of interest. Additionally, the increased
principal payments received may be subject to reinvestment at lower rates.
Conversely, in a period of rising rates, prepayments would be expected to
decrease, which would make less principal available for reinvestment at higher
rates. In a rising rate environment, floating rate instruments would generate
higher yields to the extent that the indexes for determining payment of interest
did not exceed the life-time interest rate caps. Such prepayments may subject
the Company's mortgage-backed securities to yield and price volatility.
DEPOSIT ACTIVITY. The principal sources of funds for the Bank are core
deposits (demand deposits, NOW accounts, money market accounts, savings accounts
and certificates of deposit of less than $100,000) from the local market areas
surrounding each of the Bank's offices. The Bank's deposit base includes
transaction accounts, time and savings accounts and accounts which customers use
for cash management and which provide the Bank with a source of fee income and
cross-marketing opportunities as well as a low-cost source of funds. Time and
savings accounts, including money market deposit accounts, also provide a
relatively stable and low-cost source of funding. The largest source of funds
for the Bank remains certificates of deposit.
The Bank offers a variety of cash management services to its commercial
deposit customers including lock-box collections and deposit reconciliation and
verification. Commercial customers in Tulsa and Oklahoma City frequently use
third-party courier services to deliver deposits which has allowed the Bank to
effectively service these metropolitan areas from its current branch locations.
The Bank's deposits grew by $87.5 million, or 12%, during 1997. Deposit
growth during 1997 came mainly from time deposits. The Bank has not solicited
brokered deposits as a source of funds, although its capitalization would permit
such activity on an unrestricted basis under current federal banking
regulations. The Bank plans to solicit brokered deposits on a national basis
through a national brokerage firm from time to time in the future when rates on
such deposits are attractive relative to other sources of funds with comparable
maturities.
11
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposit.
DEPOSITS
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ---------------------------
Percent of Percent Percent
Amount Deposits Rate Amount of Deposits Rate Amount of Deposits Rate
------------------------------ ------------------------------ ---------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits............ $ 96,560 11.48% N/A $ 83,729 11.11% N/A $ 78,308 12.34% N/A
NOW accounts............... 37,447 4.45 2.37% 34,309 4.55 2.32% 33,762 5.32 2.37%
Money market accounts...... 94,496 11.23 4.12 86,910 11.53 3.82 75,330 11.87 4.10
Savings accounts........... 3,655 0.43 2.49 4,086 0.54 2.49 4,788 0.76 2.44
Time deposits of $100,000
or more.................. 132,003 15.69 5.48 123,068 16.33 5.66 86,258 13.60 5.77
Other time deposits........ 477,264 56.72 5.74 421,843 55.94 5.77 355,941 56.11 5.89
---------------------- ----------------------- -----------------------
Total deposits......... $841,425 100.00% $753,945 100.00% $634,387 100.00%
====================== ======================= =======================
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
AMOUNTS AND MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
Maturity Period Amount
------------------------------- ---------------
(In thousands)
<S> <C>
Three months or less........... $ 51,076
Over three through six months.. 47,966
Over six through 12 months..... 24,227
Over 12 months................. 8,734
---------------
Total...................... $132,003
===============
</TABLE>
12
<PAGE>
BORROWINGS. The Company uses various forms of short-term borrowings for
cash management and liquidity purposes on a limited basis. These forms of
borrowings include federal funds purchased and borrowings from the Federal
Reserve Bank, the Federal Home Loan Bank ("FHLB") and the Student Loan Marketing
Association ("SLMA"). For additional information regarding the Company's
borrowings, see "Liquidity" in the Management's discussion on page 17 and "Note
5. Other Borrowed Funds" and "Note 6. Long-Term Debt" to Consolidated Financial
Statements on pages 33 and 34 of the Annual Report.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1997 1996 1995
--------- --------- ------
<S> <C> <C> <C>
(dollars in thousands)
Amounts outstanding at end of period
Treasury, tax and loan note option...... $ 1,595 $1,185 $ 471
Federal funds purchased and securities
sold under repurchase agreements...... 18,953 1,800 2,800
Other short-term borrowings............. -- -- 7,500
Weighted average rate paid on:
Treasury, tax and loan note option...... 5.25% 4.99% 5.15%
Federal funds purchased and securities
sold under repurchase agreements...... 4.94% 6.70% 5.75%
Other short-term borrowings............. -- -- 5.55%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
Treasury, tax and loan note option........ $ 1,843 $1,500 $ 1,710
Federal funds purchased and securities
sold under repurchase agreements........ 19,953 2,300 11,200
Other short-term borrowings............... 5,000 -- 12,500
Approximate average short-term borrowings
outstanding with respect to:
Treasury, tax and loan note option........ 1,205 1,135 1,152
Federal funds purchased and securities
sold under repurchase agreements........ 4,657 251 1,536
Other short-term borrowings............... 739 554 1,839
Approximate weighted average rate paid on:
Treasury, tax and loan not option......... 5.36% 4.96% 5.79%
Federal funds purchased and securities
sold under repurchase agreements........ 4.98% 5.78% 6.05%
Other short-term borrowings............... 5.84% 5.59% 6.41%
</TABLE>
13
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company 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 (change 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.
CHANGES IN INTEREST INCOME AND EXPENSES RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
Compared to Compared to
December 31, 1996 December 31, 1995
--------------------------------------------------------------
Increase (decrease) attributable to change in:
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
---------------------------- -------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans receivable/(1)/ $11,182 $(799) $10,383 $10,201 $(615) $9,586
Investment securities 1,534 49 1,583 243 (57) 186
Federal funds sold 199 16 215 (46) (58) (104)
Total interest income 12,915 (734) 12,181 10,398 (730) 9,668
Interest paid on:
NOW accounts 38 18 56 90 (16) 74
Money market accounts 449 258 707 332 (364) (32)
Savings accounts (18) -- (18) (22) 3 (19)
Time deposits 6,402 (306) 6,096 4,916 (477) 4,439
Short-term borrowings 240 (5) 235 (143) (30) (173)
Long-term debt 1,338 -- 1,338 -- -- --
---------------------------- -------------------------------
Total interest expense 8,449 (35) 8,414 5,173 (884) 4,289
---------------------------- -------------------------------
Net interest income $ 4,466 $(699) $ 3,767 $ 5,225 $ 154 $5,379
==============================================================
</TABLE>
(1) Average balance includes nonaccrual loans. Fees included in interest income
on loans receivable are not considered material to any period presented.
Interest on tax-exempt loans and securities is not presented on a tax-equivalent
basis because such amounts are not considered material.
14
<PAGE>
REGULATION OF BRANCH AND INTERSTATE BANKING.
Under the McFadden Act of 1927, national banks may only establish branches
to the extent specifically authorized by statute for banks chartered by the
state in which the national bank is located and subject to the restrictions as
to location imposed by state law on state banks. Oklahoma law provides that
Oklahoma banks may establish no more than two branches within the corporate city
limits where the main bank is located or within 25 miles of the main bank if it
is located in a city that has no other bank. Oklahoma banks, however, may
acquire an unlimited number of offices of other banks or savings associations
provided that the bank does not control more than 15% of the insured deposits in
the State of Oklahoma. Accordingly, the Bank can open branches in markets other
than Stillwater only through acquisitions of existing banks or branches.
The Bank Holding Company Act of 1956, as amended (the "BHC Act") allows 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 bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years), if any, specified by the statutory law of the host
state. The BHC 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 bank's home state or in any
state in which the target bank maintains a branch. The BHC 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 bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit.
Beginning on June 1, 1997, the federal banking agencies were authorized to
approve interstate bank (as opposed to bank holding company) merger transactions
without regard to whether such transactions are prohibited by the law of any
state, unless the home state of one of the banks had "opted out" of the
interstate bank mergers that applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks. Oklahoma
did not "opt out," and allows interstate bank mergers and interstate branch
acquisitions, provided that the Oklahoma bank or branch acquired has been in
existence for at least five years. Interstate bank mergers and branch
acquisitions also are subject to the nationwide and statewide insured deposit
concentration amounts described above.
Federal law also generally allows bank holding companies to acquire or
establish federal savings associations, without regard to location. Under
federal law, federal savings associations may establish or acquire branches in
or outside of their home states without regard to state restrictions.
Federal law authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching. Oklahoma does not. Federal law also
prohibits any out-of-state bank from using the interstate branching authority
primarily for the purpose of deposit production, and requires an out-of-state
bank to help meet the credit needs of the communities served by its interstate
branches.
COMPETITION
The Bank encounters competition primarily in seeking deposits and in
obtaining loan customers. The level of competition for deposits is high. The
Bank's principal competitors for deposits are other financial institutions,
including other banks, credit unions, and savings institutions. 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
15
<PAGE>
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 banks and savings associations, 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 banks and thrifts.
The Bank also competes in its lending activities with other financial
institutions such as savings institutions, credit unions, securities firms,
insurance companies, small loan companies, finance companies, mortgage companies
and other sources of funds. Many of the Bank's nonbank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and federally-insured banks and state regulations governing state
chartered banks. As a result, such nonbank competitors have advantages over the
Bank in providing certain services. A number of the financial institutions with
which the Bank competes in both lending and deposit activities are larger than
the Bank. In recent periods, competition has increased in the Bank's market area
as new entrants and existing competitors have sought to more aggressively expand
their loan and deposit market share, and as a result of the Bank's efforts to
solicit larger loan customers, for whom there is greater competition. The
Company anticipates that competition may intensify as a result of acquisition of
Oklahoma banks by out-of-state bank holding companies and the special advantages
given to federal credit unions under current law. See " --Regulation of Branch
and Interstate Banking."
The business of mortgage banking is highly competitive. The Company
competes for loan origination with other financial institutions, such as
mortgage bankers, state and national commercial banks, savings and loan
associations, credit unions and insurance companies. Many of the Company's
competitors have financial resources that are substantially greater than those
available to the Company. The Company 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.
EMPLOYEES
As of December 31, 1997, the Company and the Bank had 348 full-time
equivalent employees. None of the employees of the Company or the Bank is
subject to a collective bargaining agreement. The Company considers its
relationships with its employees and those of the Bank to be good.
SUPERVISION AND REGULATION
GENERAL
The Company and the Bank are extensively regulated under federal and state
law. These laws and regulations are generally intended to protect depositors and
the federal deposit insurance funds, not shareholders. As an originator of
guaranteed student loans, the Bank is also subject to examination by the U.S.
Department of Education to determine its compliance with the requirements of
federal laws governing student loans. In addition, the Bank is considered to be
a federal contractor required to comply with the requirements of the Office of
Federal Contract Compliance Programs for affirmative action programs, among
other things.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company and the Bank. The operations of the Company and the Bank may be
affected by legislative changes and by the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new Federal or state legislation may have in the future.
16
<PAGE>
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the BHC Act,
and, as such, it is subject to regulation, supervision and examination by the
Federal Reserve. The Company is required to file annual and quarterly reports
with the Federal Reserve and to provide to the Federal Reserve such additional
information as the Federal Reserve may require.
With certain limited exceptions, the BHC Act requires every bank holding
company to obtain the prior approval of the Federal Reserve before: (1)
acquiring direct or indirect ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (2) acquiring all or substantially all of the assets
of another bank or bank holding company; or (3) merging or consolidating with
another bank holding company. The Federal Reserve will not approve any
acquisition, merger or consolidation that would have a substantially anti-
competi tive result, unless the anti-competitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served.
In addition, and subject to certain exceptions, the Change in Bank Control
Act (the "Control Act") and regulations promulgated thereunder by the Federal
Reserve require any person acting directly or indirectly, or through or in
concert with one or more persons, to give the Federal Reserve 60 days' written
notice before acquiring control of a bank holding company. Transactions which
are presumed to constitute the acquisition of control include the acquisition of
any voting securities of a bank holding company having securities registered
under section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), if, after the transaction, the acquiring person (or persons
acting in concert) owns, controls or holds with power to vote 25% or more of any
class of voting securities of the institution. The acquisition may not be
consummated subsequent to such notice if the Federal Reserve issues a notice
within 60 days, or within certain extensions of such period, disapproving the
same.
With certain exceptions, the BHC Act also prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the Federal
Reserve considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency, which can be expected
to outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve also considers capital adequacy and other financial and management
factors, including Community Reinvestment Act ("CRA") and "fair lending"
compliance, in reviewing acquisitions and mergers.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its subsidiaries, on investments in their securities and
on the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for payment of dividends,
interest and operating expenses. Further, under the BHC Act and certain
regulations of the Federal Reserve, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
For example, the Bank may not generally require a customer to obtain other
services from the Bank or the Company, and may not require that customer to
promise not to obtain other services from a competitor, as a condition to an
extension of credit to the customer.
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
17
<PAGE>
of earning retention that is consistent with the company's capital needs, asset
quality, and overall financial condition.
Bank holding companies are required to give the Federal Reserve notice of
any purchase or redemption of their outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the bank holding company's consolidated net
worth. The Federal Reserve may disapprove such a purchase or redemption if it
determines that the proposal would violate any law, regulation, Federal Reserve
order, directive, or any condition imposed by, or written agreement with, the
Federal Reserve. Bank holding companies whose capital ratios exceed the
thresholds for "well-capitalized" banks on a consolidated basis are exempt from
the foregoing requirement if they were rated composite 1 or 2 in their most
recent inspection and are not the subject of any unresolved supervisory issues.
STATE BANK HOLDING COMPANY REGULATION
Under Oklahoma law, any bank holding company or other company which submits
an application to the Federal Reserve for approval of the acquisition of a state
or national bank located in Oklahoma must submit a copy of such application to
the Oklahoma Bank Board. Subject to certain exceptions for supervisory
acquisitions and certain other limited exceptions, Oklahoma law further provides
that it shall be unlawful for a multi-bank holding company to acquire direct or
indirect ownership or control of any financial institution with deposits insured
by the FDIC or the National Credit Union Administration ("NCUA") and located in
Oklahoma if such acquisition results in such multi-bank holding company having
direct or indirect ownership or control of banks located in Oklahoma, the total
deposits of which at the time of such acquisition exceed 15% of aggregate
deposits of all financial institutions with deposits insured by the FDIC and the
NCUA. See "Business -- Regulation of Branch and Interstate Banking."
FEDERAL BANK REGULATION
As a national bank, the Bank 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.
The OCC regularly examines the operations and condition of the Bank,
including but not limited to its capital adequacy, reserves, loans, investments,
and management practices. These examinations are for the protection of the
Bank's depositors and the Bank Insurance Fund. In addition, the Bank 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 bank from engaging
in unsafe or unsound practices or violating laws or regulations governing its
business.
The OCC has adopted regulations regarding the capital adequacy of national
banks, which require national banks to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets. See "Regulatory
Capital Requirements."
The ability of banks and bank holding companies to operate in multiple
locations or in more than one state is regulated by both federal and state law.
See "Business -- Regulation of Branch and Interstate Banking."
The CRA requires that, in connection with examinations of financial
institutions within their jurisdiction, the Federal Reserve or the OCC evaluate
the record of the financial institutions in meeting the credit needs of their
local communities, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those banks. These factors are also
considered by the Federal Reserve and OCC in evaluating mergers, acquisitions
and applications to open a branch or facility.
18
<PAGE>
The Bank participates in various community development programs in an
effort to meet its responsibilities under the CRA. The Bank's participation in
the Guaranteed Student Loan program, the SBA loan programs, and the Central
Oklahoma Clearing House Association Home Loan program also helped meet CRA
responsibilities. In addition, the Bank has developed and operates its own
Sheltered Home Loan program to specifically address the need for a home loan
program for low-to-moderate income borrowers.
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank is also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of the Bank, the imposition of a cease and desist order, and other
regulatory sanctions.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the FDIC to the legal maximum of $100,000 for each insured depositor.
Some of the aspects of the lending and deposit business of the Bank that are
subject to regulation by the Federal Reserve and the FDIC include reserve
requirements and disclosure requirements in connection with personal and
mortgage loans and deposit accounts. In addition, the Bank is 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.
The Bank is subject to restrictions imposed by federal law on extensions of
credit to, and certain other transactions with, the Company and other
affiliates, and on investments in their stock or other securities. These
restrictions prevent the Company from borrowing from the Bank 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 the Bank are
generally limited in amount as to the Company and as to any other affiliate to
10% of the Bank's capital and surplus and as to the Company and all other
affiliates together to an aggregate of 20% of the Bank's capital and surplus.
These regulations and restrictions may limit the Company's ability to obtain
funds from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest, and operating expenses.
Under OCC regulations, national 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 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 Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") adopted by the federal bank regulators. The Interagency 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
Interagency 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.
1996 Act. The operations of the Company and the Bank are affected by new
--------
federal and state laws. The federal Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "1996 Act"), enacted in September 1996, included
provisions that affect banks, bank holding companies, and savings institutions.
The 1996 Act had, and is expected to have in the future, its most significant
effect upon banks and savings institutions that hold deposits assessed at
Savings Deposit Insurance Fund ("SAIF") rates. Among other things, the 1996 Act
recapitalized the SAIF through a special assessment on savings association
deposits and bank deposits that had been acquired from savings associations. The
Bank is assessed at "SAIF" rates on certain deposits, as described below. The
1996 Act may
19
<PAGE>
increase competition from savings associations by equalizing, over time, the
amount of federal insurance premiums paid on savings association and bank
deposits. The 1996 Act also provided that institutions with deposits insured by
the Bank Insurance Fund ("BIF"), as well as those with SAIF-insured deposits,
are responsible for payment of certain bonds issued in connection with the
resolution of failed savings associations. The result of these provisions will
be somewhat higher federal deposit insurance premiums for the Bank. These higher
insurance premiums are not expected to have a material adverse effect on the
Bank or the Company.
The 1996 Act also simplified the regulatory approval process for new
activities of banks and bank holding companies, and reduces a number of other
regulatory burdens. None of these changes is expected to have a significant
effect on the Company or the Bank.
DEPOSIT INSURANCE
As an FDIC member institution, the deposits of the Bank are currently
insured to a maximum of $100,000 per depositor through the BIF, administered by
the FDIC, and the Bank is required to pay quarterly deposit insurance premium
assessments to the FDIC.
The FDIC is permitted by Federal Law to make special assessments on insured
depository institutions, in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
Generally, under the risk-based assessment system used by the FDIC, banks are
assessed insurance premiums according to how much risk they are deemed to
present the BIF. Banks with higher levels of capital and involving a low degree
of supervisory concern are assessed lower premiums than banks with lower levels
of capital or involving a higher degree of supervisory concern. As a result of
the acquisition of savings association deposits in 1991, the Bank is required to
pay insurance premiums on a portion of its deposits at the rates assessed on
SAIF-insured deposits. The 1996 Act authorized the FDIC to assess a one-time fee
on institutions with deposits insured by the SAIF and other deposits assessed at
SAIF rates in order to increase the SAIF's reserves to the 1.25% of insured
deposits required by the Federal Deposit Insurance Act. The amount of this one-
time special assessment on the Bank's SAIF-assessable deposits was $436,000.
After the payment of this special assessment in 1996, the insurance premiums
related to the Bank's SAIF-assessable deposits were reduced. The Bank has been
informed that it is in the lowest assessment category for BIF and SAIF for the
first assessment period of 1998.
DIVIDENDS
The principal source of the Company's cash revenues is dividends received
from the Bank. Pursuant to the National Bank Act, no national bank may pay
dividends from its paid-in capital. All dividends must be paid out of current
or retained net profits, after deducting reserves for losses and bad debts. The
National Bank Act further restricts the payment of dividends out of net profits
by prohibiting a national bank from declaring a dividend on its shares of common
stock until the surplus fund equals the amount of capital stock or, if the
surplus fund does not equal the amount of capital stock, until one-tenth of a
bank's net profits for the preceding half-year in the case of quarterly or
semiannual dividends, or the preceding two half-year periods in the case of an
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. The Bank may not pay a dividend if, after
paying the dividend, the Bank would be undercapitalized.
At December 31, 1997 the Bank had a maximum of approximately $13.2 million
available for dividend payments to the Company under the foregoing statutes.
Accordingly, the Company does not anticipate that these limitations will affect
the Company's ability to pay dividends to its shareholders consistent with its
past practice and as proposed.
20
<PAGE>
In the first quarter of 1998, the Company adopted a policy which prohibits
the declaration of dividends on common stock while the Company is operating at a
loss. Dividends on common stock were declared in the third quarter of 1997,
prior to the adoption of this policy, although a loss was incurred for that
quarter.
In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends which would
constitute an unsafe and unsound banking practice. The Bank and the Company are
not currently subject to any such regulatory restrictions on their dividends.
REGULATORY CAPITAL REQUIREMENTS
The Federal Reserve and the OCC have established guidelines for maintenance
of appropriate levels of capital by bank holding companies and national banks,
respectively. The regulations impose two sets of capital adequacy requirements:
minimum leverage rules, which require bank holding companies and banks to
maintain a specified minimum ratio of capital to total assets, and risk-based
capital rules, which require the maintenance of specified minimum ratios of
capital to "risk-weighted" assets.
The regulations of the Federal Reserve and the OCC require bank holding
companies and national 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 and banks, with
composite examination ratings of 1 under the rating system used by the federal
bank regulators, are permitted to operate at or near this minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. A bank 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.
The risk-based capital rules of the Federal Reserve and the OCC require
bank holding companies and national 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 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; and subordinated debt and intermediate-term preferred
stock. Federal Reserve Guidelines applicable to cumulative perpetual preferred
stock limit the amount of the Company's outstanding Preferred Stock and the
9.30% Cumulative Trust Preferred Securities issued by SBI Capital Trust that may
be included in the calculation of Tier 1 capital to 25% of total Tier 1 capital.
The excess, if any, is included as supplementary capital.
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 total risk-
weighted assets.
The risk-based capital regulations require all 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
will be limited. In addition, the risk-based capital
21
<PAGE>
regulations limit the allowance for loan losses that may be included in
includable capital to 1.25% of total risk-weighted assets.
In 1996, the federal bank regulatory agencies, including the OCC, issued a
joint policy statement regarding the evaluation of commercial banks' capital
adequacy for interest rate risk. Under the policy, the OCC's assessment of a
bank's capital adequacy includes an assessment of the bank's 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. The OCC may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are adequate.
Federal banking regulations also require banks with significant trading
assets or liabilities to maintain supplemental risk-based capital based upon
their levels of market risk. The Bank did not have significant levels of trading
assets or liabilities during 1997, and was not required to maintain such
supplemental capital.
The OCC has established regulations that classify national banks by capital
levels and provide for the OCC to take various "prompt corrective actions" to
resolve the problems of any bank that fails to satisfy the capital standards.
Under these regulations, a well-capitalized bank is one that is not subject to
any regulatory order or directive to meet any specific capital level and that
has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital
ratio of 6% or more, and a leverage ratio of 5% or more. An adequately
capitalized bank is one that does not qualify as well-capitalized but meets or
exceeds the following capital requirements: a total risk-based capital ratio of
8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i)
4% or (ii) 3% if the bank has the highest composite examination rating. A bank
that does not meet these standards is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, depending on its
capital levels. A national 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, 1997,
the Bank was well-capitalized as defined in the OCC's regulations.
As of December 31, 1997, the Company and the Bank were in compliance with
applicable capital requirements. See "Note 6. Long Term Debt," "Note 8.
Shareholders' Equity" and "Note 9. Capital Requirements" to the Notes to
Consolidated Financial Statements on pages 34, 36 and 37 of the Annual Report.
SUPERVISION AND REGULATION OF MORTGAGE BANKING OPERATIONS
The Bank'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"),
FMHA 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 the Company are required annually
to submit to FNMA, FHA and VA audited financial statements, and each regulatory
entity has its own financial requirements. The Company's affairs are also
subject to examination by the Federal Reserve, FNMA, FHA and VA at all times to
assure compliance with the applicable regulations, policies and procedures.
Mortgage origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit
Reporting Act, the National Flood Insurance Act and the Real Estate Settlement
Procedures Act and related regulations that prohibit discrimination and require
the disclosure of certain basic information to mortgagors concerning credit
terms and settlement costs. The Company's mortgage banking operations also are
affected by various state and local laws and regulations and the requirements of
various private mortgage investors.
22
<PAGE>
MONETARY POLICY
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the Federal Reserve, in connection with the
Federal Reserve's regulation of the money supply. The Federal Reserve uses
various methods to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits. The monetary policies of the Federal Reserve have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Robert L. McCormick.................................... 63 President and Director of the Company; Vice Chairman
and Chief Executive Officer and Director of the Bank
Thomas E. Bennett, Jr.................................. 47 President, Tulsa Division of the Bank
Kerby E. Crowell....................................... 48 Executive Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank
Rick J. Green.......................................... 50 Executive Vice President and Chief Operating Officer
of the Bank
Jerry L. Lanier........................................ 49 Senior Vice President of the Bank
Joseph P. Root......................................... 33 President, Central Oklahoma Division of the Bank
Kimberly G. Sinclair................................... 42 Executive Vice President and Chief Administrative
Officer of the Bank
Stanley R. White....................................... 51 Chief Lending Officer of the Bank
Patrick E. Zimmerman................................... 36 President, Stillwater Division of the Bank
</TABLE>
Set forth below is certain information regarding the principal occupations
and business experience of each executive officer of the Company. Unless
otherwise indicated, each person has held the indicated positions for at least
the last five years.
Robert L. McCormick has been a director and Chief Executive Officer of the
Company since its inception in 1981. He has been President, Chief Executive
Officer and a director of the Bank since 1970. He is presently a Regent,
Oklahoma State Regents for Higher Education. He has served as President of the
Independent Bankers Association of America; President, Independent Bankers
Association of Oklahoma; President of the Board of Directors Stillwater Chamber
of Commerce; Chairman of the State Chamber, Oklahoma's Association of Business
and Industry; Chairman and President of the Board of Directors for the Oklahoma
Academy for State Goals; Chairman of the Board of Trustees of the Oklahoma State
University Foundation; 1991 Drive Chairman for the Stillwater United Way; and
was 1990 Citizen of the Year of the Stillwater Chamber of Commerce.
23
<PAGE>
Thomas E. Bennett, Jr. has been President of the Tulsa Division of the Bank
since 1991 and associated with the Bank since 1973; with the exception of 1985-
86 when he was a White House Fellow and Special Assistant to the Comptroller of
the Currency, U.S. Department of the Treasury in Washington, D.C.; and from
1986-87 while he obtained a Masters in Public Administration with Honors from
Harvard University in Cambridge, Massachusetts; and from 1987-88 when he was
Senior Advisor and Coordinator of Strategic Planning for the Oklahoma Department
of Commerce putting together a comprehensive Five Year Economic Development Plan
for the State of Oklahoma. Mr. Bennett is currently a Member of the National
Advisory Board of the U.S. Small Business Administration, Director of the Tulsa
Metropolitan Chamber of Commerce and a Trustee of the Tulsa Airport Authority.
Mr. Bennett is a former Trustee of Rogers University, a past National President
of the Oklahoma State University Alumni Association, a former Trustee of the
Oklahoma State University Development Foundation, a past National Director of
the Independent Bankers Association of America, a past Director of the Higher
Education Alumni Council of Oklahoma, and a member of Oklahoma's Post Secondary
Oversight Counsel. Mr. Bennett is a past member of the Regional Advisory Board
of the Resolution Trust Corporation, a past Chairman of the Oklahoma Group of
the Robert Morris Associates, and a past Chairman of the lending committee of
the Oklahoma Bankers Association. He is also a past Director of the Tulsa
Philharmonic, past President and Drive Chairman of the Stillwater United Way,
past President and Co-founder of the Stillwater Public Education Foundation,
past Director of the Stillwater Chamber of Commerce, Stillwater YMCA and Payne
County Red Cross.
Kerby E. Crowell has served as Executive Vice President, Treasurer and
Chief Financial Officer of the Company and the Bank for the last eleven years.
Mr. Crowell joined the Bank in 1969. He is currently President of the Oklahoma
City Chapter of the Financial Executives Institute, and a member of the Bank
Operations Committee of the Independent Bankers Association of America. 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, and past Vice Chairman of the Bank
Services Committee. Mr. Crowell is also a graduate of the Leadership Stillwater
Class XI.
Rick J. Green is an Executive Vice President and the Chief Operating
Officer of the Bank. Previously, Mr. Green has served as President of the
Central Oklahoma Division of the Bank and as Executive Vice President of the
Bank. Mr. Green joined the Bank in 1972. He is a member of the Oklahoma City
and Edmond Chambers of Commerce and has served as Chair/Ambassador of the
Stillwater Chamber of Commerce, on the Oklahoma State University Alumni
Association Homecoming and Honor Students Committees, as Chairman of the Payne
County Youth Services, as Co-Chairman of the United Way of Stillwater Fund
Drive and as a member of the Advisory Board of the Oklahoma State University
Technical Institute. He is a member of the Commercial Real Estate Association
of Oklahoma City, the Oklahoma and Oklahoma City Homebuilders Associations, and
past member of the Stillwater Medical Center Committee on Physician Recruitment.
Jerry L. Lanier was recently appointed Senior Vice President in Credit
Administration, supervising this area corporate-wide. From 1992 until joining
the Bank 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 Comptroller of the Currency in Oklahoma City and
Dallas, Texas, and, while an examiner, served as Regional Director of Special
Surveillance from 1979 to 1981, and conducted bank examinations in Europe. 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.
Joseph P. Root was appointed President of the Central Oklahoma Division of
the Bank in November 1997. Previously, Mr. Root was Senior Vice President in
the Central Oklahoma Division. Mr. Root joined the Bank in 1992. He is a member
of the Oklahoma City Chamber of Commerce and the State Chamber of Commerce of
Oklahoma, and of Robert Morris Associates. In addition, he is a member of the
Oklahoma City Men's Dinner Club.
24
<PAGE>
Kimberly G. Sinclair was appointed Chief Administrative Officer in 1995 and
has been Executive Vice President of the Bank since 1991. Prior to 1991, she had
been Senior Vice President and Chief Operations Officer of the Bank since 1985.
Ms. Sinclair joined the Bank in 1975. She is a member of the Stillwater Junior
Service League, 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.
Stanley R. White was appointed Chief Lending Officer in December 1995.
Prior to this appointment he had been President of the Stillwater Division of
the Bank since 1991. Mr. White joined the Bank in 1974. He is a past member and
past Chairman of the Board of Trustees of the Stillwater Medical Center, past
Director of the Stillwater Public Education Foundation, the Judith Karman
Hospice, United Way, March of Dimes, and the Stillwater Rotary, and past
President of the Stillwater Chamber of Commerce and the Stillwater Industrial
Foundation. Mr. White has also served as past Director of the Oklahoma State
University Alumni Association and the Oklahoma State Chamber of Commerce, past
Board Member of the Oklahoma Law Enforcement Retirement Board, and currently
serves as Director of the Oklahoma Medical Research Foundation, Director of
Leadership Oklahoma, Vice President of Leadership Oklahoma Alumni, past Chairman
and Trustee of the Board of Governors of the Oklahoma State University
Foundation, and is a Director of Oklahoma Academy for State Goals. Mr. White is
also past Chairman of the Oklahoma Bankers Association, past Chairman of the
Oklahoma Bankers Association Government Relations Council and past Chairman of
the Education Committee of this organization, and a member of the American
Bankers Association Government Relations Council. Mr. White is also Director of
the Texas Chapter and Senior Member of the Robert Morris Association.
Patrick E. Zimmerman has been President of the Stillwater Division since
July 1996. Prior to becoming President, Mr. Zimmerman served as Executive Vice
President and Stillwater Division Manager from December 1995 to July 1996, as
Senior Vice President of Commercial Lending of the Bank from January 1995 to
December 1995, as Vice President of Commercial Lending of the Bank from January
1992 to January 1995, and as the Administrative Vice President and Branch
Manager of Farm Credit Services in Stillwater, an agricultural lending
institution, from February 1987 to January 1992. Mr. Zimmerman is a member of
the Stillwater Chamber of Commerce and a 1995 Graduate of Leadership Oklahoma.
He currently serves as a board member of the Oklahoma State University Alumni
Association. Mr. Zimmerman has also served as a board member of the Stillwater
Chamber of Commerce, Stillwater Area United Way, and as a Director of the
Stillwater Industrial Foundation. He was the Campaign Chairman for the 1996
Stillwater Area United Way Campaign and is past Chairman of the Board of the
Stillwater Chamber of Commerce. Mr. Zimmerman is past president of the
Stillwater Frontier Rotary Club and is past Chairman of the Banking Leadership
Oklahoma Committee for the Oklahoma Bankers Association. Mr. Zimmerman is also a
member of the Robert Morris Association.
ITEM 2. PROPERTIES
- -------------------
The Bank's principal office occupies 14,000 square feet of ground on the
corner of Sixth and Main Streets in Stillwater, Oklahoma. The building consists
of 29,300 square feet of office space which was constructed in 1967 and
remodeled in 1981, 1994 and 1996. The principal office houses the Bank's
commercial and consumer lending operations as well as its executive offices and
human resources and training departments.
The Bank's other banking office in Stillwater occupies approximately 90,000
square feet of ground on the corner of Third and Main Streets. The building
consists of 11,500 square feet of office space which was constructed in 1981.
The facility houses the Bank's mortgage lending operations, a six-lane drive-
through facility including commercial teller facilities, two ATMs, plus parking
for both customers and employees of the facility.
In order to provide room for the back-office operations needed to support
its asset growth, the Bank has leased approximately 24,000 square feet of
additional space at 1624 Cimarron Plaza in Stillwater, in which it houses
student lending operations along with its accounting, marketing, finance, loan
review and check-clearing operations. The lease on this space expires on March
31, 2001 with options to renew through February 28, 2010.
25
<PAGE>
The Bank's Oklahoma City office occupies 22,677 square feet in the
Waterford office complex near 63rd Street and Pennsylvania Avenue and includes
one ATM. The space is leased pursuant to Leases which expire on December 31,
2002, with options to renew for up to six years.
The Bank owns an additional parcel of land in Oklahoma City where one of
the branches acquired in the Branch Acquisition was formerly located and is now
used only to house an ATM. The parcel occupies 15,000 square feet at the
intersection of Broadway and Robert S. Kerr Avenues. The building occupies
1,400 square feet. The Company has leased out this building on a month-to-month
basis while retaining the right to maintain its ATM on the premises.
The Bank's Tulsa banking offices consist of 22,337 square feet of leased
space in the Silvey office building near 61st and Lewis Streets and an owned
full-service branch located at 21st and Birmingham Streets. The leased facility
provides space for E-Bank, commercial and mortgage lending operations, teller
services, deposit-gathering services, and an ATM. The space is leased for five
years with options to renew for up to ten years. The owned facility consists of
16,000 square feet of land with a 2,000 square foot facility housing a three-
lane drive-in and lending and deposit-gathering operations.
The Company is in the process of constructing a new facility to replace its
21st and Birmingham Streets office in Tulsa. Groundbreaking on this 42,000
square foot building occurred May 22, 1997, with occupancy anticipated in the
fourth quarter of 1998. When opened, the building will include space for rental
to third parties. The total cost of the new building is expected to be $9.5
million. A substantial portion of these costs will be capitalized and, except
for the cost of the land, will be expensed over the useful life of the property.
During 1996, the Bank purchased a new building at 500 W. Grand Avenue,
Chickasha, Oklahoma. The building consists of approximately 3,600 square feet of
office space and has one drive-through lane. The Bank also continues to own the
office building at its former location in Chickasha and to house an ATM on that
site.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
In the normal course of business, the Company 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 the Company's financial position; however,
the Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
- -------
The information contained under the section captioned "Stock Information"
in the Annual Report (See Exhibit 13, page 48) is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
26
<PAGE>
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report (See Exhibit 13, pages 5 and 6) is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report (See Exhibit 13, pages 8 through 21) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information contained in the section captioned "Asset/Liability
Management and Quantitative and Qualitative Disclosures About Market Risk" in
the Annual Report (See Exhibit 13, pages 17 through 19) is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements contained in the Annual Report (see
Item 14(a)(1)) and the information under the caption "Selected Quarterly
Financial Data (Unaudited)" in the Annual Report (See Exhibit 13, pages 22
through 44 and 7) are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information concerning the Board of Directors of the Company and the
filing of Beneficial Ownership Reports contained under the section captioned
"Proposal I -- Election of Directors" on pages 3 through 6 of the Proxy
Statement and the information with respect to initial statements of beneficial
ownership and changes in beneficial ownership under the section captioned
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 13 of the
Proxy Statement are incorporated herein by reference. For information as to
executive officers of the Company, see "Executive Officers of the Registrant" in
Part I of this Annual Report on Form 10-K.
ITEM 11. MANAGEMENT REMUNERATION
- --------------------------------
The information contained under the sections captioned "Compensation
Committee Report on Executive Compensation," "Stock Performance Comparisons" and
"Executive Compensation and Other Benefits" on pages 6 through 11 of the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" on pages 1 and 2 of the Proxy Statement.
27
<PAGE>
(B) SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Management" on pages
12 and 13 of the Proxy Statement.
(C) CHANGES IN CONTROL
------------------
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Transactions" on page 11 of the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(A) DOCUMENTS FILED AS PART OF THIS REPORT
--------------------------------------
(1) FINANCIAL STATEMENTS. The following financial statements are
--------------------
incorporated by reference in Item 8 hereof from the Annual Report (see Exhibit
13, pages 22 through 44 ).
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1997 and
1996
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements.
(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 with an index to their location in the sequentially
numbered copy of this Annual Report on Form 10-K.
NO. EXHIBITS
--- --------
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 as
Exhibit 3.2 to Registration Statement on Form S-1 (File No. 33-
71168))
28
<PAGE>
4 Certificate of Designations for 9.20% Redeemable, Cumulative,
Preferred Stock, Series A (incorporated by reference to Exhibit
4 to Quarterly Report on Form 10-Q for the quarter ended June
30, 1995)
* 10.1 1992 Performance Unit Plan (incorporated by reference as Exhibit
10.1 to Registration Statement on Form S-1 (File No. 33-71168))
* 10.2 Severance Compensation Plan (incorporated by reference as Exhibit
10.2 to Registration Statement on Form S-1 (File No. 33-71168))
* 10.3 Southwest Bancorp, Inc. 1994 Stock Option Plan (incorporated by
reference from Exhibit 10.3 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1993)
* 10.4 Southwest Bancorp, Inc. Employee Stock Purchase Plan
(incorporated by reference from Exhibit 4.1 to Registration
Statement on Form S-8 (File No. 33-97850))
10.5 Agreement dated as of November 17, 1997 between Stillwater
National Building Corporation and Flintco, Inc. with respect to
1500 South Utica,
Tulsa, Oklahoma
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
-------------------
last quarter of the period covered by this Annual Report on Form 10-K.
(C) EXHIBITS. See (a)(3) above for all exhibits filed herewith and the
--------
Exhibit Index.
(D) FINANCIAL STATEMENTS EXCLUDED FROM ANNUAL REPORT. There are no other
------------------------------------------------
financial statements which were excluded from the Annual Report to Stockholders
by Rule 14a-3(b) which are required to be included herein.
- ------------
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
29
<PAGE>
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 25, 1998 By: /s/ Robert L. McCormick
----------------------------
Robert L. McCormick
President
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/ Robert L. McCormick March 25, 1998
- -------------------------------------------
Robert L. McCormick
Director and President
(Principal Executive Officer)
/s/ Kerby E. Crowell March 25, 1998
- -------------------------------------------
Kerby E. Crowell
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
A majority of the directors of the Company executed a power of attorney
appointing Robert L. McCormick as their attorney-in-fact, empowering him to sign
this report on their behalf. This power of attorney has been filed with the
Securities and Exchange Commission under Part IV, Exhibit 24 of this Form 10-K
for the year ended December 31, 1997. This report has been signed below by such
attorney-in-fact as of March 25, 1998.
By: /s/ Robert L. McCormick
---------------------------------------
Robert L. McCormick
Attorney-in-Fact for Majority of the
Directors of the Company
30
<PAGE>
Standard Form of Agreement Between
Owner and Contractor where the basis of payment is
the Cost of the Work Plus a Fee with or
without a Guaranteed Maximum Price
AIA Document A111 - Electronic Format
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS
ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION. AUTHENTICATION OF
THIS ELECTRONICALLY DRAFTED AIA DOCUMENT MAY BE MADE BY USING AIA DOCUMENT D401.
The 1981 Edition of AIA Document A201, General Conditions of the Contract for
Construction, is adopted in this document by reference. Do not use with other
general conditions unless this document is modified. This document has been
approved and endorsed by The Associated General Contractors of America.
Copyright 1920, 1925, 1951, 1958, 1961, 1967, 1974, 1978, 1987 by The American
institute of Architects, 1735 New York Avenue N W., Washington D C 20006-5292
Reproduction of the material herein or substantial quotation of its provisions
without written permission of the AIA violates the copyright laws of the United
States and will be subject to legal prosecution.
AGREEMENT
made as of the 17th day of November in the year of Nineteen Hundred and Ninety -
seven.
BETWEEN the Owner:
(Name and address)
STILLWATER NATIONAL BUILDING CORP.
- ----------------------------------
2431 East 61st Street, Suite 170
- --------------------------------
TULSA, OK 74136
- ---------------
and the Contractor:
(Name and address)
FLINTCO, INC., 1624 WEST 21ST STREET. P.O. BOX 490, TULSA, OK 74101-0490
- ------------------------------ ----------------------------------
the Project is:
(Name and address)
STILLWATER NATIONAL BANK
- ------------------------
1500 SOUTH UTICA
- ----------------
TULSA, OK 74120
- ---------------
the Architect is:
(Name and address)
GARY SPARKS COMPANIES, 1336 EAST 15th STREET, TULSA, OK 74120
- -------------------------------------------------------------
The Owner and Contractor agree as set forth below.
AIA DOCUMENT Al I I - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA -
COPYRIGHT 1987 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE
N.W., WASHINGTON D.C. 20006-5292. Unlicensed photocopying violates U.S.
copyright laws and is subject to legal prosecution. . This document was
electronically produced with permission of the AIA and can be reproduced without
violation until the date of expiration as noted below.
ELECTRONIC FORMAT A111-1987
USER DOCUMENT SLWRR1 11.DOC - 10/28/1997. AIA LICENSE NUMBER 101015, Which
EMPIRES ON 9/7/1998 - PAGE #1
<PAGE>
ARTICLE 1
THE CONTRACT DOCUMENTS
1.1 The Contract Documents consist of this Agreement, Conditions of the Contract
(General, Supplementary and other Conditions), Drawings, Specifications, Addenda
issued prior to execution of this Agreement, other documents listed in this
Agreement and Modifications issued after execution of this Agreement; these form
the Contract, and are as fully a part of the Contract as if attached to this
Agreement or repeated herein. The Contract represents the entire and integrated
agreement between the parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of the
Contract Documents, other than Modifications, appears in Article 16. If anything
in the other Contract Documents is inconsistent with this Agreement, this
Agreement shall govern.
ARTICLE 2
THE WORK OF THIS CONTRACT
2.1 The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract Documents
to be the responsibility of others, or as follows:
ARTICLE 3
RELATIONSHIP OF THE PARTIES
3.1 The Contractor accepts the relationship of trust and confidence established
by this Agreement and covenants with the Owner to cooperate with the Architect
and utilize the Contractor a best skill, effects and judgment in furthering the
interests of the Owner: to furnish efficient business administration and
supervision: to make best efforts to furnish at all times an adequate supply of
workers and materials: and to perform the Work in the best way and most
expeditious and economical manner consistent with the interests of the Owner.
The Owner agrees to exercise best efforts to enable the Contractor to perform
the Work in the best way and most expeditious manner by furnishing and approving
in a timely way information required by the Contractor and making payments to
the Contractor in accordance with requirements of the Contract Documents.
ARTICLE 4
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
4.1 The date of commencement is the date from which the Contract Time of
Subparagraph 4.2 is measured: it shall be the date of this Agreement, as first
written above, unless a different date is stated below or provision is made for
the date to be fixed in a notice to proceed issued by the Owner.
(Insert the dale of commencement, if it differs from the ale of this Agreement
o, if applicable, state that the date will be fixed in a notice to proceed.)
Construction commenced Februarv 3,1997 {demolition)
- ---------------------------------------------------
Unless the date of commencement is established by a notice to proceed issued by
the Owner, the Contractor shall notify the Owner in writing not less than five
days before commencing the Work to permit timely filing of mortgages, mechanic s
liens and other security interests.
4.2 The Contractor shall achieve Substantial Completion of the entire Work not
later than
(Insert the calendar date or number of calendar days after the date of
commencement. Also insert any requirements for earlier Substantial Completion
of certain portions of the Work, if not stated elsewhere in the Contract
Documents.)
Anticipated Substantial Completion is November 1,1998
- -----------------------------------------------------
, subject to adjustments of this Contract Time as provided in the Contract
Documents.
(Insert provisions if any for liquidated damages relating to failure to complete
on rime J
ARTICLE 5
CONTRACT SUM
AIA DOCUMENT Al l t - OWNER CONTRACTOR AGREEMENT - TENTH EDITION - AIA -
COPYRIGHT 1987 - THE AMERICAN INSTITUTE OF ARCHITECTS 1735 NEW YORK AVENUE N W.
WASHtNGTON D C. 2000b-5292. Unlicensed photocopying violates U.S. copyright laws
and is subject to legal prosecution. This document was electronically produced
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<PAGE>
5.1 The Owner shall pay the Contractor in current funds for the Contractor's
performance of the Contract the Contract Sum consisting of the Cost of the Work
as defined in Article 7 and the Contractor's Fee determined as follows:
(State a lump sum percentage of Cast of the Work or other provision for
determining the Contractor's Fee, and explain how the Contractor's Fee is to be
adjusted for changes in the Work.)
Flintco's overhead and fee: 4% of the total cost of the work including general
requirements and architect's construction document ohase work.
5.2 GUARANTEED MAXIMUM PRICE (IF APPLICABLE)
5.2.1 The sum of the Cost of the Work and the Contractors Fee is guaranteed by
the Contractor not to exceed Six Million Two Hundred Sixty-eight Thousand Eight
Hundred Eighty-six and No/100 Dollars ($6,268.886.00), subject to additions and
deductions by Change Order as provided in the Contract Documents. Such maximum
sum is referred to in the Contract Documents as the Guaranteed Maximum Price.
Costs which would cause the Guaranteed Maximum Price to be exceeded shall be
paid by the Contractor without reimbursement by the Owner.
(Insert specific provisions if the Contractor is to participate in any savings.)
Refer to Exhibit "A" for Allowances in this price and Exhibit "B" for fixed fee
breakdown.
5.2.2 The Guaranteed Maximum Price is based upon the following alternates, if
any, which are described in the Contract Documents and are hereby accepted by
the Owner:
(State the numbers or other identification of accepted alternates, but only if a
Guaranteed Maximum Price is inserted in Subparagraph 5.2.1. If decisions on
other alternates are to be made by the Owner subsequent to the execution of this
Agreement attach a schedule of such alternates showing the amount for each and
the date until which that amour is valid.)
5.2.3 The amounts agreed to for unit prices, if any, are as follows: (State unit
prices only If a Guaranteed Maximum Price is inserted in Subparagraph 5.2.1)
ARTICLE 6
CHANGES IN THE WORK
6.1 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
6.1.1 Adjustments to the Guaranteed Maximum Price on account of changes in the
Work may be determined by any of the methods listed in Subparagraph 7.3,3 of the
General Conditions,
6.1.2 In calculating adjustments to subcontracts (except those awarded with the
Owner's prior consent on the basis of cost plus a fee), the terms "cost" and
"fee" as used in Clause 7.3.3,3 of the General Conditions and the terms "costs"
and "a reasonable allowance for overhead and profit" as used in Subparagraph 7.3
6 of the General Conditions shall have the meanings assigned to them in the
General Conditions and shall not be modified by Articles 5, 7 and 8 of this
Agreement. Adjustments to subcontracts awarded with the Owner's prior consent on
the basis of cost plus a fee shall be calculated in accordance with the terms of
those subcontracts.
6.1.3 In calculating adjustments to this Contract, the terms "cost" and "costs"
as used in the above-referenced provisions of the General Conditions shall mean
the Cost of the Work as defined in Article 7 of this Agreement and the terms
"fee" and "a reasonable allowance for overhead and profit" shall mean the
Contractor's Fee as defined in Paragraph 5.1 of this Agreement. For chances in
the work, all related General Condition items will be priced in the change and
then a fee of four Percent (4%) will be calculated against the total change.
6.2 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE
6.2.1 Increased costs for the items set forth in Article 7 which result from
changes in the Work shall become part of the Cost of the Work, and the
Contractor's Fee shall be adjusted as provided in Paragraph 5,1,
6.3 ALL CONTRACTS
6.3.1 If no specific provision is made in Paragraph 5,1 for adjustment of the
Contractor's Fee in the case of changes in the Work, or if the extent of such
changes is such, in the aggregate, that application of the adjustment provisions
of Paragraph 5,1 will cause
AIA DOCUMENT AIII - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1785 NEW YORK AVENUE N.W..
WASHINGTON D C 20005292 Unlicensed photocopying violates U. S. copyright laws
and is subject to legal prosecution. This document was electronically produced
with permission of the AIA and can be reproduced without violation until the
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Electronic Format A 111-1987
User Document: SLWFR111 DOG--10/28/1997 AIA License Number 101015, which expires
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- --------------------------------------------------------------------------------
substantial inequity to the Owner or Contractor, the Contractor's Fee shall be
equitably adjusted on the basis of the Fee established for the original Work.
<PAGE>
ARTICLE 7
COSTS TO BE REIMBURSED
7.1 The term Cost of the Work shall mean costs necessarily incurred by the
Contractor in the proper performance of the Work. Such costs shall be at rates
not higher than the standard paid at the place of the Project except with prior
consent of the Owner. The Cost of the Work shall include only the items set
forth in this Article 7.
7.1.1 LABOR COSTS
7.1.1.1 Wages of construction workers directly employed by the Contractor to
perform the construction of the Work at the site or, with the Owner's agreement,
at off-site workshops.
7.1.1.2 Wages or salaries of the Contractor's supervisory and administrative
personnel when stationed at the site with the Owner's agreement.
(If it is intended that the wages or salaries of certain personnel stationed at
the Contractors principal or other offices shall be included in the Cost of the
Work, identify in Article 14 the personnel to be included and whether for all or
only part of their time.)
7.1.1.3 Wages and salaries of the Contractor's supervisory or administrative
personnel engaged, at factories, workshops or on the road, in expediting the
production or transportation of materials or equipment required for the Work,
but only for that portion of their time required for the Work.
7.1.1.4 Costs paid or incurred by the Contractor for taxes, insurance,
contributions, assessments and benefits required by law or collective bargaining
agreements and, for personnel not covered by such agreements, customary benefits
such as sick leave, medical and health benefits, holidays, vacations and
pensions, provided such costs are based on wages and salaries included in the
Cost of the Work under Clauses 7.1.1.1 through 7.1.1.3.
7.1.2 SUBCONTRACT COSTS
Payments made by the Contractor to Subcontractors in accordance with the
requirements of the subcontracts.
7.1.3 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
7.1.3.1 Costs, including transportation. of materials and equipment incorporated
or to be incorporated in the completed construction.
7.1.3.2 Costs of materials described in the preceding Clause 7.1.3.1 in excess
of those actually installed but required to provide reasonable allowance for
waste and for spoilage. Unused excess materials, if any, shall be handed over to
the Owner at the completion of the Work or, at the Owner's option, shall be sold
by the Contractor; amounts realized, if any, from such sales shall be credited
to the Owner as a deduction from the Cost of the Work.
7.1.4 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED
ITEMS
7.1.4.1 Costs, including transportation, installation, maintenance, dismantling
and removal of materials, supplies, temporary facilities, machinery, equipment,
and hand tools not customarily owned by the construction workers, which are
provided by the Contractor at the site and fully consumed in the performance of
the Work; and cost less salvage value on such items if not fully consumed,
whether sold to others or retained by the Contractor. Cost for items previously
used by the Contractor shall mean fair market value.
7.1.4.2 Rental charges for temporary facilities, machinery, equipment, and hand
tools not customarily owned by the construction workers, which are provided by
the Contractor at the site, whether rented from the Contractor or others, and
costs of transportation, installation, minor repairs and replacements,
dismantling and removal thereof.
AIA DOCUMENT AIII - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS. 1735 NEW YORK AVENUE N. W.,
WASHINGTON D. C. 20006 5292. Unlicensed photocopying violates U. S. copyright
laws and is subject to legs prosecution. . This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the date of expiration as noted below.
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expires on 9/7/1998 - Page#4
<PAGE>
7.1.4.3 Costs of removal of debris from the site.
7.1.4.4 Costs of telegrams and long-distance telephone calls, postage and
delivery charges, telephone service at the site and reasonable petty cash
expenses of the site office.
7.1.4.5 That portion of the reasonable travel and subsistence expenses of the
Contractor's personnel incurred while traveling in discharge of duties connected
with the Work.
7.1.5 MISCELLANEOUS COSTS
7.1.5.1 That portion directly attributable to this Contract of premiums for
insurance and bonds.
7.1.5.2 Sales, use or similar taxes imposed by a governmental authority which
are related to the Work and for which the Contractor is liable.
7.1.5.3 Fees and assessments for the building permit and for other permits,
licenses and inspections for which the Contractor is required by the Contract
Documents to pay.
7.1.5.4 Fees of testing laboratories for tests required by the Contract
Documents, except those related to defective or nonconforming Work for which
reimbursement is excluded by Subparagraph 13.5.3 of the General Conditions or
other provisions of the Contract Documents and which do not fall within the
scope of Subparagraphs 7.2.2 through 7.2.4 below.
7.1.5.5 Royalties and license fees paid for the use of a particular design,
process or product required by the Contract Documents: the cost of defending
suits or claims for infringement of patent rights arising from such requirement
by the Contract Documents; payments made in accordance with legal judgments
against the Contractor resulting from such suits or claims and payments of
settlements made with the Owner's consent: provided, however, that such costs of
legal defenses, judgment and settlements shall not be included in the
calculation of the Contractor's Fee or of a Guaranteed Maximum Price, if any,
and provided that such royalties, fees and costs are not excluded by the last
sentence of Subparagraph 3.17.1 of the General Conditions or other provisions of
the Contract Documents.
7.1.5.6 Deposits lost for causes other than the Contractor's fault or
negligence.
7.1.6 OTHER COSTS
7.1.6.1 Other costs incurred in the performance of the Work if and to the extent
approved in advance in writing by the Owner. The Contractor can self-perform,
with the Owner's consent, any portion of the Work at a mutuallv agreed upon
price. This will be a lump_sum amount that is billed as a percent complete of
the scheduled value on the payment application.
7.2 EMERGENCIES: REPAIRS TO DAMAGED, DEFECTIVE OR NONCONFORMING WORK
The Cost of the Work shall also include costs described in Paragraph 7.1 which
are incurred by the Contractor:
7.2.1 In taking action to prevent threatened damage, injury or loss in case of
an emergency affecting the safety of persons and progeny, as provided in
Paragraph 10.3 of the General Conditions.
7.2.2 In repairing or correcting Work damaged or improperly executed by
construction workers in the employ of the Contractor, provided such damage or
improper execution did not result from the fault or negligence of the Contractor
or the Contractor's foremen, engineers or superintendents, or other supervisory,
administrative or managerial personnel of the Contractor.
7.2.3 In repairing damaged Work other than that described in Subparagraph 7.2.2,
provided such damage did not result from the fault or negligence of the
Contractor or the Contractor's personnel, and only to the extent that the cost
of such repairs is not recoverable by the Contractor from others and the
Contractor is not compensated therefor by insurance or otherwise.
7.2.4 In correcting defective or nonconforming Work performed or supplied by a
Subcontractor or material supplier and not corrected by them, provided such
defective or nonconforming Work did not result from the fault or neglect of the
Contractor or the
AIA DOCUMENT AIII - OWNER CONTRACTOR AGREEMENT . TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE N. W.,
WASHINGTON D. C. 20006-6292. Unlicensed photocopying violates U. S. copyright
laws and is subject to legal prosecution. . This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the date of expiration as noted below.
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<PAGE>
Contractor's personnel adequately to supervise and direct the Work of the
Subcontractor or material supplier, and only to the extent that the cost of
correcting the defective or nonconforming Work is not recoverable by the
Contractor from the Subcontractor or material supplier.
ARTICLE 8
COSTS NOT TO BE REIMBURSED
8.1 The Cost of the Work shall not include:
8.1.1 Salaries and other compensation of the Contractor's personnel stationed at
the Contractor's principal office or offices other than the site office, except
as specifically provided in Clauses 7.1.1.2 and 7.1.1.3 or as may be provided in
Article 14.
8.1.2 Expenses of the Contractor's principal office and offices other than the
site office.
8.1.3 Overhead and general expenses, except as may be expressly included in
Article 7.
8.1.4 The Contractor's capital expenses, including interest on the Contractor's
capital employed for the Work.
8.1.5 Rental costs of machinery and equipment, except as specifically
provided in Clause 7.1.4.2.
8.1.6 Except as provided in Subparagraphs 7.2.2 through 7.2.4 and Paragraph
13.5 of this Agreement, costs due to the fault or negligence of the Contractor,
Subcontractors, anyone directly or indirectly employed by any of them, or for
whose acts any of them may be liable, including but not limited to costs for the
correction of damaged, defective or nonconforming Work, disposal and replacement
of materials and equipment incorrectly ordered or supplied, and making good
damage to property not forming part of the Work.
8.1.7 Any cost not specifically and expressly described in Article 7.
8.1.8 Costs which would cause the Guaranteed Maximum Price, if any, to be
exceeded.
ARTICLE 9
DISCOUNTS, REBATES AND REFUNDS
9.1 Cash discounts obtained on payments made by the Contractor shall accrue to
the Owner if (1) before making the payment, the Contractor included them in an
Application for Payment and received payment therefor from the Owner, or (2) the
Owner has deposited funds with the Contractor with which to make payments:
otherwise, cash discounts shall accrue to the Contractor. Trade discounts,
rebates, refunds and amounts received from sales of surplus materials and
equipment shall accrue to the Owner, and the Contractor shall make provisions so
that they can be secured.
9.2 Amounts which accrue to the Owner in accordance with the provisions of
Paragraph 9.1 shall be credited to the Owner as a deduction From the Cost of the
Work.
ARTICLE 10
SUBCONTRACTS AND OTHER AGREEMENTS
10.1 Those portions of the Work that the Contractor does not customarily perform
with the Contractor's own personnel shall be performed under subcontracts or by
other appropriate agreements with the Contractor. The Contractor shall obtain
bids from Subcontractors and from suppliers of materials or equipment fabricated
especially for the Work and shall deliver such bids to the Architect. The Owner
will then determine, with the advice of the Contractor and subject to the
reasonable objection of the Architect, which bids will be accepted. The Owner
may designate specific persons or entities from whom the Contractor shall obtain
bids: however, if a Guaranteed Maximum Price has been established, the Owner may
not prohibit the Contractor from obtaining bids from others. The Contractor
shall not be required to contract with anyone to whom the Contractor has
reasonable objection.
AIA DOCUMENT Alll - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE N. W,
WASHINGTON D.C. 20006 5292. Unlicensed photocopying violates U. s. copyright
laws and is subject to legal prosecution. This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the date of expiration as noted below.
Electronic Format A l l 1-1987
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<PAGE>
10.2 If a Guaranteed Maximum Price has been established and a specific bidder
among those whose bids are delivered by the Contractor to the Architect (1) is
recommended to the Owner by the Contractor; (2) is qualified to perform that
portion of the Work; and (3) has submitted a bid which conforms to the
requirements of the Contract Documents without reservations or exceptions, but
the Owner requires that another bid be accepted: then the Contractor may require
that a Change Order be issued to adjust the Guaranteed Maximum Price by the
difference between the bid of the person or entity recommended to the Owner by
the Contractor and the amount of the subcontract or other agreement actually
signed with the person or entity designated by the Owner.
10.3 Subcontracts or other agreements shall conform to the payment provisions of
Paragraphs 12.7 and 12.8, and shall not be awarded on the basis of cost plus a
fee without the prior consent of the Owner.
ARTICLE 11
ACCOUNTING RECORDS
11.1 The Contractor shall keep full and detailed accounts and exercise such
controls as may be necessary for proper financial management under this
Contract; the accounting and control systems shall be satisfactory to the Owner.
The Owner and the Owner's accountants shall be afforded access to the
Contractor's records, books, correspondence, instructions, drawings, receipts,
subcontracts, purchase orders, vouchers, memoranda and other data relating to
this Contract, and the Contractor shall preserve these for a period of three
years after final payment, or for such longer period as may be required by law.
ARTICLE 12
PROGRESS PAYMENTS
12.1 Based upon Applications for Payment submitted to the Architect by the
Contractor and Certificates for Payment issued by the Architect, the Owner shall
make progress payments on account of the Contract Sum to the Contractor as
provided below and elsewhere in the Contract Documents.
12.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:
12.3 Provided an Application for Payment is received by the Architect not later
than the 1st day of a month, the Owner shall make payment to the Contractor not
later than the 10th day of the month. If an Application for Payment is received
by the Architect after the application date fixed above, payment shall be made
by the Owner not later than 10 days after the Architect receives the Application
for Payment.
12.4 With each Application for Payment the Contractor shall submit payrolls,
petty cash accounts, receipted invoices or invoices with check vouchers
attached, and any other evidence required by the Owner or Architect to
demonstrate that cash disbursements already made by the Contractor on account of
the Cost of the Work equal or exceed (1) progress payments already received by
the Contractor; less (2) that portion of those payments attributable to the
Contractor's Fee; plus (3) payrolls for the period covered by the present
Application for Payment; plus (4) retainage provided in Subparagraph 12.5.4, if
any, applicable to prior progress payments.
12.5 CONTRACTS WITH A GUARANTEED MAXIMUM PRICE
12.5.1 Each Application for Payment shall be based upon the most recent schedule
of values submitted by the Contractor in accordance with the Contract Documents.
The schedule of values shall allocate the entire Guaranteed Maximum Price among
the various portions of the Work, except that the Contractor's Fee shall be
shown as a single separate item. The schedule of values shall be prepared in
such form and supported by such data to substantiate its accuracy as the
Architect may require. This schedule, unless objected to by the Architect, shall
be used as a basis for reviewing the Contractor's Applications for Payment.
12.5.2 Applications for Payment shall show the percentage completion of each
portion of the Work as of the end of the period covered by the Application for
Payment. The percentage completion shall be the lesser of (1) the percentage of
that portion of the Work which has actually been completed or (2) the percentage
obtained by dividing (a) the expense which has actually been
AIA DOCUMENT AIII - OWNER-CONTFACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS 1735 NEW YORK AVENUE N.W.,
WASHINGTON D C. 20006-5292. Unlicensed photocopying violates U. S. copyright
laws and is subject to legal prosecution. . This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the date of expiration as noted below.
Electronic Format A111-1987
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1.DOC -10/2811997. AIA License Number 101015, which expires on 9/7/1998 - Page
#7
<PAGE>
incurred by the Contractor on account of that portion of the Work for Which the
Contractor has made or intends to make actual payment prior to the next
Application for Payment by (b) the share of the Guaranteed Maximum Price
allocated to that portion of the Work in the schedule of values.
12.5.3 Subject to other provisions of the Contract Documents, the amount of each
progress payment shall be computed as follows:
12.5.3.1 Take that portion of the Guaranteed Maximum Price properly allocable to
completed Work as determined by multiplying the percentage completion of each
portion of the Work by the share of the Guaranteed Maximum Price allocated to
that portion of the Work in the schedule of values. Pending final determination
of cost to the Owner of changes in the Work, amounts not in dispute may be
included as provided in Subparagraph 7.3.7 of the General Conditions, even
though the Guaranteed Maximum Price has not yet been adjusted by Change Order.
12.5 3.2 Add that portion of the Guaranteed Maximum Price properly allocable to
materials and equipment delivered and suitably stored at the site for subsequent
incorporation in the Work or, if approved in advance by the Owner, suitable
stored off the site at a location agreed upon in writing.
12.5.3.3 Add the Contractor's Fee, less retainage of zero percent (0%). The
-----
Contractor's Fee shall be computed upon the Cost of the Work described in the
two preceding Clauses at the rate stated in Paragraph S.l or, if the
Contractor's Fee is stated as a fixed sum to that Paragraph, shall be an amount
which bears the same ratio to that fixed-sum Fee as the Cost of the Work in the
two preceding Clauses bears to a reasonable estimate of the probable Cost of the
Work upon its completion.
12.5.3.4 Subtract the aggregate of previous payments made by the Owner.
12.5.3.5 Subtract the shortfall, if any, indicated by the Contractor in the
documentation required by Paragraph 12.4 to substantiate prior Applications for
Payment, or resulting from errors subsequently discovered by the Owner's
accountants in such documentation.
12.5.3.6 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment as provided in Paragraph 9. 5 of the General
Conditions.
12.5.4 Additional retainage, if any, shall be as follows:
(If it is intended to retain additional amounts from progress payments to the
Contractor beyond (I) the retainage from the Contractors Fee provided in Clause
12.5.3.3. (2) the retainage from Subcontractors provided in Paragraph 12.7
below, and (3) the retainage, if any, provided by other provisions of the
Contract. Insert provision for such additional retainage here. Such provision,
if made, should also describe any arrangement for limiting or reducing the
amount retained after the Work reaches a certain state of completion.)
12.6 CONTRACTS WITHOUT A GUARANTEED MAXIMUM PRICE
12.6.1 Applications for Payment shall show the Cost of the Work actually
incurred by the Contractor through the end of the period covered by the
Application for Payment and for which the Contractor has made or intends to make
actual payment prior to the next Application for Payment.
12.6.2 Subject to other provisions of the Contract Documents, the amount of each
progress payment shall be computed as follows:
12.6.2.1 Take the Cost of the Work as described in Subparagraph 12.6.1.
12.6.2.2 Add the Contractor's Fee, less retainage of percent (%). The
Contractor's Fee shall be computed upon the Cost of the Work described in the
preceding Clause 12.6.2.1 at the rate stated in Paragraph 5.l or, if the
Contractor's Fee is stated as a fixed sum in that Paragraph, an amount which
bears the same ratio to that fixed-sum Fee as the Cost of the Work in the
preceding Clause bears to a reasonable estimate of the probable Cost of the Work
upon its completion.
12.6.2.3 Subtract the aggregate of previous payments made by the Owner.
12.6.2.4 Subtract the shortfall, if any, indicated by the Contractor in the
documentation required by Paragraph 12.4 or to
AIA DOCUMENT AIII - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHECTS. 1735 NEW YORK AVENUE N. W.,
WASHINGTON DC 20006-5292. Unlicensed photocopying violates U. S. copyright laws
and is subject to legal prosecution . This document was electronically produced
with permission of the AIA and can be reproduced without violation until the
date of expiration as noted below.
Electronic Format A 1 11-1987
User Document: SLWTR11 1.DOC - 10/28/1997. AIA License Number 101015, which
expires on 9f711998 - Page #8
<PAGE>
substantiate prior Applications for Payment or resulting from errors
subsequently discovered by the Owner's accountants an such documentation.
12.6.2.5 Subtract amounts, if any, for which the Architect has withheld or
withdrawn a Certificate for Payment as provided in the Contract Documents.
12.6.3 Additional retainage, if any, shall be as follows:
12.7 Except with the Owner's prior approval, payments to Subcontractors included
in the Contractor's Applications for Payment shall not exceed an amount for each
Subcontractor calculated as follows:
12.7.1 Take that portion of the Subcontract Sum properly allocable to completed
Work as determined by multiplying the percentage completion of each portion of
the Subcontractor's Work by the share of the total Subcontract Sum allocated to
that portion in the Subcontractor's schedule of values, less retainage of zero
----
percent (0%). Pending final determination of amounts to be paid to the
Subcontractor for changes in the Work, amounts not in dispute may be included as
provided in Subparagraph 7.3 7 of the General Conditions even though the
Subcontract Sum has not yet been adjusted by Change Order.
12.7.2 Add that portion of the Subcontract Sum properly allocable to materials
and equipment delivered and suitably stored at the site for subsequent
incorporation in the Work or, if approved in advance by the Owner, suitably
stored off the site at a location agreed upon in writing, less retainage of ten
percent (10%).
12.7.3 Subtract the aggregate of previous payments made by the Contractor to the
Subcontractor.
12.7.4 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment by the Owner to the Contractor for reasons
which are the fault of the Subcontractor.
12.7.5 Add, upon Substantial Completion of the entire Work of the Contractor, a
sum sufficient to increase the total payments to the Subcontractor to one
hundred_percent (100%) of the Subcontract Sum, less amounts, if any, for
incomplete Work and unsettled claims; and, if final completion of the entire
Work is thereafter materially delayed through no fault of the Subcontractor, add
any additional amounts payable on account of Work of the Subcontractor in
accordance with Subparagraph 9.10.3 of the General Conditions.
(If it is intended, prior to Substantial Completion of the entire Work of the
Contractor, to reduce or limit the retainage from Subcontractors resulting from
the percentages inserted in Subparagraphs 12.7.1 and 12.7.2 above, and this is
not explained elsewhere in the Contract Documents, insert here provisions for
such reduction or limitation.)
The Subcontract Sum is the total amount stipulated in the subcontract to be paid
by the Contractor to the Subcontractor for the Subcontractor's performance of
the subcontract.
12.8 Except with the Owner's prior approval, the Contractor shall not make
advance payments to suppliers for materials or equipment which have not been
delivered and stored at the site.
12.9 In taking action on the Contractor's Applications for Payment, the
Architect shall be entitled to rely on the accuracy and completeness of the
information furnished by the Contractor and shall not be deemed to represent
that the Architect has made a detailed examination, audit, or arithmetic
verification of the documentation submitted in accordance with Paragraph 12.4 or
other supporting data: that the Architect has made exhaustive or continuous on-
site inspections or that the Architect has made examinations to ascertain how or
for what purposes the Contractor has used amounts previously paid on account of
the Contract. Such examinations, audits and verifications, if required by the
Owner, will be performed by the Owner's accountants acting in the sole interest
of the Owner.
ARTICLE 13
FINAL PAYMENT
AIA DOCUMENT AIII OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS. 1735 NEW YORK AVENUE N W,
WASHINGTON D. C. 20006-5292. Unlicensed photocopying violates US. copyright laws
and is subject to legal prosecution. . This document was electronically produced
with permission of the AIA and can be reproduced without violation until the
date of expiration as noted below.
Electronic Format A111-1987
User Document:
SLvVTR111.DOC -10/28/1997, AIA License Number 101015, Which expires on 9/7/1998
- - Page#9
<PAGE>
13.1 Final payment shall be made by the Owner to the Contractor when (1) the
Contract has been fully performed by the Contractor except for the Contractor's
responsibility to correct defective or nonconforming Work, as provided in
Subparagraph 12.2.2 of the General Conditions, and to satisfy other
requirements, if any, which necessarily survive final payment; (2) a final
Application for Payment and a final accounting for the Cost of the Work have
been submitted by the Contractor and reviewed by the Owner's accountants; and
(3) a final Certificate for Payment has then been issued by the Architect; such
final payment shall be made by the Owner not more than 30 days after the
issuance of the Architect's final Certificate for Payment, or as follows:
13.2 The amount of the final payment shall be calculated as follows:
13.2.1 Take the sum of the Cost of the Work substantiated by the Contractor's
final accounting and the Contractor's Fee; but not more than the Guaranteed
Maximum Price, if any.
13.2.2 Subtract amounts, if any, for which the Architect withholds, in whole or
in part, a final Certificate for Payment as provided in Subparagraph 9.5.1 of
the General Conditions or other provisions of the Contract Documents
13.2.3 Subtract the aggregate of previous payments made by the Owner.
If the aggregate of previous payments made by the Owner exceeds the amount due
the Contractor, the Contractor shall reimburse the difference to the Owner.
13.3 The Owner's accountants will review and report in writing on the
Contractor's final accounting within 30 days after delivery of the final
accounting to the Architect by the Contractor. Based upon such Cost of the Work
as the Owner's accountants report to be substantiated by the Contractor's final
accounting, and provided the other conditions of Paragraph 13.1 have been met,
the Architect will, within seven days after receipt of the written report of the
Owner's accountants, either issue to the Owner a final Certificate for Payment
with a copy to the Contractor. or notify the Contractor and Owner in writing of
the Architect's reasons for withholding a certificate as provided in
Subparagraph 9.5 1 of the General Conditions. The time periods stated in this
Paragraph 13.3 supersede those stated in Subparagraph 9.4.1 of the General
Conditions.
13.4 if the Owner's accountants report the Cost of the Work as substantiated by
the Contractor's final accounting to be less than claimed by the Contractor, the
Contractor shall be entitled to demand arbitration of the disputed amount
without a further decision of the Architect. Such demand for arbitration shall
be made by the Contractor within 30 days after the Contractor's receipt of a
copy of the Architect's final Certificate for Payment: failure to demand
arbitration within this 30-day period shall result in the substantiated amount
reported by the Owner's accountants becoming binding on the Contractor. Pending
a final resolution by arbitration, the Owner shall pay the Contractor the amount
certified in the Architect's final Certificate for Payment.
13.5 If, subsequent to final payment and at the Owner's request. the Contractor
incurs costs described in Article 7 and not excluded by Article 8 to correct
defective or nonconforming Work, the Owner shall reimburse the Contractor such
costs and the Contractor's Fee applicable thereto on the same basis as if such
costs had been incurred prior to final payment. but not in excess of the
Guaranteed Maximum Price, if any. If the Contractor has participated in savings
as provided in Paragraph 5.2, the amount of such savings shall be recalculated
and appropriate credit given to the Owner in determining the net amount to be
paid by the Owner to the Contractor.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 Where reference is made in this Agreement to a provision of the General
Conditions or another Contract Document, the reference refers to that provision
as amended or supplemented by other provisions of the Contract Documents.
14.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof at the
legal rate prevailing from time to time at the place where the Project is
located.
(Insert rate of interest agreed upon, if any.)
TEN PERCENT (10%)
- -------------
(Usury laws and requirements under the Federal Truth in Lending Act, similar
stale and local consumer credit taws and other regulations at the Owners and
AIA DOCUMENT AIII - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS. 1785 NEW YORK AVENUE N W.,
WASHINGTON D.C. 20006-52(o)2. Unlicensed photocopying violates U.S. copyright
laws and is subject to legal prosecution. . This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the dale of expiration as noted below.
Electronic Format Al 11-1987
User Document: SLVvTR1 1 1.DOC -1 0/2811997. AlA License Number 1 0101 5, which
expires on gl711 998 - Page #10
<PAGE>
Contractor's principal places of business, the location of the Project and
elsewhere may affect the validity of this provision. Legal advice should be
obtained with respect to deletions or modifications, and also regarding
requirements such as written disclosures or waivers)
14.3 Other provisions:
Personnel stationed at Contractor's Principal offices:
- ------------------------------------------------------
Project Manager - Full-time
- ---------------------------
Estimator - Part-time
- ---------------------
Scheduler - Part-time
- ---------------------
Director of Safety - Part-time
- ------------------------------
Director of Quality Control - Part-time
- ---------------------------------------
ARTICLE 15
TERMINATION OR SUSPENSION
15.1 The Contract may be terminated by the Contractor as provided in Article 14
of the General Conditions; however, the amount to be paid to the Contractor
under Subparagraph 14.1.2 of the General Conditions shall not exceed the amount
the Contractor would be entitled to receive under Paragraph 15.3 below, except
that the Contractor's Fee shall be calculated as if the Work had been fully
completed by the Contractor, including a reasonable estimate of the Cost of the
Work for Work not actually completed.
15.2 If a Guaranteed Maximum Price is established in Article 5, the Contract
may be terminated by the Owner for cause as provided in Article 14 of the
General Conditions: however, the amount, if any, to be paid to the Contractor
under Subparagraph 14.2.4 of the General Conditions shall not cause the
Guaranteed Maximum Price to be exceeded, nor shall it exceed the amount the
Contractor would be entitled to receive under Paragraph 15.3 below.
15.3 If no Guaranteed Maximum Price is established in Article 5, the Contract
may be terminated by the Owner for cause as provided in Article 14 of the
General Conditions; however, the Owner shall then pay the Contractor an amount
calculated as follows:
15.3.1 Take the Cost of the Work incurred by the Contractor to the date of
termination.
15.3.2 Add the Contractor's Fee computed upon the Cost of the Work to the date
of termination at the rate stated in Paragraph 5. I or, if the Contractor's Fee
is stated as a fixed sum in that Paragraph, an amount which bears the same ratio
to that fixed-sum Fee as the Cost of the Work at the time of termination bears
to a reasonable estimate of the probable Cost of the Work upon its completion.
15.3.3 Subtract the aggregate of previous payments made by the Owner. The Owner
shall also pay the Contractor fair compensation, either by purchase or rental at
the election of the Owner, for any equipment owned by the Contractor which the
Owner elects to retain and which is not otherwise included in the Cost of the
Work Under Subparagraph 15.3.1. To the extent that the Owner elects to take
legal assignment of subcontracts and purchase orders (including rental
agreements), the Contractor shall, as a condition of receiving the payments
referred to in this Article 15, execute and deliver all such papers and rake all
such steps, including the legal assignment of such subcontracts and other
contractual rights of the Contractor, as the Owner may require for the purpose
of fully vesting in the Owner the rights and benefits of the Contractor under
such subcontracts or purchase orders.
15.4 The Work may be suspended by the Owner as provided in Article 14 of the
General Conditions; in such case, the Guaranteed Maximum Price, if any, shall be
increased as provided in Subparagraph 14.3.2 of the General Conditions except
that the term "cost of performance of the Contract" in that Subparagraph shall
be understood to mean the Cost of the Work and the term "profit" shall be
understood to mean the Contractor's Fee as described in Paragraphs 5.1 and 6.3
of this Agreement.
ARTICLE 16
ENUMERATION OF CONTRACT DOCUMENTS
16.1 The Contract Documents, except for Modifications issued after execution of
this Agreement, are enumerated as follows:
AIA DOCUMENT AIII OWNER ~ CONTRACTOR AGREEMENT - TENTH EDITION - VIA -
COPYRIGHT 1987 - THE AMERICAN INSTITUTE OF ARCHITECTS, 1735 NEW YORK AVENUE N.
W.. WASHINGTON D.C.20006-5292. Unlicensed photocopying violates U.S. copyright
laws and is subject to legal prosecution This document was electronically
produced with permission of the AIA and can be reproduced without violation
until the date of expiration as noted below.
ELECTRONIC FORMAT AL t 1-1987
User Document: SLWTR111.DOC - 10/28/1997. AIA LICENSE NUMBER 101015, WHICH
EXPIRES ON 9/7/1998 - Page#11
<PAGE>
16.1.4 The Specifications are those contained in the Project Manual dated as in
Paragraph 18.1.3, and are as follows:
(Either list me Specifications here to an exhibit attached to this Agreement).
SECTION TITLE PAGES
SEE ATTACHED EXHIBIT "C"
16.1.5 The Drawings are as follows, and are dated September 19, 1997 unless a
different date is shown below:
(Either list me Specifications here to an exhibit attached to this Agreement).
NUMBER TITLE DATE
SEE ATTACHED EXHIBIT "D"
16.1.6 The Addenda, if any, are as follows:
NUMBER DATE PAGES
1 September 23, 1997 13
2 October 13,1997 20
2 Bid package #10-26 October 13, 1997 4
1 Asbestos Abatement Bid Package March 24, 1997 1
1 Bid Package #5 July 31, 1997 2
1 Bid Package #4 August 1,1997 2
2 Bid Package #4 August 1,1997 2
1 Bid Package #7 August 25, 1997 2
2 Bid Package #7 August 25, 1997 1
3 Bid Package #7 August 26, 1997 4
Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in this
Article 16.
16.1.7 Other Documents, if any, forming part of the Contract Documents are as
follows:
(List here ANY additional documents which are intended to form part of the
Contact Documents. The General Conditions provide that bidding requirements such
as advertisement of invitation to bid, instructions to Bidders, sample forms and
the Contractor's bid are not part of the Contract Documents unless enumerated in
this Agreement. They should be listed here only V intended to be part of the
Contract Documents.)
This Agreement entered into as of the day and year first written above and is
executed in at least three original copies of which one is to be deliver7l/o,je
Contractor, one to the Architect for use in the administration of the Contract,
and the remainder to the Owner.
OWNER CONTRACTOR
(SIGNATURE) (SIGNATURE)
Robert L. McCormick, Jr., CEO W. Lowell Heck-V.P.
(Printed name and title) (Printed name and title)
AlA DOCUMENT AIII - OWNER-CONTRACTOR AGREEMENT - TENTH EDITION - AIA - COPYRIGHT
1987 - THE AMERICAN INSTITUTE OF ARCHITECTS. 1735 NEW YORK AVENUE N. W.,
WASHINGTON DC 20006-5292. Unlicensed photocopying violates U.& copyright laws
arid is sublet to legal prosecution. This document was electronically produced
with permission of the AIA and can be reproduced without violation until the
date of expiration as noted below.
Electronic Format A III - 1987
User Document: SLWrR111.Doc - 10/28/1997. AIA License Number 101015, which
expires on 9/7/1998--Page #12
END OF EXHIBIT
EXHIBIT "A"
Allowances: The following allowances are included within the Guaranteed Maximum
Price. If the actual cost of any one particular item is less than the allowance,
100% of the savings will accrue to the Owner. If any cost is exceeded, due to
selection and approval of Owner, the additional cost will be added to the
Guaranteed Maximum Cost by way of a properly executed Change Order.
1. Artist Glass: $243,200.00
Anticipated items of Work for the supplier of the Artist Glass for the amount
referenced above:
<PAGE>
a. Furnishing of 3/8" high performance glass material (or other material as
proposed by the Artist and approved by the Owner).
b. Freight and handling expenses of the raw material.
c. Overhead, facilities, labor, equipment, and materials required for
manufacture of the Art Glass.
d. Freight, insurance, off-loading, and installation of the completed Art
Glass.
e. Installation will include shipping the existing protective 1/4" glass and
the Art Glass to an approved glass plant hermetically sealing the Art
Glass to the existing 1/4" tempered protective glass and re-installation
of the sealed unit in place. Note: Removal and stock-piling of the
existing 1/4" tempered glass is included in the Guaranteed Maximum Price
and will be conducted by the Glass SubContractor.
2. Signage: $55,900.00 (Exterior and interior)
Anticipated items of Work for the supplier and installer of the exterior
and interior signage:
a. Design and Proposal
b. Manufacture and installation of two monument signs, two site directional
signs, building entrance sign, exterior building cast letters, directory,
lobby entrance signs and room signage.
3. Banking Equipment: $226,885.00
The banking equipment manufacturer and installer included in the
Guaranteed Maximum Cost is Diebold incorporated. Diebold, inc. is the low
responsive bidder for this equipment, and is the recommendation of the
Contractor to the Owner.
END OF EXHIBIT
EXHIBIT "B"
Fixed Fee Schedule: The following fixed fees are included in the Guaranteed
Maximum Cost. The General Condition items and the Contractors field staff fixed
fees are based on the project duration as shown adjacent to each item. If the
project is extended due to Owner approved changes in project scope, the
additional time will be added to the Guaranteed Maximum Cost The items to be
included for extension of time are the cost of the added Work and for the
General Conditions and Contractor's field staff (Project Manager and
Superintendent) by way of a properly executed Change Order and by a direct ratio
of the stated monthly fees.
Fixed Fee items:
1. PUD Exhibits: $ 9,000.00
2. Pre-Construction Fee: $10,000.00
3. Civil Engineering Fee: $40,000.00
4. Soils Analysis & Recommendations: $ 6,000.00
5. Landscape Design Fee: $10,000.00
6. Architect's Additional Services (3rd $ 7,132.50
floor rev.)
7. General Conditions: $ 3,222.22 per month for 18 months
8. Project Manager $ 5,000.00 per month for 18 months
9. Project Superintendent: $ 4,000.00 per month for 19 months
10. Taxes & insurance (29%) On Project Manager & Super. Only
General Notes of Clarification:
1. The Architect's fee is based on 6% of the actual construction cost at the
completion of the project. The Anticipated Architect's fee is included in
the Guaranteed Maximum Cost from inception through
<PAGE>
the Construction Document Phase. All Architectural and Landscaping
construction administration costs will be tHe responsibility of the Owner by
separate agreement.
2. The General Conditions referenced above contains the following items:
a. Builders Risk insurance
b. Contractor site office trailer expenses
c. Contractor mobilization expenses
d. Contractor vehicle and fuel expenses
e. Contractor postage expenses
f. Contractor site office utility expenses
g. Contractor site and principle office telephone expenses
h. Contractor progress photograph expenses
i. Contractor document reproduction expenses
j. On-site & Off-site office equipment expenses
k. Project Sign,
l. Contractor safety equipment expenses
m. Contractor, storage trailer expenses
n. As-Built Drawings & Specification production
END OF EXHIBIT
EXHIBIT "C"
List of Specifications dated August 1, 1997
Section: Title: Pages:
00110 Supple. Instructions To Sub-Bidders 1
00200 Information Available To Bidders 1
00500 Agreement Form 1
00700 General Conditions 1
00800 Supplementary Conditions 5
01060 Regulatory Requirements (Addenda 1) 2
01110 Supplementary Work 1
01330 Submittals 3
01400 Quality Control 3
01500 Const. Facilities & Temp. Controls 3
01600 Material & Equipment 2
01780 Contract Close-Out 3
02218 Landscape Grading (Addenda 2) 2
02310 Grading 2
02320 Excavating, Back-filling & Compacting 3
02362 Termite Control 2
02475 Drilled Concrete Piers (Caissons) 2
02620 Foundation Drainage Systems 2
02765 Stamped Patterned Concrete 2
02811 Underground Sprinkler System (Add. 2) 5
02938 Sodding (Addenda #2) 3
02950 Trees, Shrubs & Ground Cover 4
03300 Concrete 3
04100 Mortar 1
04300 Unit Masonry System 4
04720 Cast Stone 4
05120 Structural Steel 2
05210 Steel Joists 2
<PAGE>
05310 Steel Deck 2
05400 Cold Formed Metal Framing 2
05509 Metal Fabrications 3
05530 Ornamental Handrails 2
06100 Rough Carpentry 2
06400 Architectural Woodwork 4
07130 Bentonite Waterproofing 4
07210 Building insulation 2
07241 Exterior insulation & Finish System 2
07420 Composite Metal Wall Panels 4
07530 Modified Bitumen Sheet Roofing 3
07600 Flashings & Sheet Metal 1
Exhibit "C" Continued:
07724 Roof Hatches 2
07920 Joint Sealants 2
08110 Standard Steel Doors & Frames 2
08210 Flush Wood Doors 2
08305 Access Panels 1
08331 Overhead Wood Counter Doors 2
08410 Alum. Storefront & All-Glass System 5
08710 Door Hardware 2
08800 Glazing 2
09260 Gypsum Board Systems 3
09300 Tile 2
09511 Suspended Acoustical Ceilings 2
09650 Resilient Flooring 2
09686 Carpet 1
09900 Painting 3
09955 Vinyl Coated Fabric Wall Covering 3
10155 Toilet Compartments 2
10270 Access Flooring 3
10350 Flagpoles 3
10522 Fire Extinguishers & Cabinets 2
10530 Protective Canopies 2
10800 Toilet & Barn Accessories 2
11132 Projection Screen 2
12480 Floor Mats & Frames 2
12511 Horizontal Louver Blinds 2
14240 Hydraulic Elevator 5
15010 Mechanical Special Conditions 6
15245 Vibration isolators 1
15260 Piping Insulation 4
15280 Equipment insulation 4
15290 Ductwork insulation 3
15325 Sprinkler Systems 2
15410 Plumbing Piping 8
15430 Plumbing Specialties 5
15440 Plumbing Fixtures 3
15510 Hydronic Piping 8
15515 Hydronic Specialties 5
15541 Ground Source Circulating Pumps 4
15542 Frame Mounted End Suction Cent Pumps 4
15543 Variable Frequency Drives 7
<PAGE>
15755 Closed Circuit, Earth Coupled Heat Exch. 2
15790 Packaged Heat Pumps 2
15860 Centrifugal Fans 4
15870 Power Ventilators 2
Exhibit "C" Continued:
15890 Ductwork 4
15910 Ductwork Accessories 3
15940 Air Outlets & Inlets 2
15990 Testing, Adjusting & Balancing 7
16010 Electrical Special Conditions 9
16111 Conduit 5
16123 Building Wire and Cable 5
16130 Boxes 3
16170 Grounding & Bonding 3
16190 Supporting Devices 2
16466 Feeder & Plug-In Busway 3
16470 Panelboards 4
16477 Fuses 2
16501 Lamps 1
16502 Ballast & Accessories 2
16721 Fire Alarm Systems 13
End of Exhibit
Exhibit "D"
List of Drawings dated August 1, 1997 unless a different date is shown below
CIVIL DRAWINGS:
Number Title: Date:
1 of 1 Sanitary Sewer Plan & Profile 5/6/97
1 of 5 Existing Conditions & Demo. Plan (PFPI) 5/21/97
2 of 5 Utica Curb-line Reconfiguration Plan (PFPI) 5/21/97
3 of 5 Public Sidewalk Plan & Details (PFPI) 5/21/97
4 of 5 Drainage Area & Storm Sewer Lay-Out (PFPI) 5/21/97
5 of 5 Storm Sewer Profile/Alignment Plan (PFPI) 5/21/97
C-1 Grading/Paving Plan 5/6/97
C-2 Grading/Paving Plan 5/6/97
C-3 Paving Plan 5/6/97
LANDSCAPE DRAWINGS:
Number: Title: Date:
<PAGE>
L-1 Landscape improvements - Planting 9/22/97
L-2 Landscape improvements - Planting 7/15/97
ARCHITECTURAL DRAWINGS:
Number Title: Date:
A101 First Level Floor Plan
A101.1 First Level Exterior Dimension Plan
A101.2 First Level Interior Dimension Plan
A101.3 First Level Furniture, Flooring & Finish Plan
A101.4 First Level -- Exterior Dimension Plan Revised 9/26/97
Al02 Second Level Floor Plan
A102.2 Second Level Interior Dimension Plan
A102.3 Second Level Furniture, Flooring & Finishes Plan
A103 Third Level Floor Plan
A103.1 Third Level Exterior Dimension Plan
A103.2 Third Level Interior Dimension Plan
A103.3 Third Level Furniture, Flooring, & Finishes Plan
A104 Fourth Level Floor Plan
A104.1 Fourth Level Exterior Dimension Plan
A104.2 Fourth Level Interior Dimension Plan
A104.3 Fourth Level Furniture, Flooring, & Finishes Plan
A105 Roof Plan
EXHIBIT "D" CONTINUED
Number Title: Date:
A106 Drive-Thru Plan
A200 Exterior Elevations and Building Section
A201 Exterior Elevations
A300 Stair Sections
A301 Stair Plans & Details
A302 Stair Details
A303 Elevator Plans & Details
A401 First Level Reflected Ceiling Plan
A402 Second Level Reflected Ceiling Plan
A403 Third Level Reflected Ceiling Plan
A404 Fourth Level Reflected Ceiling Plan
A405 Ceiling Details
A406 Ceiling Details
A500 Door Schedule And Details
A501 Foundation Details
A502 Foundation Details
A503 Details
A504 Details
A505 Details
A506 Details
A507 Details
A508 Details
A509 Details
A510 Details
<PAGE>
A511 Section, Elevation and Details
A512 Atrium Details
A513 Building Section & DetaIls
A514 Night Depository Details
A600 Finish Schedule and Wail Type Legend
A601 Enlarged Plans & interior Elevations
A602 Interior Elevations & Details
A603 Interior Elevations
A604 Interior Elevations
A605 Interior Elevations & Sections
A608 Second Level Interior Elevations
A609 Second Level interior Elevations
Exhibit "D" Continued
STRUCTURAL DRAWINGS:
Number Title: Date:
S101 Foundation Plan 9/12/97
S102 Second Floor Framing Plan 8/22/97
S103 Third Floor Framing Plan 8/22/97
S104 Fourth Floor Framing Plan 8/22/97
S105 Roof Framing Plan 8/22/97
S106 Structural Detail 8/22/97
S107 Schedule & Details 8/22/97
S108 Enlarged Detail 8/22/97
S109 Enlarged Detail 8/22/97
S110 Enlarged Detail 8/22/97
S111 Enlarged Detail 8/22/97
S112 Enlarged Detail 8/22/97
MECHANICAL DRAWINGS:
Number Title: Date:
M101 First Level HVAC Plan
M102 Second Level HVAC Plan
Ml03 Third Level HVAC Plan
Ml04 Fourth Level HVAC Plan
M200 Details & Schedules
M201 Details & Schedules
PLUMBING DRAWINGS:
Number: Title: Date:
P100 Site Plan Wells Layout
P101 First Level Plumbing Plan
P102 Second Level Plumbing Plan
P103 Third Level Plumbing Plan
P104 Fourth Level Plumbing Plan
P105 Roof Drains
P200 Plumbing Details & Schedules
P300 Piping isometric
<PAGE>
P400 Piping Diagram
Exhibit "D" Continued
ELECTRICAL DRAWINGS:
Number Title:
SE100 Site Electrical
E101 First Level Lighting Plan
E101.1 First Level Power & Communication Plan
E101.2 First Level HVAC Wiring
E102 Second Level Lighting Plan
E102.1 Second Level Power & Communication Plan
E102.2 Second Level HVAC Wiring
E103 Third Level Lighting Plan
El03.1 Third Level Power & Communication Plan
El03:2 Third Level HVAC Wiring
El04 Fourth Level Lighting Plan
E104.l Fourth Level Power & Communication Plan
El04.2 Fourth Level HVAC Wiring
El05 Roof Level Lighting & Power Pan
E200 Electrical and Telephone Risers
END OF EXHIBIT
<PAGE>
EXHIBIT 13
LETTER TO SHAREHOLDERS
February 26, 1998
Shareholders, Customers and Friends:
1997 was a disappointing year for us. Our loan loss experience was
excessive amounting to 1.57% of average loans outstanding for the year. As it
became apparent that we would experience losses, we immediately took action to
recognize those losses, review our loan policies and procedures, and make
changes in policies, organization and staffing to improve loan quality and
credit review. Our loan portfolio has grown at a compound annual rate of more
than 22% over the last five years. Growth rates at that level tend to introduce
additional risks which are, in part, reflected in this year's losses.
[Graphic - Marble design and picture of desktop with pen and paper appears here]
Although we believe that our underwriting standards and policies were
balanced and served the Bank well in past years, last year's losses call for a
more conservative approach. We have revised loan authorities for individual
officers and loan committees in an effort to assure that appropriate standards
are met for large loans. We are also providing our Chief Lending Officer with
more resources in order to assure that our credit department has the opportunity
to thoroughly review loan proposals with less reliance on lending officers. We
have hired an additional, highly experienced credit officer as Senior Vice
President for Credit Administration, reporting to the Chief Lending Officer. We
are also reviewing the directors' independent loan review function in order to
ensure the Board of Directors has sufficient resources to carry out its duties.
During 1997, management recognized that, in addition to asset quality,
funding costs and other expenses were areas in which our Company needed to
improve its performance. In the past, the Bank has funded its asset growth with
time deposits. While this has proven to be a
1
<PAGE>
successful funding strategy, it has resulted in higher funding costs than those
of our peers. The Bank has now developed a funding strategy designed to help
meet the future funding needs of the Bank while bringing the total cost of
funding more in line with our peer group. Stillwater National Bank will continue
to pay competitive rates, but we will focus more on adding value to our customer
relationships. In addition, a broader funding base will be utilized including
several non-deposit sources of funds. These sources include repurchase
agreements, Federal Home Loan Bank advances and national market certificates of
deposit. The impact of the new funding strategy contributed to our improved cost
of funds in the fourth quarter of 1997. A greater contribution is expected in
1998 as the funding program becomes fully implemented.
The Company has taken actions to reduce other expenses. This is reflected
by the decline in other expenses as a percentage of average assets to 2.61% for
the fourth quarter of 1997 compared to 2.95% for the same period in 1996.
[Graphic - Marble design and picture of a pond appears here]
During 1997, major credit card companies began to aggressively solicit the
purchase of our credit card portfolio and, at the same time, were making very
attractive overtures to one of our major credit card affinity relationships. A
review of our opportunity to sell the credit card portfolio together with an
analysis of the competitive nature of the credit card business, led us to
believe it was an appropriate time to sell. We sold substantially all of our
credit card portfolio for a premium of $3.7 million, net of related expenses.
The results of that sale are reflected in our fourth quarter operating results.
Although we sold our credit card portfolio in 1997, we continue to offer debit
and credit cards to our customers.
The Company continued to grow in 1997. Total assets were $963.3 million on
December 31, 1997, up 16% from $829.1 million at year-end 1996. Our Company has
developed renewed interest in expanding our offerings of financial services to
the retail market and we are in the process of establishing a telephone Sales
and Service Center which, by the second quarter of this year, will be delivering
services 15 hours a day, seven days a week. It is our expectation that we
2
<PAGE>
will be able to offer web-based home banking services by the end of the second
quarter as an adjunct to our Sales and Service Center.
During 1997, Mr. Rick Green was selected as the Company's Chief Operating
Officer. Mr. Green has been with the Company since 1972 and has served in
various capacities, most recently as the President of our Central Oklahoma
Division.
Mr. Haskell Cudd has notified us that he will not stand for re-election to
our Board of Directors at the 1998 Annual Shareholders' Meeting. Mr. Cudd has
served as a director of the Company since its inception in 1981 and as a
director of the Bank since 1947. His 50 years of service to our Company are
greatly appreciated. In addition to being a director of our Company, Mr. Cudd is
President and C.E.O. of the Stillwater Milling Company. Over the years, he has
provided leadership to that company and industry, serving as President of the
Oklahoma Flour Millers' Association and as President of the Oklahoma Feed
Manufacturers' Association. He is a
[Graphic - Marble design and picture of Mr. McCormick appears here]
Past President of the Stillwater Chamber of Commerce and a former City
Commissioner. He has received numerous awards for his service to his industry
and to our community. We are thankful for his years of service and he will be
missed.
[As this annual report was going to the printer, we were saddened by the death
of Paul C. Wise, Executive Vice President and Director for the Bank and the
Company. Mr. Wise joined the Bank in 1927 and became a Director in 1936. His
dedication and contributions to the Company are without peer. Our sympathies are
extended to his family, including directors James B. Wise and Lee Wise, and his
many friends. The following page is dedicated in his memory.]
We are beginning 1998 with the goal of making 1998 more reflective of the
Company's performance prior to 1997.
Sincerely,
/s/
Robert L. McCormick
President
3
<PAGE>
In Memory of Paul C. Wise
February 1998
We are saddened by the recent death of Paul C. Wise, Executive Vice
President and Director of the Bank and the Company. Since joining the Bank in
1927, Mr. Wise was totally dedicated to our Company and our community.
[Graphic - Picture of Mr. Wise appears here]
According to Robert L. McCormick, "Mr. Wise has been a wonderful leader and
mentor to the Board of Directors and all the employees of our Company. Having
worked with him for over 27 years, I always respected his judgment and work
ethic. We all became much better bankers and people because of his commitment to
integrity, honesty and genuine customer service. He thoroughly enjoyed helping
customers with their financial needs."
Mr. Wise was instrumental in the growth of our Bank and the Oklahoma
Banking industry. In 1931, he established the first installment loan department
in Oklahoma and later helped develop the drive-in banking concept in our state.
We were further reminded of Paul Wise's dedication to banking when he was
honored as a prestigious member of the Oklahoma Bankers Association's 50-year
club.
Mr. Wise believed in helping his community. He accepted many leadership
roles over the years, including helping organize the Stillwater Industrial
Foundation and the Stillwater United Fund. His commitment to our community was
recognized by his 1995 induction into the Stillwater Chamber of Commerce Hall of
Fame.
Paul Wise's distinguished 72-year banking career was recently highlighted
by his substantial gift to Oklahoma State University, his alma mater. In
November 1997, Mr. Wise presented a $1 million gift for an endowed chair for the
College of Business at OSU. His gracious gift was the largest-ever gift made to
the OSU College of Business.
We are thankful for Paul Wise's many years of service to our Bank and our
community.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents the Company's selected consolidated financial
information for each of the five years in the period ended December 31, 1997.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of the Company, including the accompanying
Notes, presented elsewhere herein.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Operations Data
Interest income $ 76,849 $ 64,668 $ 55,000 $ 37,654 $ 29,639
Interest expense 41,247 32,833 28,544 16,637 12,417
----------------------------------------------------------------------
Net interest income 35,602 31,835 26,456 21,017 17,222
Provision for loan losses (1) 12,104 3,100 2,000 1,800 1,400
----------------------------------------------------------------------
Net interest income after provision for loan losses 23,498 28,735 24,456 19,217 15,822
Gain on sales of securities and loans (2) 5,199 2,227 1,025 1,694 931
Other income (2) 4,696 4,122 3,849 3,427 3,284
Other expenses 25,746 23,226 19,902 16,440 13,733
----------------------------------------------------------------------
Income before taxes 7,647 11,858 9,428 7,898 6,304
Taxes on income 2,667 4,306 3,336 2,754 2,108
----------------------------------------------------------------------
Net income $ 4,980 $ 7,552 $ 6,092 $ 5,144 $ 4,196
======================================================================
Net income available to common shareholders $ 3,393 $ 5,965 $ 5,426 $ 5,144 $ 4,196
======================================================================
Dividends Declared
Preferred stock $ 1,587 $ 1,587 $ 533 - -
Common stock 1,208 1,053 901 $ 751 $ 444
Ratio of total dividends declared to net income 56.12% 34.96% 23.55% 14.60% 10.57%
Per Share Data (3)
Basic earnings per common share $ 0.90 $ 1.59 $ 1.44 $ 1.37 $ 1.44
Diluted earnings per common share 0.88 1.56 1.43 1.37 1.44
Common stock cash dividends 0.32 0.28 0.24 0.20 0.14
Book value per common share (4) 13.38 12.66 11.44 10.09 9.21
Weighted average common shares outstanding:
Basic 3,773,037 3,760,370 3,755,228 3,755,228 2,910,535
Diluted 3,872,888 3,828,381 3,788,089 3,756,674 2,910,535
Financial Condition Data (4)
Investment securities $ 187,740 $ 147,351 $ 147,688 $ 143,517 $ 83,442
Loans (5) 719,113 644,646 531,988 412,614 319,260
Interest-earning assets 916,860 791,997 679,676 556,131 416,202
Total assets 963,286 829,117 711,135 582,170 434,119
Interest-bearing deposits 744,865 670,216 556,079 458,899 339,605
Total deposits 841,425 753,945 634,387 525,560 394,521
Long-term debt (6) 25,013 - - - -
Total shareholders' equity 68,048 65,032 60,357 37,888 34,570
Common shareholders' equity 50,666 47,650 42,975 37,888 34,570
Mortgage servicing portfolio 132,824 118,953 130,188 143,899 129,648
Selected Ratios
Return on average assets 0.54% 0.98% 0.93% 1.01% 1.07%
Return on average total shareholders' equity 7.54 12.15 12.81 14.17 17.76
Return on average common equity 6.95 13.30 13.48 14.17 17.76
Net interest margin 4.03 4.32 4.23 4.34 4.61
Efficiency ratio (7) 56.59 60.83 63.52 62.90 64.06
Average assets per employee $ 2,667 $ 2,162 $ 2,204 $ 2,089 $ 1,917
</TABLE>
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for loan losses to loans (4) 1.15% 1.11% 1.09% 1.20% 1.24%
Nonperforming loans to loans (4)(8) 0.99 1.03 0.99 0.60 0.98
Allowance for loan losses to nonperforming loans (4)(8) 116.08 107.37 110.12 199.16 126.07
Nonperforming assets to loans and other real estate
owned (4)(9) 1.04 1.04 1.03 0.67 1.13
Net loan charge-offs to average loans 1.57 0.31 0.24 0.22 0.30
Capital Ratios
Average shareholders' equity to average assets
Total 7.12 8.05 7.27 7.12 6.01
Common 5.26 5.81 6.15 7.12 6.01
Tier I risk-based capital ratio (4)(10) 8.96 10.21 10.02 9.64 12.39
Total risk-based capital ratio (4)(10) 13.30 11.40 11.41 10.89 13.64
Leverage ratio (4)(10) 6.95 7.77 8.19 6.76 8.04
</TABLE>
(1) 1997 reflects provisions for loan losses that significantly exceed
historical levels. See "Provision for Loan Losses" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(2) 1997 includes the gain on the sale of credit card relationships. See
"Other Income" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(3) All share and per share information has been restated to reflect the
fourteen-to-one stock split effected in the form of a stock dividend paid
November 15, 1993 and the adoption of Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
(4) At period end.
(5) Net of unearned discounts but before deduction of allowance for loan
losses.
(6) Consists of Guaranteed Preferred Beneficial Interests in the Company's
Subordinated Debentures issued on June 4, 1997 in connection with the sale
of 9.30% Cumulative Trust Preferred Securities by a wholly-owned subsidiary
of the Company. See Note 6 to the consolidated financial statements.
(7) The efficiency ratio = other expenses/(net interest income + gain on sales
of securities and loan + other income).
(8) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms.
(9) Nonperforming assets consist of nonperforming loans and foreclosed assets.
(10) Computed in accordance with regulatory guidelines as in effect on the
indicated dates.
6
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended
-----------------------------------------------------
12-31-97 09-30-97 06-30-97 03-31-97
-----------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Operations Data
Interest income $ 20,033 $ 19,962 $ 19,003 $ 17,851
Interest expense 10,908 10,860 10,220 9,259
-----------------------------------------------------
Net interest income 9,125 9,102 8,783 8,592
Provision for loan losses (1) 3,201 5,101 801 3,001
-----------------------------------------------------
Net interest income after provision for loan losses 5,924 4,001 7,982 5,591
Gain on sales of securities and loans (2) 3,811 488 489 411
Other income (2) 1,509 1,111 1,073 1,003
Other expenses 6,406 6,397 6,584 6,359
-----------------------------------------------------
Income before taxes 4,838 (797) 2,960 646
Taxes on income 1,781 (357) 1,057 186
-----------------------------------------------------
Net income $ 3,057 $ (440) $ 1,903 $ 460
=====================================================
Per Share Data (3)
Basic earnings per common share $0.70 $(0.22) $0.40 $0.02
Diluted earnings per common share $0.69 $(0.22) $0.39 $0.02
Weighted average common shares outstanding:
Basic 3,786,019 3,771,101 3,768,662 3,766,172
Diluted 3,894,919 3,872,638 3,868,656 3,851,280
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended
----------------------------------------------------
12-31-96 09-30-96 06-30-96 03-31-96
----------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Operations Data
Interest income $ 17,261 $ 16,696 $ 15,622 $ 15,089
Interest expense 8,917 8,561 7,769 7,586
----------------------------------------------------
Net interest income 8,344 8,135 7,853 7,503
Provision for loan losses 675 775 775 875
----------------------------------------------------
Net interest income after provision for loan losses 7,669 7,360 7,078 6,628
Gain on sales of securities and loans 612 601 444 570
Other income 1,065 991 1,034 1,032
Other expenses 6,089 6,453 5,465 5,219
----------------------------------------------------
Income before taxes 3,257 2,499 3,091 3,011
Taxes on income 1,214 898 1,115 1,079
----------------------------------------------------
Net income $ 2,043 $ 1,601 $ 1,976 $ 1,932
====================================================
Per Share Data (3)
Basic earnings per common share $0.44 $0.32 $0.42 $0.41
Diluted earnings per common share $0.43 $0.32 $0.41 $0.40
Weighted average common shares outstanding:
Basic 3,763,870 3,761,502 3,759,198 3,756,861
Diluted 3,840,236 3,827,903 3,825,443 3,820,347
</TABLE>
(1) The first, third and fourth quarters reflect provisions for loan losses
that significantly exceed historical levels. See "Provision for Loan
Losses" in the Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(2) The fourth quarter of 1997 includes the gain on the sale of credit card
relationships. See "Other Income" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(3) All share and per share information has been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share.
7
<PAGE>
FORWARD-LOOKING STATEMENTS
Portions of this Annual Report contain forward-looking statements,
including statements of goals, intentions, and expectations, regarding or based
upon general economic conditions, interest rates, developments in national and
local markets, and other matters, and which, by their nature, are subject to
significant uncertainties. Because of these uncertainties and the assumptions
on which statements in this report are based, the actual future results may
differ materially from those indicated in this report. Past results also are
not necessarily indicative of future performance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Southwest Bancorp, Inc. (the "Company") is a one-bank holding company
headquartered in Stillwater, Oklahoma engaged primarily in commercial and
consumer banking services through its subsidiary, the Stillwater National Bank
and Trust Company (the "Bank"). The Company has six full-service banking
offices, two of which are located in each of Stillwater and Tulsa and one each
in Oklahoma City and Chickasha, Oklahoma. The Company pursues a decentralized
community banking strategy through three regional divisions. These divisions --
the Stillwater Division, the Central Oklahoma Division (which includes Oklahoma
City and Chickasha) and the Tulsa Division -- offer commercial, consumer and
real estate lending services and retail and commercial deposit products in their
market areas. Student and mortgage lending services are offered throughout the
State of Oklahoma. Through its sales and service center in Tulsa, the Bank is
developing products for home banking and for delivery through its website,
www.banksnb.com.
The Company offers a wide variety of commercial and consumer lending and
deposit services. The commercial loans offered by the Company include (i)
commercial real estate loans, (ii) working capital and other commercial loans,
(iii) construction loans, and (iv) Small Business Administration ("SBA")
guaranteed loans. Consumer lending services include (i) government-guaranteed
student loans, (ii) residential real estate loans and mortgage banking services,
and (iii) personal lines of credit and other installment loans. The Company
also offers deposit and personal banking services, including (i) commercial
deposit services such as lock-box services, commercial checking and other
deposit accounts, (ii) retail deposit services such as certificates of deposit,
money market accounts, savings accounts and Automatic Teller Machine ("ATM")
access, and (iii) personal brokerage and trust services.
8
<PAGE>
THREE YEAR COMPARISON OF CONSOLIDATED AVERAGE BALANCE SHEETS, INTEREST, YIELDS,
AND RATES
The following table provides certain information relating to the Company's
average consolidated statements of financial condition and reflects the interest
income on interest-earning assets, interest expense of interest-bearing
liabilities, and the average yields earned and rates paid for the periods
indicated. Yields and rates are derived by dividing income or expense by the
average daily balance of the related assets or liabilities, respectively, for
the periods presented. Nonaccrual loans have been included in the average
balances of loans receivable.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable $700,129 $65,560 9.36% $580,590 $55,177 9.50% $473,080 $45,591 9.64%
Investment securities 170,635 10,582 6.20 146,973 8,999 6.12 142,254 8,813 6.20
Other interest-earning assets 12,819 707 5.52 9,200 492 5.35 10,007 596 5.96
------------------------- -------------------------- --------------------------
Total interest-earning assets 883,583 76,849 8.70 736,763 64,668 8.78 625,341 55,000 8.80
------------------------- -------------------------- --------------------------
Noninterest-earning assets:
Other assets 44,672 35,019 29,145
Total assets $928,255 $771,782 $654,486
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 37,740 $ 894 2.37% $ 36,088 $ 838 2.32% $ 32,261 $ 764 2.37%
Money market accounts 93,118 3,836 4.12 81,939 3,129 3.82 77,147 3,161 4.10
Savings accounts 3,860 96 2.49 4,580 114 2.49 5,441 133 2.44
Time deposits 612,014 34,743 5.68 498,283 28,647 5.75 412,570 24,208 5.87
------------------------- -------------------------- --------------------------
Total interest-bearing deposits 746,732 39,569 5.30 620,890 32,728 5.27 527,419 28,266 5.36
Short-term borrowings 6,605 340 5.15 1,940 105 5.41 4,527 278 6.14
Long-term debt 14,459 1,338 9.25 - - - - - -
------------------------- -------------------------- --------------------------
Total interest-bearing liabilities 767,796 41,247 5.37 622,830 32,833 5.27 531,946 28,544 5.37
------------------------- -------------------------- --------------------------
Noninterest-bearing liabilities:
Noninterest-bearing demand 93,665 79,739 68,540
Other noninterest-bearing liabilities 705 7,066 6,437
Shareholders' equity 66,089 62,147 47,563
-------- -------- --------
Total liabilities and
shareholders' equity $928,255 $771,782 $654,486
======== ======== ========
Net interest income $35,602 $31,835 $26,456
======= ======= =======
Interest rate spread 3.33% 3.51% 3.43%
====== ====== ======
Net interest margin 4.03% 4.32% 4.23%
====== ====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 115.08% 118.29% 117.56%
====== ====== ======
</TABLE>
FINANCIAL CONDITION
The Company's total assets increased by $134.2 million, or 16%, from $829.1
million at December 31, 1996 to $963.3 million at December 31, 1997 after
increasing by $118.0 million, or 17%, between December 31, 1995 and 1996. The
increase in assets in 1997 was attributable to significant increases in both
investment securities and outstanding loans. The increase in assets in 1996 was
primarily attributable to a significant increase in outstanding loans.
9
<PAGE>
The Company's investment securities increased by $40.4 million, or 27%,
from $147.3 million at December 31, 1996 to $187.7 million at December 31, 1997
after decreasing by $337,000, or less than 1%, between December 31, 1995 and
1996. The growth during 1997 came mainly from U.S. government and agency
securities, which increased by $44.2 million, or 40% from December 31, 1996 to
December 31, 1997.
Loans were $719.1 million at December 31, 1997, an increase of $74.5
million, or 12%, compared to December 31, 1996. The Company experienced
increases in the categories of commercial mortgages ($27.5 million, or 14%),
commercial loans ($22.5 million, or 10%), residential mortgages ($18.7 million,
or 31%), real estate construction loans ($18.1 million, or 33%), other consumer
loans ($6.0 million, or 19%), and government-guaranteed student loans ($2.4
million, or 4%). These increases were offset by a $20.8 million, or 99%,
reduction in credit card loans due to the sale of substantially all of that
portfolio of loans, described later in this report. The allowance for loan
losses increased by $1.1 million, or 16%, from December 31, 1996 to December 31,
1997, after the significant net charge-offs and increased provision for loan
losses recorded during the year. (See "Provision for Loan Losses"). At
December 31, 1997, the allowance for loan losses was $8.3 million, or 1.15% of
total loans, compared to $7.1 million, or 1.11% of total loans, at December 31,
1996.
Loans were $644.6 million at December 31, 1996, an increase of $112.7
million, or 21%, compared to December 31, 1995. The Company experienced its
most significant increases in the categories of commercial loans ($37.4 million,
or 21%), commercial real estate loans ($36.0 million, or 23%), real estate
construction loans ($21.2 million, or 64%), and residential mortgages ($18.2
million, or 42%). All major categories of loans increased other than
government-guaranteed student loans, which declined $5.4 million, or 8%, as a
result of greater sales of loans during 1996, and credit card loans, which
declined $1.0 million, or 5%.
The Company's deposits increased by $87.5 million, or 12%, from $753.9
million at December 31, 1996 to $841.4 million at December 31, 1997 after
increasing by $119.5 million, or 19%, between December 31, 1995 and 1996.
Deposit growth during both years came mainly from time deposits. Total time
deposits increased by $64.4 million, or 12% from December 31, 1996 to December
31, 1997 and $102.7 million, or 23%, from December 31, 1995 to December 31,
1996.
SUMMARY OF EARNINGS
NET INCOME
Net income for 1997 was $5.0 million, a 34% decrease from the $7.6 million
earned in 1996. The substantial reduction in net income during 1997 was due
principally to a $9.0 million, or 290%, increase in the provision for loan
losses. Net income for 1997 benefited from increases in net interest income
($3.8 million, or 12%) and other income ($3.5 million, or 56%) and a reduction
in taxes on income ($1.6 million, or 38%). These increases in income offset a
$2.5 million, or 11%, increase in other expenses. Included in other income was
the $3.7 million gain on sale of the credit card portfolio. Net income, after
dividends on preferred stock, was $3.4 million, a decrease of $2.6 million, or
43%, from 1996. Basic earnings per common share decreased 43% to $0.90 per
share for 1997 from $1.59 per share for 1996. Diluted earnings per common share
decreased 44% to $0.88 per share for 1997 from $1.56 per share for 1996.
The primary reason for the 1997 decline in net income was the deterioration
in several large commercial and commercial real estate credits and related
provisions for loan losses. The Company believes that it has appropriately
identified potential problem loans and has established an appropriate allowance
for loan losses at December 31, 1997. Management does not anticipate the need
to record such historically large provisions for loan losses in 1998.
Net income for 1996 was $7.6 million, a 24% increase over the $6.1 million
earned in 1995. The increase in net income during 1996 was due principally to a
$5.4 million, or 20%, increase in net interest income. Net income for 1996 also
benefited from a $1.5 million, or 30% increase in other income. These increases
in income offset a $3.3 million, or 17%, increase in other expenses, a $1.1
million, or 55%, increase in the provision for loan losses, and a $970,000, or
29%, increase in taxes on income. Net income, after dividends on the preferred
stock issued in July 1995, was $6.0 million, an increase of $539,000, or 10%,
over 1995. Basic earnings per common share increased 10% to $1.59 per share for
1996 from $1.44 per share for 1995. Diluted earnings per common share increased
9% to $1.56 per share for 1996 from $1.43 per share for 1995.
10
<PAGE>
NET INTEREST INCOME
Years ended December 31, 1997 and 1996
Net interest income increased to $35.6 million in 1997 from $31.8 million
for 1996 as continued growth in the loan portfolio enabled the Company to post a
$12.2 million increase in interest income that exceeded the $8.4 million
increase in interest expense during the year. Yields on the Company's interest-
earning assets declined by 8 basis points, and the rates paid on the Company's
interest-bearing liabilities increased by 10 basis points, resulting in a
reduction in the interest rate spread to 3.33% for 1997 from 3.51% in 1996. The
ratio of average interest-earning assets to average interest-bearing liabilities
declined to 115.08% for 1997 from 118.29% for 1996, due primarily to a greater
increase in interest-bearing liabilities, including time deposits and the
Guaranteed Preferred Beneficial Interests in the Company's Subordinated
Debentures ("Subordinated Debentures") issued during the year, than in
noninterest-bearing sources of funds, including noninterest-bearing demand
deposits and shareholders' equity.
Total interest income for 1997 was $76.8 million, up 19% from $64.7 million
during 1996. The principal factor providing greater interest income was the
$119.5 million, or 21%, increase in the volume of average loans outstanding.
The Company's loan yields declined to 9.36% for 1997 from 9.50% in 1996. During
the same period, the Company's yield on investment securities increased to
6.20% from 6.12%.
Total interest expense for 1997 was $41.2 million, an increase of 26% from
$32.8 million for 1996. The increase in total interest expense is mainly the
result of an increase in average interest-bearing liabilities of $145.0 million,
or 23%. During the same period, the rates paid on average interest-bearing
liabilities increased to 5.37% from 5.27%, as a 7 basis point decline in the
average rate paid on time deposits (to 5.68%) was more than offset by a 30 basis
point increase (to 4.12%) in the average rate paid on money market accounts.
The issuance of the Subordinated Debentures on June 4, 1997 increased the rates
paid on average interest-bearing liabilities by 7 basis points for 1997.
Years ended December 31, 1996 and 1995
Net interest income for 1996 increased to $31.8 million from $26.5 million
in 1995, primarily as a result of the increase in the Company's loan portfolio.
Yields on the Company's interest-earning assets declined by only 2 basis points
during 1996, and the rates paid on the Company's interest-bearing liabilities
declined by 10 basis points resulting in an increase in the interest rate spread
to 3.51% for 1996 from 3.43% for 1995. Net interest income benefited from an
increase in the ratio of average interest-earning assets to average interest-
bearing liabilities to 118.30% for 1996 from 117.55% for 1995. The improvement
in this ratio reflects an increase in noninterest-bearing demand deposits as
well as an increase in the Company's average shareholders' equity from the sale
of Preferred Stock in July 1995 and through retention of earnings.
Interest income for 1996 was $64.7 million, up from $55.0 million in 1995
primarily as a result of growth in interest-earning assets, which offset the
slight decline in yields. Yields on total interest-earning assets were 8.78% in
1996 and 8.80% in 1995. Loan interest and fee income increased $9.6 million
because the greater volume of loans outstanding more than offset the effect of
the 14 basis point decline in loan yields. The Company generated growth of
$107.5 million in average loans to $580.6 million in 1996 from $473.1 million in
1995, a 23% increase. Interest income on investment securities increased by
$186,000 despite lower yields earned, due to an increase in the size of the
investment portfolio. The yield on the investment portfolio declined 8 basis
points. A decrease in interest income on federal funds sold and other short-
term investments was caused by slightly lower volumes in those areas. The
increase in interest-earning assets was funded by growth in deposits at the
Company's existing branches, the proceeds from the July 1995 offering of Series
A Preferred Stock and retention of earnings.
Total interest expense for 1996 was $32.8 million, a $4.3 million increase
from $28.5 million in 1995. The increase in interest expense was primarily due
to a $93.5 million, or 18%, increase in average interest-bearing deposits from
$527.4 million for the year ended December 31, 1995 to $620.9 million for the
year ended December 31, 1996. Growth in average time deposits of $85.7 million,
or 21%, accounted for most of the increase in average interest-bearing deposits,
although average NOW and money market accounts also increased. Use of federal
funds declined significantly for the year. Rates paid on interest-bearing
liabilities declined to 5.27% in 1996 from 5.37% in 1995.
11
<PAGE>
PROVISION FOR LOAN LOSSES
In the first, third and fourth quarters of 1997, and for the year 1997 as a
whole, the Company recorded significant increases in loan charge-offs and
provisions for loan losses compared with corresponding periods of 1996 and
earlier years. The charge-offs were primarily the result of deterioration in
the financial position of the borrowers in three large commercial or commercial
real estate lending relationships. Net charge-offs for 1997 were approximately
$11.0 million, compared with net charge-offs of $1.8 million for 1996. The
provision for loan losses was $12.1 million in 1997, compared with $3.1 million
for 1996. As a result of the unusually large charge-offs recorded in 1997,
management has revised the Bank's credit and loan review policies and standards,
has revised individual and committee loan authorities, and has committed
additional resources to the credit administration and loan review functions.
The Company makes provisions for loan losses in amounts deemed necessary to
maintain the allowance for loan losses at an appropriate level. The adequacy of
the allowance for loan losses is determined by management based upon a number of
factors including, among others, analytical reviews of loan loss experience in
relation to outstanding loans and commitments; unfunded loan commitments;
problem and nonperforming loans and other loans presenting credit concerns;
trends in loan growth, portfolio composition and quality; use of appraisals to
estimate the value of collateral; and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio. Changes in the allowance may occur because of changing economic
conditions, and economic prospects or the financial position of borrowers.
Based upon this review, management established an allowance of $8.3 million, or
1.15% of total loans, at December 31, 1997 compared to an allowance of $7.1
million, or 1.11% of total loans, at December 31, 1996. During fiscal years
1997, 1996 and 1995, the provisions for loan losses were $12.1 million, $3.1
million and $2.0 million, respectively.
In establishing the level of the allowance for December 31, 1997,
management considered a number of factors that tended to indicate a potential
need for an increased allowance level, including the increased risk inherent in
the amount and percentage to total loans attributable to commercial and
commercial real estate loans, which are viewed as entailing greater risk than
certain other categories of loans, charge-off history, and the rapid expansion
of the loan portfolio over the last several years. Management also considered
other factors, including the levels of types of credits, such as residential
mortgage loans, deemed to be of relatively low risk, that tended to indicate the
potential need for a lower allowance. At December 31, 1997, total nonperforming
loans were $7.1 million, or 0.99% of total loans, compared to $6.6 million, or
1.03% of total loans, at December 31, 1996. The Company determined the level of
the allowance for loan losses at December 31, 1997 was appropriate, as a result
of its balancing these and other factors it deemed relevant to the adequacy of
the allowance. Management conducted a similar analysis in order to determine
the appropriate allowance as of December 31, 1996 and 1995.
Management strives to carefully monitor credit quality and the adequacy of
the allowance for loan losses, 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 the Company, 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, as occurred
in 1997, may lead to a material increase in charge-offs and the provision for
loan losses.
12
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 7,139 $ 5,813 $ 4,959 $ 3,960 $ 3,393
Loans charged-off:
Real estate mortgage:
Commercial 1,150 68 - 156 14
One-to-four family residential 155 80 7 16 58
Real estate construction - - 1 - 13
Commercial 8,691 1,064 1,101 461 675
Installment and consumer:
Guaranteed student loans 1 - - 1 8
Credit cards 829 803 528 370 519
Other consumer 702 286 166 199 129
--------------------------------------------------------------------------
Total charge-offs 11,528 2,301 1,803 1,203 1,416
--------------------------------------------------------------------------
Recoveries:
Real estate mortgage:
Commercial 6 10 119 34 251
One-to-four family residential 79 15 33 23 15
Real estate construction - - - - -
Commercial 300 288 334 94 76
Installment and consumer:
Guaranteed student loans 2 - 1 - 3
Credit cards 108 106 111 139 130
Other consumer 72 108 59 112 108
--------------------------------------------------------------------------
Total recoveries 567 527 657 402 583
--------------------------------------------------------------------------
Net loans charged-off 10,961 1,774 1,146 801 833
Provision for loan losses 12,104 3,100 2,000 1,800 1,400
--------------------------------------------------------------------------
Balance at end of period $ 8,282 $ 7,139 $ 5,813 $ 4,959 $ 3,960
==========================================================================
Loans outstanding:
Average $700,129 $580,590 $473,080 $356,323 $277,099
End of period 719,113 644,646 531,988 412,614 319,260
Ratio of allowance for loan losses to loans
outstanding:
Average 1.18% 1.23% 1.23% 1.39% 1.43%
End of period 1.15 1.11 1.09 1.20 1.24
Ratio of net charge-offs to average loans
outstanding during the period 1.57 0.31 0.24 0.22 0.30
</TABLE>
13
<PAGE>
The following table sets forth the amounts of nonperforming loans at the
end of the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Commercial:
Nonaccrual $ 3,938 $ 191 $ 107 $ 179 $ 261
Past due 90 days or more 179 614 88 - -
Restructured terms - 577 608 639 676
One-to-four family residential:
Nonaccrual 110 265 18 58 95
Past due 90 days or more 700 363 251 72 37
Restructured terms - - - - -
Real estate construction:
Nonaccrual - - - 86 101
Past due 90 days or more 603 119 - - -
Restructured terms - - - - -
Commercial:
Nonaccrual 1,403 4,149 567 805 1,473
Past due 90 days or more 195 71 435 241 32
Restructured terms - - 2,996 - 195
Installment and consumer:
Guaranteed student loans:
Nonaccrual - - - - -
Past due 90 days or more - - - - 17
Restructured terms - - - - -
Credit cards:
Nonaccrual - - - - -
Past due 90 days or more - 82 63 138 52
Restructured terms - - - - -
Other consumer:
Nonaccrual 7 30 32 210 28
Past due 90 days or more - 188 114 62 174
Restructured terms - - - - -
--------------------------------------------------------------------------
Total nonperforming loans 7,135 6,649 5,279 2,490 3,141
Other real estate owned 362 64 195 264 472
--------------------------------------------------------------------------
Total nonperforming assets $ 7,497 $ 6,713 $ 5,474 $ 2,754 $ 3,613
==========================================================================
Loans receivable $719,113 $644,646 $531,988 $412,614 $319,260
==========================================================================
Summary:
Total nonaccrual $ 5,458 $ 4,635 $ 724 $ 1,338 $ 1,958
Total past due 90 days or more 1,677 1,437 951 513 312
Total restructured - 577 3,604 639 871
--------------------------------------------------------------------------
Total nonperforming loans 7,135 6,649 5,279 2,490 3,141
Other real estate owned 362 64 195 264 472
--------------------------------------------------------------------------
Total nonperforming assets $ 7,497 $ 6,713 $ 5,474 $ 2,754 $ 3,613
==========================================================================
Allowance for loan losses to loans 1.15% 1.11% 1.09% 1.20% 1.24%
Nonperforming loans to loans 0.99 1.03 0.99 0.60 0.98
Allowance for loan losses to nonperforming loans 116.08 107.37 110.12 199.16 126.07
Nonperforming assets to loans and other real
estate owned 1.04 1.04 1.03 0.67 1.13
</TABLE>
14
<PAGE>
OTHER INCOME
The following table sets forth the Company's other income for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Service charges and fees $3,177 $2,985 $2,574
Credit cards 659 869 901
Other noninterest income 360 268 374
Gain on sale of credit card portfolio 3,745 - -
Gain on sales of loans receivable 1,936 1,768 1,033
Gain (loss) on sales of investment securities 18 459 (8)
---------------------------------------
Total other income $9,895 $6,349 $4,874
=======================================
</TABLE>
The Company has sought to develop sources of noninterest income through
credit card lending, student lending and mortgage banking, in addition to
traditional deposit and loan service charges and fees.
Total other income increased by $3.5 million for 1997 compared to 1996
primarily as a result of the gain on sale of the credit card portfolio. During
the fourth quarter of 1997, the Bank completed the sale of substantially all of
its credit card portfolio at a premium before taxes, but net of other related
expenses, of $3.7 million. The Bank continues to offer credit cards and debit
cards to its customers. The gain on sale of investment securities of $18,000
occurred when $1.0 million in "held to maturity" and $5.0 million in "available
for sale" Agency securities, originally purchased at a discount, were called
prior to their stated maturity date.
Total other income increased by $1.5 million for fiscal year 1996 compared
to 1995 primarily due to increased gains on sales of student loans and
residential mortgage loans, increased gains on sales of investment securities
and increased service charges attributable to its higher deposit base. During
1996, the Company sold $46.7 million in student loans compared to $40.2 million
in such sales during 1995. The Company also was able to increase its gain on
sales of student loans by packaging its loans in a manner than allowed it to
obtain a higher premium from the Student Loan Marketing Association ("SLMA").
The principal balance of residential mortgage loans sold was $45.1 million
during 1996 compared to $33.6 million during 1995.
The gain on sales of investment securities during 1996 occurred when $4.6
million in Agency securities classified as "held to maturity", and $11.2 million
in Agency securities classified as "available for sale", originally purchased at
a discount, were called prior to their stated maturity date, and $150,000 in
Corporate Stock classified as "available for sale" was sold. During 1995, a
loss on sales of investment securities occurred when the Bank sold securities
classified as "held to maturity". The Company concluded that these securities
were sold at a time near enough to their maturity dates that interest rate risk
was substantially eliminated as a pricing factor.
OTHER EXPENSES
The following table sets forth the Company's other expenses for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits $13,808 $12,164 $10,057
Occupancy 4,681 3,671 3,080
FDIC and other insurance 254 859 856
Credit cards 313 411 547
General and administrative 6,690 6,121 5,362
---------------------------------------
Total other expenses $25,746 $23,226 $19,902
=======================================
</TABLE>
15
<PAGE>
The Company's other expenses increased to $25.7 million for 1997 compared
to $23.2 million for 1996. This $2.5 million increase was primarily the result
of an increase in salaries and employee benefits, which increased $1.6 million
as a result of a 3% increase in staffing from year-end 1996 to mid-year 1997 and
salary increases for current staff, the majority of which are effective at the
first of each year. Staffing levels declined 6% during the third and fourth
quarters of 1997. In addition, occupancy expense increased $1.0 million and
general and administrative expense increased $569,000 compared to 1996. The
increase in occupancy expense was due primarily to increased data processing,
depreciation and equipment costs as systems, facilities and equipment were
upgraded beginning in November 1996 and continuing through 1997. These
increases were partially offset by a $605,000 reduction in FDIC and other
insurance.
The Company's other expenses increased $3.3 million, or 17%, for fiscal
year 1996 compared to fiscal year 1995. This increase was primarily the result
of an increase in salaries and employee benefits, which increased $2.1 million,
or 21%, as a result of a 20% increase in staffing. The increase in staffing is
related to the expansion of the Company's asset and deposit bases. In addition,
occupancy expense increased $591,000, due primarily to the leasing of additional
office space and the depreciation on furniture and equipment purchased to
furnish those new offices, and general and administrative expense increased
$759,000. Included in general and administrative expense was $139,000 in
expenses related to an unsuccessful effort to establish additional branches.
Despite the increase in the Company's deposit base, FDIC and other
insurance for 1996 increased only $3,000 compared to 1995. Regular deposit
insurance premium rates decreased beginning July 1, 1995 as the Bank Insurance
Fund ("BIF"), of which the Bank is a member, achieved its statutory reserve
ratio. However, legislation enacted by Congress required that the Bank pay a
one-time special assessment of $436,000 to the FDIC with respect to deposits it
acquired from a savings association in 1991. After the payment of this special
assessment, the insurance premiums related to these acquired deposits were also
reduced.
The Company is constructing a new facility for its Tulsa operations.
Groundbreaking on the 42,000 square foot building occurred in the third quarter
of 1997, with occupancy anticipated in the third quarter of 1998. When opened,
the building will include space for rental to third parties. The total cost of
the building is expected to be $9.5 million. A substantial portion of these
costs will be capitalized and, except for the cost of the land, will be expensed
over the useful life of the property.
TAXES ON INCOME
The Company's income tax expense for fiscal years 1997, 1996 and 1995 was
$2.7 million, $4.3 million and $3.3 million, respectively. The Company's
effective tax rates have been lower than the 34% to 35% federal and 6% state
statutory rates primarily because of tax-exempt income on municipal obligations
and loans.
CAPITAL RESOURCES
Shareholders' equity increased to $68.0 million at December 31, 1997 from
$65.0 million a year earlier. The increase was primarily attributable to
earnings retained after common and preferred stock dividend payments. Net
unrealized gains on investment securities available for sale (net of tax)
increased to $580,000 at December 31, 1997 compared to $205,000 at December 31,
1996. The Corporation also increased common stock and related surplus by
$456,000 through the issuance of common stock through the dividend reinvestment
plan, the employee stock purchase plan, and the employee stock option plan.
During the second quarter of 1997, SBI Capital Trust ("SBI"), a statutory
business trust and consolidated subsidiary of the Company, sold 1,000,500
Preferred Securities, having a liquidation amount of $25 per security, for a
total price of $25,012,500. The distributions payable on the preferred
securities are based on a 9.30% fixed annual rate. The Preferred Securities
meet the regulatory criteria for Tier I Capital, subject to Federal Reserve
guidelines that limit the amount of the Preferred Securities and cumulative
perpetual preferred stock to an aggregate of 25% of Tier I Capital. Proceeds
from the Preferred Securities were invested in 9.30% Subordinated Debentures of
the Company. The net proceeds to the Company from the sale of the Subordinated
Debentures were used for general corporate purposes, including use in investment
activities and the Bank's lending activities.
The Bank meets the requirements for a well-capitalized institution. See
accompanying Notes to Consolidated Financial Statements for additional
information.
16
<PAGE>
In the first quarter of 1998, the Company adopted a policy which prohibits
the declaration of dividends on common stock while the Company is operating at a
loss. Dividends on common stock were declared in the third quarter of 1997,
prior to the adoption of this policy, although a loss was incurred for that
quarter.
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. The Company's portfolio of
government-guaranteed student loans and SBA loans are also readily salable.
Additional sources of liquidity, including cash flow from the repayment of
loans, are also considered in determining whether liquidity is satisfactory.
Liquidity is also achieved through growth of core deposits and liquid assets,
and accessibility to the capital and money markets. These funds are used to
meet deposit withdrawals, maintain reserve requirements, fund loans and operate
the organization. Core deposits, defined as demand deposits, interest-bearing
transaction accounts, savings deposits and certificates of deposit less than
$100,000, were 84%, 84% and 86% of total deposits at December 31, 1997, 1996 and
1995, respectively.
The Company has used various forms of short-term borrowings for cash
management and liquidity purposes on a limited basis. These forms of borrowings
include federal funds purchases, securities sold under agreements to repurchase,
and borrowings from the Federal Reserve Bank. The Bank has approved federal
funds purchase lines totaling $20.0 million with three other banks. The Bank
also carries interest-bearing demand notes issued to the U.S. Treasury as a
participant in the Treasury Tax and Loan note program. In addition, the Bank
has available a $35.0 million line of credit from the Student Loan Marketing
Association ("SLMA") and a $177.0 million line of credit from the Federal Home
Loan Bank of Topeka ("FHLB"). Borrowings under the SLMA line would be secured
by student loans. Borrowings under the FHLB line would be secured by all other
unpledged securities and loans. During 1997 and 1996, no category of borrowings
averaged more than 30% of ending shareholders' equity.
During 1997, the Company began selling securities under agreements to
repurchase with the Company retaining custody of the collateral. Collateral
consists of direct obligations of the U.S. Government or U.S. Government Agency
issues and the Company retains custody of the security which is designated as
pledged with the Company's safekeeping agent. The type of collateral required,
and the retention of the collateral and the security sold minimize the Company's
risk of exposure to loss. These transactions are for one-to-three day periods
and do not materially affect the Company's liquidity or operations.
Cash and cash equivalents increased by $13.3 million during 1997. This
increase was the result of cash generated from financing activities (primarily
increased deposits and the issuance of Subordinated Debentures) of $127.7
million and operating activities of $13.5 million offset by $127.9 million in
cash used in investing activities.
During 1996, cash and cash equivalents increased by $2.1 million as
compared to the year ended December 31, 1995. The increase was the result of
cash generated from financing activities (primarily increased deposits) of
$109.3 million and operating activities of $7.2 million offset by $114.4 million
in cash used in investing activities.
ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's net income is largely dependent on its net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income. 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.
The Bank attempts to manage interest rate risk while enhancing net interest
margin by adjusting its asset/liability position. At times, depending on the
level of general interest rates, the relationship between long- and short-term
interest rates, market conditions and competitive factors, the Bank may
determine to increase its interest
17
<PAGE>
rate risk position somewhat in order to increase its net interest margin. The
Bank monitors interest rate risk and adjusts the composition of its interest-
related assets and liabilities in order to limit its exposure to changes in
interest rates on net interest income over time. The Bank's asset/liability
committee reviews its interest rate risk position and profitability, and
recommends adjustments. The Bank also reviews the securities portfolio,
formulates investment strategies, and oversees the timing and implementation of
transactions. Notwithstanding the Bank's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income. The Bank's results of operations and
portfolio market values remain vulnerable to changes in interest rates and to
fluctuations in the difference between long- and short-term interest rates.
The Bank assesses its interest rate risk exposure by analyzing the Bank's
interest rate sensitivity "gap" between its interest rate sensitive assets and
liabilities at different repricing intervals and by analyzing the Bank's market
risk measured by Market Value ("MV") modeling.
Interest Rate Sensitivity Analysis
Generally, during a period of rising interest rates, a negative gap
position would adversely affect net interest income, while a positive gap would
result in an increase in net interest income, while, conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
Because of the Company's current gap position and the repricing and repayment
characteristics of its loan portfolio, which consists primarily of short-term
and floating-rate loans, management believes the Company's net interest income
will not be materially adversely affected by increases or decreases in market
interest rates.
The following table sets forth the Company's interest rate sensitivity gap
at December 31, 1997.
<TABLE>
<CAPTION>
0 to 3 4 to 12 Over 1 to Over
Months Months 5 Years 5 Years Total
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $368,274 $220,655 $ 97,772 $ 32,412 $719,113
Investment securities 12,881 32,859 132,026 9,974 187,740
Federal funds sold 10,000 - - - 10,000
Due from banks 7 - - - 7
-------------------------------------------------------
Total 391,162 253,514 229,798 42,386 916,860
Interest-bearing liabilities:
Money market deposit accounts 94,496 - - - 94,496
Time deposits 206,336 340,238 62,692 1 609,267
Savings accounts 3,655 - - - 3,655
NOW accounts 37,447 - - - 37,447
Short-term borrowings 20,548 - - - 20,548
Long-term debt - - - 25,013 25,013
-------------------------------------------------------
Total 362,482 340,238 62,692 25,014 790,426
-------------------------------------------------------
Interest sensitivity gap $ 28,680 $(86,724) $167,106 $ 17,372 $126,434
=======================================================
Cumulative interest sensitivity gap $ 28,680 $(58,044) $109,062 $126,434 $126,434
=======================================================
Percentage of interest-earning assets
to interest-bearing liabilities 107.91% 74.51% 366.55% 169.45% 116.00%
=======================================================
Percentage of cumulative gap to total assets 2.98% (6.03)% 11.32% 13.13% 13.13%
=======================================================
</TABLE>
It is the Company's goal to maintain a percentage of rate-sensitive assets
to rate-sensitive liabilities of between 75% and 125%. This percentage of rate-
sensitive assets to rate-sensitive liabilities presents a static position as of
a single day and is not necessarily indicative of the Company'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
18
<PAGE>
foregoing analysis assumes that the Company'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 the Company's interest-earning
assets.
Market Value ("MV") Analysis
Generally, MV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and other assets and outgoing
cash flows on interest-bearing liabilities and other liabilities. The
application of the methodology attempts to quantify interest rate risk as the
change in the MV which would result from a theoretical 200 and 400 basis point
("bp") (1 basis point equals .01%) change in market interest rates. Both 200
and 400 bp increases in market interest rates and 200 and 400 bp decreases in
market interest rates are considered.
At December 31, 1997, it was estimated that the Bank's MV would decrease
12.84% and 22.64% in the event of 200 and 400 bp increases in market interest
rates, respectively. The Bank's MV at the same date would increase 16.09% and
20.64% in the event of 200 and 400 bp decreases in market interest rates,
respectively.
Presented below, as of December 31, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts of 200 and 400 bp increments in market interest rates.
<TABLE>
<CAPTION>
MV as % of
Market Market Present Value (PV)
Change Value Value of Assets
In Rates $ Amount $ Change % Change MV Ratio Change
- -------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp $60,787 $(17,786) (22.64)% 6.58% (1.67) bp
+ 200 bp 68,483 (10,091) (12.84) 7.31 (0.94) bp
+ 000 bp 78,574 - - 8.25 - bp
- - 200 bp 91,214 12,640 16.09 9.39 1.15 bp
- - 400 bp 94,791 16,217 20.64 9.67 1.42 bp
<CAPTION>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Change MV Ratio: MV as % of PV of Assets 8.25 %
Exposure Measuer: Post-Change MV Ratio 7.31 %
Sensitivity Measure: Change in MV Ratio (0.94)%
Change in MV as % of PV of Assets 12.84 %
Interest Rate Risk Capital Component -
</TABLE>
Management believes that the MV methodology overcomes three shortcomings of
the interest rate sensitivity gap methodology. First, it does not use arbitrary
repricing measurement intervals but does account for all expected future cash
flows; weighting each by its appropriate discount factor. Second, because the
MV method projects cash flows of each financial instrument under different
interest-rate environments, it can incorporate the effect of embedded options on
an institution's interest rate risk exposure. Third, it allows interest rates
on different instruments to change by varying amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are
certain shortcomings inherent to the MV methodology. The model assumes interest
rate changes are instantaneous, parallel shifts in the yield curve. In reality,
rate changes are rarely instantaneous. The use of the simplifying assumption
that short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial instruments may react in advance of changes in market rates,
while the reaction of other types of financial instruments may lag behind the
change in general market rates. Additionally, the MV methodology may not reflect
the full impact of annual and life-time restrictions on changes in rates for
certain assets, such as adjustable-rate mortgage loans. When interest rates
change, actual loan prepayments and actual early withdrawals from certificates
may deviate significantly from assumptions used in the model. Finally, this
methodology does not measure or reflect the impact that higher rates may have on
adjustable-rate loan customers' ability to service their debt. All of these
factors are considered in monitoring the Bank's exposure to interest rate risk.
19
<PAGE>
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. This year 2000 issue affects virtually all enterprises. In recognition
of potential adverse effects of the year 2000 issue, management of the Company
has created a task force and has established a plan to prevent or mitigate
adverse effects of the year 2000 issue on the Company and its customers.
Quarterly progress reports are provided to the Board of Directors. The
Company's primary supplier of data processing services also has adopted a year
2000 plan and timetable. Management believes that the cost of resolving year
2000 issues relating to the Company's computer programs and those used by its
suppliers of significant data processing services will not be material to the
Company's business, operations, liquidity, capital resources, or financial
condition, based on information developed to date and communications from data
processing suppliers. The Company's year 2000 plan required an assessment of
year 2000 effects on its commercial lending and other customers. The effect on
individual, corporate and governmental customers of the Company and on
governmental authorities that regulate the Company and its subsidiaries cannot
yet be determined.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles and practices within the banking industry that require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 129, Disclosure
of Information About Capital Structure. SFAS No. 129 establishes standards for
disclosure of information regarding an entity's capital structure. The adoption
of SFAS No. 129 did not affect the Company's capital structure disclosures.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings per share. The
Company adopted SFAS No. 128 as of December 31, 1997, and restated all per share
data as reflected in the consolidated financial statements in accordance with
SFAS No. 128.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125
requires the Company to recognize the financial and servicing assets it controls
and liabilities it has incurred, derecognize financial assets when control has
been surrendered, and derecognize liabilities when extinguished. The adoption
of SFAS No. 125 did not affect the Company's consolidated financial position or
results of operations.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In December of 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125. The Company
will adopt SFAS No. 127 on January 1, 1998 as required. Management believes the
adoption of SFAS No. 127 will not have a material impact on the Company's
consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other
20
<PAGE>
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
Standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company will adopt SFAS No.
131 on January 1, 1998 as required, and believes the Company has only one
segment, as that term is defined in SFAS No. 131.
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF SOUTHWEST BANCORP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Southwest Bancorp, Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Southwest Bancorp, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/
Oklahoma City, Oklahoma
January 30, 1998
22
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,259 $ 22,914
Federal funds sold 10,000 -
------------- -------------
Cash and cash equivalents 36,259 22,914
Investment securities:
Held to maturity, fair value $87,592 (1997) and $83,963 (1996) 86,994 83,589
Available for sale, amortized cost $99,778 (1997) and $63,419 (1996) 100,746 63,762
Loans receivable, net of allowance for loan losses
of $8,282 (1997) and $7,139 (1996) 710,831 637,507
Accrued interest receivable 8,883 7,400
Premises and equipment, net 13,571 9,649
Other assets 6,002 4,296
------------- -------------
Total assets $963,286 $829,117
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 96,560 $ 83,729
Interest-bearing demand 37,447 34,309
Money market accounts 94,496 86,910
Savings accounts 3,655 4,086
Time deposits 609,267 544,911
------------- -------------
Total deposits 841,425 753,945
------------- -------------
Income taxes payable 521 187
Accrued interest payable 6,504 5,061
Other liabilities 1,227 1,907
Short-term borrowings 20,548 2,985
Long-term debt:
Guaranteed preferred beneficial interests in the
Company's subordinated debentures 25,013 -
------------- -------------
Total liabilities 895,238 764,085
------------- -------------
Commitments and contingencies - -
Shareholders' equity:
Serial preferred stock -
Series A, 9.20% Redeemable, Cumulative Preferred Stock;
$1 par value; 1,000,000 shares authorized; liquidation value
$17,250,000; 690,000 shares issued and outstanding 690 690
Series B, $1 par value; 1,000,000 shares authorized; none issued - -
Common stock - $1 par value; 10,000,000 shares authorized; issued
and outstanding 3,787,839 (1997) and 3,764,216 (1996) 3,788 3,764
Capital surplus 24,764 24,332
Retained earnings 38,226 36,041
Unrealized gain (loss) on investment securities available for sale, net of tax 580 205
------------- -------------
Total shareholders' equity 68,048 65,032
------------- -------------
Total liabilities & shareholders' equity $963,286 $829,117
============= =============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $65,560 $55,177 $45,591
Investment securities:
U.S. Government and agency obligations 8,667 6,815 6,737
State and political subdivisions 508 577 477
Mortgage-backed securities 1,234 1,531 1,535
Other securities 173 76 64
Federal funds sold 707 492 596
---------------- ---------------- ----------------
Total interest income 76,849 64,668 55,000
Interest expense:
Interest-bearing demand 894 838 764
Money market accounts 3,836 3,129 3,161
Savings accounts 96 114 133
Time deposits 34,743 28,647 24,208
Short-term borrowings 340 105 278
Long-term debt 1,338 - -
---------------- ---------------- ----------------
Total interest expense 41,247 32,833 28,544
---------------- ---------------- ----------------
Net interest income 35,602 31,835 26,456
Provision for loan losses 12,104 3,100 2,000
---------------- ---------------- ----------------
Net interest income after provision for loan losses 23,498 28,735 24,456
Other income:
Service charges and fees 3,177 2,985 2,574
Credit cards 659 869 901
Other noninterest income 360 268 374
Gain on sale of credit card portfolio 3,745 - -
Gain on sales of loans receivable 1,936 1,768 1,033
Gain (loss) on sales of investment securities 18 459 (8)
---------------- ---------------- ----------------
Total other income 9,895 6,349 4,874
Other expenses:
Salaries and employee benefits 13,808 12,164 10,057
Occupancy 4,681 3,671 3,080
FDIC and other insurance 254 859 856
Credit cards 313 411 547
General and administrative 6,690 6,121 5,362
---------------- ---------------- ----------------
Total other expenses 25,746 23,226 19,902
---------------- ---------------- ----------------
Income before taxes 7,647 11,858 9,428
Taxes on income 2,667 4,306 3,336
---------------- ---------------- ----------------
Net income $ 4,980 $ 7,552 $ 6,092
================ ================ ================
Net income available to common shareholders $ 3,393 $ 5,965 $ 5,426
================ ================ ================
Basic earnings per common share $0.90 $1.59 $1.44
================ ================ ================
Diluted earnings per common share $0.88 $1.56 $1.43
================ ================ ================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) TOTAL
ON AVAILABLE SHARE-
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED FOR SALE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS SECURITIES EQUITY
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 - - 3,755,228 $3,755 $ 8,539 $26,471 $ (877) $37,888
Cash dividends paid:
Common, $0.18 per share - - - - - (676) - (676)
Preferred, $0.7731 per share - - - - - (533) - (533)
Cash dividends declared:
Common, $0.06 per share - - - - - (225) - (225)
Issuance of preferred stock,
net of offering costs 690,000 $690 - - 15,632 - - 16,322
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 1,489 1,489
Net income - - - - - 6,092 - 6,092
-----------------------------------------------------------------------------------------------
Balance, December 31, 1995 690,000 690 3,755,228 3,755 24,171 31,129 612 60,357
Cash dividends paid:
Common, $0.21 per share - - - - - (790) - (790)
Preferred, $2.30 per share - - - - - (1,587) - (1,587)
Cash dividends declared:
Common, $0.07 per share - - - - - (263) - (263)
Common stock issued:
Employee Stock Purchase Plan - - 3,552 4 64 - - 68
Dividend Reinvestment Plan - - 5,436 5 97 - - 102
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - (407) (407)
Net income - - - - - 7,552 - 7,552
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 690,000 690 3,764,216 3,764 24,332 36,041 205 65,032
Cash dividends paid:
Common, $0.24 per share - - - - - (905) - (905)
Preferred, $2.30 per share - - - - - (1,587) - (1,587)
Cash dividends declared:
Common, $0.08 per share - - - - - (303) - (303)
Common stock issued:
Employee Stock Purchase Plan - - 3,767 4 78 - - 82
Dividend Reinvestment Plan - - 5,856 6 117 - - 123
Stock Option Plan - - 14,000 14 237 - - 251
Change in unrealized gain
(loss) on available for sale
securities, net of tax - - - - - - 375 375
Net income - - - - - 4,980 - 4,980
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 690,000 $690 3,787,839 $3,788 $24,764 $38,226 $ 580 $68,048
===============================================================================================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,980 $ 7,552 $ 6,092
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 12,104 3,100 2,000
Depreciation and amortization expense 1,577 1,254 1,026
Amortization of premiums and accretion of
discounts on securities, net 113 244 248
Amortization of intangibles 221 174 174
(Gain) Loss on sales of securities (18) (459) 8
(Gain) Loss on sales of loans receivable (1,936) (1,768) (1,033)
(Gain) Loss on sale of credit card portfolio (3,745) - -
(Gain) Loss on sales of premises/equipment (25) (10) 3
(Gain) Loss on other real estate owned, net 13 (2) (52)
Proceeds from sales of residential mortgage loans 71,710 45,519 34,002
Residential mortgage loans originated for resale (69,205) (48,469) (34,947)
Changes in assets and liabilities:
Accrued interest receivable (1,483) (283) (1,240)
Other assets (1,879) (1,188) (986)
Income taxes payable 334 (84) 78
Accrued interest payable 1,443 795 1,632
Other liabilities (720) 786 (449)
------------- ------------- -----------
Net cash (used in) provided from operating activities 13,484 7,161 6,556
------------- ------------- -----------
Investing activities:
Proceeds from sales of held to maturity securities - - 5,993
Proceeds from sales of available for sale securities - 438 -
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 19,649 25,388 17,193
Available for sale securities 18,017 28,969 6,286
Purchases of held to maturity securities (23,178) (34,538) (23,363)
Purchases of available for sale securities (54,347) (20,383) (8,054)
Loans originated and principal repayments, net (145,116) (157,501) (159,227)
Proceeds from sale of credit card portfolio 21,798 - -
Proceeds from sales of guaranteed student loans 40,545 47,768 40,738
Purchases of premises and equipment (5,603) (4,693) (1,936)
Proceeds from sales of premises and equipment 129 24 18
Proceeds from sales of other real estate 210 152 68
------------- ------------- -----------
Net cash (used in) provided from investing activities (127,896) (114,376) (122,284)
------------- ------------- -----------
Financing activities:
Net increase in deposits 87,480 119,558 108,827
Net increase (decrease) in short-term borrowings 17,563 (7,786) (3,629)
Net proceeds from issuance of common stock 456 170 -
Net proceeds from issuance of preferred stock - - 16,322
Proceeds from issuance of subordinated debentures 25,013 - -
Common stock dividends paid (1,168) (1,015) (864)
Preferred stock dividends paid (1,587) (1,587) (533)
------------- ------------- -----------
Net cash (used in) provided from financing activities 127,757 109,340 120,123
------------- ------------- -----------
Net increase (decrease) in cash and cash equivalents 13,345 2,125 4,395
Cash and cash equivalents,
Beginning of period 22,914 20,789 16,394
------------- ------------- -----------
End of period $ 36,259 $ 22,914 $ 20,789
============= ============= ===========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
SOUTHWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Organization and Nature of Operations - Southwest Bancorp, Inc. ("the
Company") was incorporated in 1981 as a bank holding company headquartered in
Stillwater, Oklahoma engaged primarily in commercial and consumer banking
services in the State of Oklahoma. The accompanying consolidated financial
statements include the accounts of Stillwater National Bank and Trust Company
(the "Bank"), a national bank established in 1894, and SBI Capital Trust, a
Delaware Business Trust established in 1997. The Bank and SBI Capital Trust are
wholly owned, direct subsidiaries of the Company. The Company has six full-
service banking offices, two of which are located in each of Stillwater and
Tulsa, Oklahoma, with one each in Oklahoma City and Chickasha, Oklahoma. The
Company pursues a decentralized community banking strategy and operates through
three regional divisions. All significant intercompany balances and
transactions have been eliminated.
MANAGEMENT ESTIMATES - In preparing its financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities as
of the dates shown on the consolidated statements of financial position and
revenues and expenses during the periods reported. Actual results could differ
significantly from those estimates. Changes in economic conditions could impact
the determination of material estimates such as the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
INVESTMENT SECURITIES - Investments in debt and equity securities are
identified as held to maturity, trading, 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. Under
certain circumstances (including the deterioration of the issuer's
creditworthiness, a change in tax law, or statutory or regulatory requirements),
the Company may change the investment security classification. The
classifications the Company utilizes determines the related accounting treatment
for each category of investments. Investments classified as trading are
accounted for at fair value with unrealized gains and losses included in other
income. Available for sale securities are accounted for at fair value with
unrealized gains or losses, net of taxes, excluded from earnings and reported as
a separate component of shareholders' equity. Held to maturity securities are
accounted for at amortized cost.
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to income over the contractual maturity or estimated life of the
individual investment on the level yield method. The Company has the ability and
intent to hold to maturity its investment securities classified as held to
maturity. Declines in the fair value of securities below their cost that are
other than temporary result in write-downs of the individual securities to their
fair value. The related write-down is included in earnings as realized losses.
Gain or loss on sale of investments is based upon the specific identification
method. Income earned on the Company's investments in state and political
subdivisions is not taxable.
LOANS RECEIVABLE - Interest on loans is accrued and credited to income
based upon the principal amount outstanding. In general, accrued interest
income on impaired loans is written off after the loan is 90 days past due;
subsequent interest income is recorded when cash receipts are received from the
borrower. The Bank 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 are generally sold after the
Company has been notified of the borrower's change from deferment status, which
can range from one to five years, or longer. Real estate mortgage loans held
for sale and guaranteed student loans are carried at cost, which does not exceed
market. Gains or losses recognized upon the sales 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 expense. Loans which are
determined to be impaired are charged against this allowance, to the extent of
the impairment, 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 the Company 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
27
<PAGE>
identified for evaluation of impairment is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. 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
the Company's nonaccrual loans have been defined as impaired loans.
The adequacy of the allowance for loan losses is determined by management
based upon a number of factors including, among others, analytical reviews of
loan loss experience in relationship to outstanding loans and commitments;
unfunded loan commitments; problem and nonperforming loans and other loans
presenting credit concerns; trends in loan growth, portfolio composition and
quality; use of appraisals to estimate the value of collateral; and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio. Changes in the allowance may occur
because of changing economic conditions and economic prospects or financial
positions of borrowers. While there can be no assurance that the allowance for
loan losses will be adequate to cover all losses from all loans, management
believes that the allowance for loan losses is adequate. While management uses
all available information to estimate the adequacy of the allowance for loan
losses, the ultimate collectability of a substantial portion of the loan
portfolio and the need for future additions to the allowance will be based upon
changes in economic conditions and other relevant factors. Recovery of the
carrying value of such loans is dependent to a great extent on conditions that
may be beyond the Company's control. Actual future losses could differ
significantly from the amounts estimated by management adversely affecting net
income.
DEPOSITS - The total amount of time deposits with a minimum denomination of
$100,000 was approximately $132.0 million and $123.1 million at December 31,
1997 and 1996, respectively. The total amount of overdrawn deposit accounts
that were reclassified as loans at December 31, 1997 and 1996 was $437,000 and
$952,000, respectively.
LOAN SERVICING INCOME - The Company earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Major additions or improvements are
charged to the asset account while normal maintenance and repairs are expensed
as incurred. Depreciation and amortization are computed using the straight-line
and declining-balance methods based on asset lives which vary from three to
forty years.
OTHER REAL ESTATE OWNED - Other real estate owned is initially recorded at
the lesser of the fair value less the estimated costs to sell the asset or the
recorded amount of the related loan. Write-downs of carrying value required at
the time of foreclosure are recorded as a charge to the allowance for loan
losses. Costs related to the development of such real estate are capitalized
whereas those related to holding the property are expensed. Foreclosed property
is subject to periodic reevaluation 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. The net cost of operating
other real estate owned, including provision for losses, rental income, and
gains and losses on sales of real estate, is not significant.
Profit from sales of foreclosed property by the Company is recognized in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 66, Accounting for Sales of Real Estate. Losses are recognized as
incurred.
INTANGIBLES - Intangibles consist of a core deposit intangible, goodwill
and mortgage servicing rights. The core deposit intangible is amortized over
the estimated life of the assumed deposits, ranging from four to seven years
using the level yield method. Goodwill is amortized using the straight-line
method over 15 years. Mortgage servicing rights are capitalized using an
allocated cost of the observable market price at the point of origination. The
servicing rights are amortized on an individual loan by loan basis in proportion
to, and over the period of, estimated net servicing income. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
The capitalized amounts and amortization of the mortgage servicing rights is not
material. At December 31, 1997 and 1996, the Bank had recorded cumulative
amortization of $1.2 million and $1.0 million, respectively.
LONG-TERM DEBT - The long-term debt consists of the Guaranteed Preferred
Beneficial Interests in the Company's Subordinated Debentures purchased from SBI
Capital Trust. See Note 6.
TAXES ON INCOME - The Company and its subsidiaries file consolidated income
tax returns. Deferred income taxes arise from temporary differences between
financial and tax bases of certain assets and liabilities. A
28
<PAGE>
valuation allowance will be established if it is more likely than not that some
portion of the deferred tax asset will not be realized.
EARNINGS PER COMMON SHARE - The Company has adopted Financial Accounting
Standards Board ("FASB") SFAS No. 128, Earnings Per Share, and has restated
earnings per share for all periods presented in accordance with that Statement.
Basic earnings per common share is computed based upon net income, after
deducting the dividend requirements of preferred stock, divided by the weighted
average number of common shares outstanding during each period. Diluted
earnings per common share is computed based upon net income, after deducting the
preferred stock dividend requirements, 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. At December
31, 1997 and 1996, the Company had 3,858 and 302 antidilutive options to
purchase common shares, respectively. There were no antidilutive options at
December 31, 1995. The following is a reconciliation of the common shares used
in the calculations of basic and diluted earnings per common share:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding:
Basic earnings per share 3,773,037 3,760,370 3,755,228
Effect of dilutive securities:
Stock options 99,851 68,011 32,861
------------ ------------ ------------
Weighted average common shares outstanding:
Diluted earnings per share 3,872,888 3,828,381 3,788,089
============ ============ ============
</TABLE>
TRUST - The Company offers trust services to customers through its
relationship with the Trust Company of Oklahoma, a trust services company.
Property (other than cash on deposit) held by the Bank 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 the Bank.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
and federal funds sold. Federal funds sold are sold for one day periods.
LIQUIDITY - The Bank 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 $4.6 million and
$5.1 million at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Bank had available unsecured lines of credit from
correspondent banks, the Student Loan Marketing Association ("SLMA"), and the
Federal Home Loan Bank of Topeka ("FHLB") totaling $20.0 million, $35.0 million,
and $177.0 million, respectively. Short-term borrowings outstanding on these
lines of credit totaled $1.8 million, with weighted average rates of 6.70%, at
December 31, 1996; there were no borrowings outstanding on these lines of credit
at December 31, 1997. The average balances outstanding on these lines of credit
were not material for either year.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year amounts to conform to the current year presentation.
29
<PAGE>
2. INVESTMENT SECURITIES
A summary of the amortized cost and fair values of investment securities
follows:
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $77,261 $ 677 $ 30 $ 77,908
Obligations of state and political subdivisions 9,733 29 78 9,684
-------------- -------------- -------------- ------------
Total $86,994 $ 706 $ 108 $ 87,592
============== ============== ============== ============
Available for Sale:
U.S. Government and agency obligations $76,277 $ 690 $ 19 $ 76,948
Obligations of state and political subdivisions 1,220 1 1 1,220
Mortgage-backed securities 16,388 72 33 16,427
Other securities 5,893 268 10 6,151
-------------- -------------- -------------- ------------
Total $99,778 $ 1,031 $ 63 $100,746
============== ============== ============== ============
<CAPTION>
At December 31, 1996
----------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency obligations $72,345 $ 467 $ 100 $ 72,712
Obligations of state and political subdivisions 11,244 52 45 11,251
-------------- -------------- -------------- ------------
Total $83,589 $ 519 $ 145 $ 83,963
============== ============== ============== ============
Available for Sale:
U.S. Government and agency obligations $37,440 $ 253 $ 50 $ 37,643
Obligations of state and political subdivisions 1,892 17 - 1,909
Mortgage-backed securities 23,108 56 103 23,061
Other securities 979 170 - 1,149
-------------- -------------- -------------- ------------
Total $63,419 $ 496 $ 153 $ 63,762
============== ============== ============== ============
</TABLE>
As required by law, investment securities are pledged to secure public and
trust deposits. Securities with an amortized cost of $99.7 million and $134.9
million were pledged to meet such requirements of $34.9 million and $15.4
million at December 31, 1997 and 1996, respectively. Any amount overpledged can
be released at any time.
30
<PAGE>
A comparison of the amortized cost and approximate fair value of the
Company's investment securities by maturity date at December 31, 1997 follows.
Mortgage-backed securities are included in the period in which they are
estimated to prepay.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
One year or less $13,633 $ 13,648 $27,920 $ 27,970
Two years through five years 72,396 72,973 59,074 59,622
Five years through ten years 7,856 7,974 - -
More than ten years 2,000 2,000 - -
Other securities not due at a single maturity date 3,893 4,151 - -
-------------- -------------- -------------- ------------
Total $99,778 $100,746 $86,994 $ 87,592
============== ============== ============== ============
</TABLE>
Realized gross gains/(losses) on sales of investment securities were $18,000,
$459,000 and $(8,000) during 1997, 1996 and 1995, respectively. The gross
proceeds from such sales of investment securities totaled approximately $0,
$438,000 and $6.0 million during 1997, 1996 and 1995, respectively. All of the
gain on sales of investment securities during 1997 and a portion of the gain on
sales of investment securities during 1996 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. During 1995, a loss
on sales of investment securities occurred when the Bank sold securities
classified as "held to maturity". The Company concluded that these securities
were sold at a time near enough to their maturity dates that interest rate risk
was substantially eliminated as a pricing factor.
3. LOANS RECEIVABLE
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1997 1996
-------------------------------
(dollars in thousands)
<S> <C> <C>
Real estate mortgage:
Commercial $223,672 $196,163
One-to-four family residential 79,843 61,175
Real estate construction 72,454 54,369
Commercial 241,007 218,515
Installment and consumer:
Guaranteed student loans 64,390 61,959
Credit cards 73 20,839
Other 37,674 31,626
------------ --------------
719,113 644,646
Allowance for loan losses (8,282) (7,139)
------------ --------------
Loans receivable, net $710,831 $637,507
============ ==============
</TABLE>
The Bank extends commercial and consumer credit primarily to customers in
the State of Oklahoma which subjects the loan portfolio to the general economic
conditions within this area. At December 31, 1997 and 1996, substantially all
of the Bank's loans, except for credit cards, are collateralized with real
estate, inventory, accounts receivable and/or other assets or guaranteed by
agencies of the United States Government.
Loans to individuals and businesses in the healthcare industry totaled
approximately $71.1 million, or 10% of total loans. The loan portfolio also
includes $17.7 million, or 2% of total loans, in hotel/motel loans, $22.4
million, or 3% of total loans, in residential construction loans, and $14.8
million, or 2% of total loans, in restaurant
31
<PAGE>
loans. In the event of total nonperformance by the borrowers, the Company's
accounting loss would be limited to the recorded investment in the loans
receivable reduced by proceeds received from disposition of the related
collateral.
The Company had loans which were held for sale of $13.0 million and $12.3
million at December 31, 1997 and 1996, respectively. These loans are carried at
cost, which does not exceed 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 two servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $5.5 million and $4.6 million at December 31,
1997 and 1996, 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 $144,000, $398,000 and $48,000
for 1997, 1996 and 1995, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $132.8 million and $119.0 million at December 31, 1997 and 1996,
respectively. The Bank maintained escrow accounts totaling $547,000 and
$366,000 for real estate mortgage loans serviced for others at December 31, 1997
and 1996, respectively.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 1997. Credit card and student loans that do not have
stated maturities are treated as due in one year or less.
<TABLE>
<CAPTION>
One year One to Over
or less five years five years Total
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage:
Commercial $ 10,228 $ 54,713 $158,731 $223,672
One-to-four family residential 11,683 28,615 39,545 79,843
Real estate construction 51,304 11,246 9,904 72,454
Commercial 104,690 87,273 49,044 241,007
Installment and consumer:
Guaranteed student loans 64,390 - - 64,390
Credit Cards 73 - - 73
Other 11,332 25,415 927 37,674
------------- ------------- ------------- -------------
Total $253,700 $207,262 $258,151 $719,113
============= ============= ============= =============
</TABLE>
The following table sets forth at December 31, 1997 the dollar amount of
all loans due more than one year after December 31, 1997.
<TABLE>
<CAPTION>
Fixed Variable Total
------------ ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Real estate mortgage:
Commercial $ 39,264 $174,180 $213,444
One-to-four family residential 18,857 49,303 68,160
Real estate construction 3,178 17,972 21,150
Commercial 24,921 111,396 136,317
Installment and consumer:
Guaranteed student loans - - -
Credit Cards - - -
Other 24,134 2,208 26,342
------------ ----------- -----------
Total $110,354 $355,059 $465,413
============ =========== ===========
</TABLE>
32
<PAGE>
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 7,139 $ 5,813 $ 4,959
Provision for loan losses 12,104 3,100 2,000
Loans charged off (11,528) (2,301) (1,803)
Recoveries 567 527 657
----------------- ------------------ ------------------
Total $ 8,282 $ 7,139 $ 5,813
================= ================== ==================
</TABLE>
As of December 31, 1997 and 1996, impaired loans totaled $5.5 million and
$4.8 million and had been allocated a related allowance for loan loss of
$707,000 and $2.0 million, respectively. The average balance of impaired loans
totaled $4.1 million and $3.8 million and interest income recognized on impaired
loans totaled $187,000 and $37,000, respectively, for the years ended December
31, 1997 and 1996.
Directors and officers of the Company and the Bank were customers of, and
had transactions with, the Bank in the ordinary course of business, and similar
transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of loss or present other
unfavorable features. Certain officers, directors, employees, and companies in
which they have partial ownership had indebtedness to the Bank totaling $2.1
million and $1.0 million at December 31, 1997 and 1996, respectively. During
1997, $1.6 million of new loans were made to these persons and repayments
totaled $509,000.
4. PREMISES AND EQUIPMENT
These consist of the following:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1997 1996
-------------------------------------
(dollars in thousands)
<S> <C> <C>
Land $ 4,397 $ 1,214
Buildings and improvements 4,115 3,869
Furniture, fixtures, and equipment 13,750 12,024
-------------- --------------
22,262 17,107
Accumulated depreciation and amortization (8,691) (7,458)
-------------- --------------
Premises and equipment, net $13,571 $ 9,649
============== ==============
</TABLE>
5. OTHER BORROWED FUNDS
During 1997, the Company began selling securities under agreements to
repurchase with the Company retaining custody of the collateral. Collateral
consists of direct obligations of the U.S. Government or U.S. Government Agency
issues and the Company retains custody of the security which is designated as
pledged with the Company's safekeeping agent. The type of collateral required,
and the retention of the collateral and the security sold, minimizes the
Company's risk of exposure to loss. These transactions are for one-to-three day
periods and do not materially impact the Company's liquidity or operations. As
of December 31, 1997, no material repurchase agreements exist with any one
customer.
33
<PAGE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
End of period balance $18,953 - -
Average balance 4,412 - -
Maximum month-end balance 18,953 - -
Average interest rate 4.94% - -
</TABLE>
6. LONG-TERM DEBT
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of the
Company, issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities
(the "Preferred Securities") in an underwritten public offering for an aggregate
price of $25,012,500. Proceeds of the Preferred Securities were invested in the
9.30% Subordinated Debentures (the "Subordinated Debentures") of the Company.
After deducting underwriter's compensation and other expenses of the offering,
the net proceeds were available to the Company to increase capital and for
general corporate purposes, including use in investment activities and the
Bank's lending activities, and, after September 1, 1998, possible redemption, in
whole or in part, of the Company's 9.20% Redeemable Cumulative Preferred Stock,
Series A (the "Series A Preferred Stock"). Unlike interest payments on the
Subordinated Debentures, dividends paid on the Series A Preferred Stock are not
deductible for federal income tax purposes.
The Preferred Securities and the Subordinated Debentures each mature on
July 31, 2027. If certain conditions are met, the maturity dates of the
Preferred Securities and the Subordinated Debentures may be shortened to a date
not earlier than July 31, 2002, or extended to a date not later than July 31,
2036. The Preferred Securities and the Subordinated Debentures also may be
redeemed prior to maturity if certain events occur. The Preferred Securities
are subject to mandatory redemption, in whole or in part, upon repayment of the
Subordinated Debentures at maturity or their earlier redemption. The Company
also has the right, if certain conditions are met, to defer payment of interest
on the Subordinated Debentures, which would result in a deferral of dividend
payments on the Preferred Securities, at any time or from time to time for a
period not to exceed 20 consecutive quarters in a deferral period.
The Company and SBI Capital Trust believe that, taken together, the
obligations of the Company under the Preferred Securities Guarantee Agreement,
the Amended and Restated Trust Agreement, the Subordinated Debentures, the
Indenture and the Agreement As To Expenses and Liabilities, entered into in
connection with the offering of the Preferred Securities and the Subordinated
Debentures, in the aggregate constitute a full and unconditional guarantee by
the Company of the obligations of SBI Capital Trust under the Preferred
Securities.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Preferred Securities and purchasing the Subordinated Debentures,
which are its sole assets. The Company owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of SBI
Capital Trust.
The Preferred Securities meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Preferred
Securities and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 1997, all of the Company's Preferred Stock and
$580,000 of the Preferred Securities were included in Tier I Capital.
For accounting purposes, the Preferred Securities are presented on the
Consolidated Statements of Financial Condition as a separate category of long-
term debt entitled "Guaranteed Preferred Beneficial Interests in the Company's
Subordinated Debentures".
34
<PAGE>
7. INCOME TAXES
The components of taxes on income follow:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $3,266 $4,275 $3,366
State 366 667 508
Deferred tax benefit:
Federal (820) (543) (458)
State (145) (93) (80)
---------------- ---------------- ----------------
Taxes on income $2,667 $4,306 $3,336
================ ================ ================
</TABLE>
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:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Computed tax expense at 34% $2,600 $4,032 $3,206
Increase (decrease) in income
taxes resulting from:
Benefit of income not subject to U.S. Federal
income tax (240) (210) (202)
State income taxes, net of Federal income
tax benefit 146 379 281
Other 161 105 51
---------------- ---------------- ----------------
Taxes on income $2,667 $4,306 $3,336
================ ================ ================
</TABLE>
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses $(772) $(754) $(494)
Accelerated depreciation 158 135 56
Intangibles (16) (26) (25)
Sales of other real estate owned 5 225 -
Other (340) (216) (75)
---------------- ---------------- ----------------
Total $(965) $(636) $(538)
================ ================ ================
</TABLE>
Net deferred tax assets of $2.9 million and $2.2 million at December 31,
1997 and 1996, respectively, are reflected in the accompanying consolidated
statements of financial condition in other assets. There were no valuation
allowances at December 31, 1997 or 1996.
35
<PAGE>
Temporary differences that give rise to the deferred tax assets and
(liabilities) include the following:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1997 1996
---------------------------------------
(dollars in thousands)
<S> <C> <C>
Allowance for loan losses $3,125 $2,353
Accumulated depreciation (834) (676)
Write-down on other real estate owned 30 35
Deferred compensation accrual 103 88
Intangibles 178 162
Other 726 401
---------------- ----------------
3,328 2,363
Deferred taxes (payable) receivable on
investment securities available for sale (387) (137)
---------------- ----------------
Net deferred tax asset $2,941 $2,226
================ ================
</TABLE>
8. SHAREHOLDERS' EQUITY
In 1996, the Company's shareholders increased the authorized shares of
capital stock from 7,000,000 to 12,000,000, consisting of 10,000,000 shares of
common stock, par value $1.00 per share ("Common Stock"), and an aggregate of
2,000,000 shares of serial preferred stock, par value $1.00 per share. The
Company's Board of Directors can determine the voting powers, dividend rights,
liquidation preferences and other limitations on the preferred stock prior to
issuance. On July 31, 1995, the Company issued 690,000 shares of 9.20%
Redeemable, Cumulative Preferred Stock, Series A (the "Shares"), and received
net proceeds of $16.3 million. The liquidation preference of the Shares is $25
per share plus an amount equal to accrued and unpaid dividends. The Shares may
not be redeemed by the Company prior to September 1, 1998. Subject to prior
regulatory approval, the Shares may be redeemed at the option of the Company, in
whole or in part, on or after September 1, 1998, at a price equal to $25 per
share plus accumulated unpaid dividends to the redemption date. Such dividends
are cumulative from the date of issuance and payable quarterly at the rate of
9.20% of the original liquidation preference, or $2.30 per annum per share. For
the year ended December 31, 1997, the cumulative accrued dividend requirement
was $1.6 million, $1.5 million of which was declared and paid.
In the first quarter of 1998, the Company adopted a policy which prohibits
the declaration of dividends on common stock while the Company is operating at a
loss. Dividends on common stock were declared in the third quarter of 1997,
prior to the adoption of this policy, although a loss was incurred for that
quarter.
The Company has reserved for issuance 200,000 shares of common stock
pursuant to the terms of 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 the
Company. The Employee Stock Purchase Plan allows Company employees to acquire
additional common shares through payroll deductions. At December 31, 1997,
18,611 shares had been issued by these plans.
9. CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators, that if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
36
<PAGE>
As of December 31, 1997 and 1996, the most recent notifications from the
Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum Total Capital,
Tier I Capital, and Tier I Leverage ratios as set forth in the table below.
Since the notifications, management believes there are no conditions or events
that have changed the Bank's category.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets and Tier I capital to average assets (all
as defined). Management believes the Company and the Bank meet all capital
adequacy requirements to which they are subject as of December 31, 1997 and
1996.
The Company's and Bank's actual capital amounts and ratios are presented
below.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective For Capital
Actual Action Provisions Adequacy Purposes
------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to risk-weighted assets)
Company $100,322 13.30% N/A N/A $60,331 8.00%
Bank 80,631 10.72% $75,182 10.00% 60,145 8.00%
Tier I Capital (to risk-weighted assets)
Company 67,607 8.96% N/A N/A 30,165 4.00%
Bank 72,349 9.62% 45,109 6.00% 30,073 4.00%
Tier I Leverage (to average assets)
Company 67,607 6.95% N/A N/A 38,901 4.00%
Bank 72,349 7.57% 47,756 5.00% 38,205 4.00%
As of December 31, 1996:
Total Capital (to risk-weighted assets)
Company $ 71,376 11.40% N/A N/A $50,077 8.00%
Bank 69,139 11.06% $62,490 10.00% 49,992 8.00%
Tier I Capital (to risk-weighted assets)
Company 63,886 10.21% N/A N/A 25,039 4.00%
Bank 62,000 9.92% 37,494 6.00% 24,996 4.00%
Tier I Leverage (to average assets)
Company 63,886 7.77% N/A N/A 32,894 4.00%
Bank 62,000 7.56% 41,026 5.00% 32,821 4.00%
</TABLE>
The approval of the Comptroller of the Currency is required if the total of
all dividends declared by the Bank 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, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be under capitalized. The Bank's maximum amount of
dividends available for payment totaled approximately $13.2 million at December
31, 1997. Dividends declared by the Bank for the years ended December 31, 1997,
1996 and 1995 did not exceed the threshold requiring regulatory approval.
37
<PAGE>
10. STOCK OPTION PLAN
The Southwest Bancorp, Inc. 1994 Stock Option Plan (the "Stock Plan")
provides selected key employees with the opportunity to acquire common stock.
The exercise price of all options granted under the Stock Plan is the fair
market value on the grant date The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for the Stock Plan;
accordingly, no compensation expense has been recorded in the accompanying
consolidated statements of operations. Had compensation cost for the Stock Plan
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, the
Company's proforma data would have been as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Proforma net income $4,778,707 $7,382,355 $5,986,700
Proforma net income available to common shareholders $3,191,707 $5,795,355 $5,320,700
Basic earnings per common share $ 0.85 $ 1.54 $ 1.42
Diluted earnings per common share $ 0.82 $ 1.51 $ 1.40
Weighted average fair value at grant date $ 9.24 $ 7.57 $ 5.40
</TABLE>
The compensation cost is calculated using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 1.30% 1.47% 1.79%
Expected volatility 17.87% 20.66% 25.20%
Risk-free interest rate 5.89% 6.90% 6.61%
Expected option term (in years) 10 10 10
</TABLE>
The Stock Plan's activity follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
-------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 182,000 $ 12.75
Granted 30,000 13.38
Exercised - -
Canceled/expired - -
-------------------------------
Outstanding at December 31, 1995 212,000 12.84
Granted 35,000 18.82
Exercised - -
Canceled/expired - -
-------------------------------
Outstanding at December 31, 1996 247,000 13.69
Granted 35,000 25.47
Exercised (14,000) 17.95
Canceled/expired (7,500) 18.50
-------------------------------
Outstanding at December 31, 1997 260,500 $ 14.90
===============================
Total exercisable at December 31, 1995 72,000 $ 12.78
Total exercisable at December 31, 1996 116,500 $ 13.36
Total exercisable at December 31, 1997 126,000 $ 13.30
</TABLE>
38
<PAGE>
At December 31, 1997, the Company had reserved 375,522 shares under the
Stock Plan, 260,500 shares of which are under option. The following summarizes
the information concerning options outstanding and exercisable at December 31,
1997.
<TABLE>
<CAPTION>
Number of Range of Weighted Average Weighted Exercisable
Options Exercise Remaining Average Number Weighted Average
Outstanding Prices Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
210,500 $12-75-$13.38 6.51 $ 12.84 119,500 $ 12.79
20,000 $19.25-$21.81 8.74 $ 19.89 3,500 $ 19.62
30,000 $24.75-$26.75 9.91 $ 26.08 3,000 $ 26.08
</TABLE>
11. EMPLOYEE BENEFITS
The Company sponsors a noncontributory, defined contribution profit sharing
plan intended to provide retirement benefits for employees of the Company. 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. The Company
made contributions of $588,000, $671,000 and $680,000 in 1997, 1996, and 1995,
respectively.
12. OPERATING LEASES
The Company leases certain equipment and facilities for its operations.
Future minimum annual rental payments required under operating leases that have
initial or remaining lease terms in excess of one year as of December 31, 1997
follow:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,001,620
1999 746,070
2000 613,093
2001 519,967
2002 368,313
</TABLE>
The total rental expense was $1.2 million, $1.0 million and $803,000 in
1997, 1996 and 1995, respectively.
13. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - The fair value of U.S. Government and agency
obligations, other securities and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
LOANS RECEIVABLE - Fair values are estimated for certain homogeneous
categories of loans adjusted for differences in loan characteristics. The
Bank's loans have been aggregated by categories consisting of commercial,
39
<PAGE>
real estate, student, credit card and other consumer. The fair value estimate
for student loans is the current historical cost carrying value as such loans
are typically sold in the secondary market at par value. The fair value of all
other loans is estimated by discounting the cash flows using credit and interest
rate risks inherent in the loan category and interest rates currently offered
for loans with similar terms and credit risks.
ACCRUED INTEREST RECEIVABLE - The carrying amount is a reasonable estimate
of fair value for accrued interest receivable.
DEPOSITS - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the statement of
financial condition date. The fair value of fixed-maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
SHORT-TERM BORROWINGS - The fair values of short-term borrowings are the
amounts payable at the statement of financial condition date, as the carrying
amount is a reasonable estimate of fair value. Included in short-term
borrowings are federal funds purchased, securities sold under agreements to
repurchase, and treasury tax and loan demand notes.
LONG-TERM DEBT - The fair value of long-term debt, which consists of the
Subordinated Debentures, is estimated based on quoted market prices or dealer
quotes.
OTHER LIABILITIES AND ACCRUED INTEREST PAYABLE - The estimated fair value
of other liabilities, which primarily include trade accounts payable, and
accrued interest payable approximates their carrying value.
COMMITMENTS - Commitments to extend credit, standby letters of credit and
financial guarantees written or other items have short maturities and therefore
have no significant fair values.
The carrying values and estimated fair values of the Company's financial
instruments follow:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------- -------------------------------------
Carrying Fair Carrying Fair
Values Values Values Values
-------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 36,259 $ 36,259 $ 22,914 $ 22,914
Investment securities:
Held to maturity 86,994 87,592 83,589 83,963
Available for sale 100,746 100,746 63,762 63,762
Loans receivable 710,831 731,459 637,507 643,927
Accrued interest receivable 8,883 8,883 7,400 7,400
Deposits 841,425 841,935 753,945 756,093
Accrued interest payable 6,504 6,504 5,061 5,061
Other liabilities 1,227 1,227 1,907 1,907
Short-term borrowings 20,548 20,548 2,985 2,985
Long-term debt 25,013 25,607 - -
Commitments - - - -
</TABLE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with generally accepted accounting principles, these
transactions are not presented in the accompanying consolidated financial
statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial
and real estate mortgage credit, standby and commercial letters of credit and
available credit card lines of credit.
40
<PAGE>
The following table provides a summary of the Company's off-balance sheet
financial instruments:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1997 1996
--------------------------------------
(dollars in thousands)
<S> <C> <C>
Commitments to extend commercial and real estate mortgage credit $242,401 $154,041
Standby and commercial letters of credit 4,505 4,214
Credit card lines of credit 559,261 348,144
---------------- ----------------
Total $806,167 $506,399
================ ================
</TABLE>
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
the Company to honor a financial commitment by issuing a guarantee to a third
party should the Company'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 the Company. 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.
The Bank'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. The Bank has an
agreement with other financial institutions to purchase $558.1 million and
$285.0 million of unadvanced credit card lines of credit at December 31, 1997
and 1996, respectively, if such credit card lines of credit are funded. Such
commitments are made with the same terms as similarly funded extensions of
credit including collateral, rates and maturities. The Bank does not anticipate
any material losses as a result of the commitments.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company 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 the Company's financial
position; however, the Company is not able to predict whether the outcome of
such actions may or may not have a material adverse effect on results of
operations in a particular future period as the timing and amount of any
resolution of such actions and relationship to the future results of operations
are not known.
At periodic intervals, the Federal Reserve Bank and the Office of the
Comptroller of the Currency routinely examine the Company's and the Bank's
financial statements as part of their legally prescribed oversight of the
banking industry. Based on these examinations, the regulators can direct that
the Company's and the Bank's financial statements be adjusted in accordance with
their findings.
The Bank 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 the Bank by providing severance compensation to them upon their involuntary
termination of employment after a change in control of the Bank. At December
31, 1997, the Bank has not recorded any amounts in the consolidated financial
statements relating to the Plan. If a change of control were to occur, the
maximum amount payable to certain officers and key members of management would
approximate $1.1 million.
41
<PAGE>
16. SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid for interest $39,804 $32,038 $26,913
Cash paid for taxes on income 2,333 4,390 3,600
Loans originated to finance the
sale of other real estate owned - - 68
Loans transferred to other real estate owned 521 21 15
Reclassification of investment securities
from held to maturity to available for sale - - 32,672
Unrealized gain/(loss) on investment
securities available for sale, net of tax 375 (407) 1,489
</TABLE>
17. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In December of 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125. The Company
will adopt SFAS No. 127 on January 1, 1998 as required. Management believes the
adoption of SFAS No. 127 will not have a material impact on the Company's
consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
Standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company will adopt SFAS No.
131 on January 1, 1998 as required and believes the Company has only one
segment, as that term is defined in SFAS No. 131.
42
<PAGE>
18. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Following are the condensed financial statements of Southwest Bancorp, Inc.
("Parent Company only") for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1997 1996
---------------------------------------
STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 3,506 $ 754
Investment in subsidiary bank 73,297 62,808
Investment securities, available for sale 15,408 1,446
Other assets 1,603 423
----------------- -----------------
Total $93,814 $65,431
================= =================
Liabilities:
Subordinated debentures $25,013 -
Other liabilities 753 $ 399
Shareholders' Equity:
Preferred 17,382 17,382
Common 50,666 47,650
----------------- -----------------
Total $93,814 $65,431
================= =================
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
STATEMENTS OF OPERATIONS (dollars in thousands)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary bank $1,875 $ 1,053 $ 901
Dividend income - 22 28
Investment income 585 116 98
Other income 2 - -
Security gains/(losses) - 288 -
----------------- ----------------- -----------------
Total income 2,462 1,479 1,027
Expense:
Interest on subordinated debentures 1,338 - -
General and administrative expense 227 150 95
----------------- ----------------- -----------------
Total expense 1,565 150 95
----------------- ----------------- -----------------
Total income before tax expense and equity
in undistributed income of subsidiary bank 897 1,329 932
Taxes on income (383) 99 4
----------------- ----------------- -----------------
Income before equity in undistributed
income of subsidiary bank 1,280 1,230 928
Equity in undistributed income of subsidiary bank 3,700 6,322 5,164
Net income $4,980 $ 7,552 $ 6,092
================= ================= =================
Net income available to common shareholders $3,393 $ 5,965 $ 5,426
================= ================= =================
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 4,980 $ 7,552 $ 6,092
Equity in undistributed income of subsidiary bank (3,700) (6,322) (5,164)
Other, net (871) 140 (421)
-------------- -------------- ---------------
Net cash provided by operating activities 409 1,370 507
-------------- -------------- ---------------
Investing activities:
Available for sale securities:
Purchases (15,506) (1,806) (3,146)
Sales - - -
Maturities 1,635 3,325 1,245
-------------- -------------- ---------------
Net cash provided by (used in) investing activities (13,871) 1,519 (1,901)
-------------- -------------- ---------------
Financing activities:
Proceeds from issuance of:
Preferred stock - - 16,322
Common stock 456 170 -
Subordinated debentures 25,013 - -
Capital contribution to Bank (6,500) - (13,500)
Cash dividends paid:
Preferred stock (1,587) (1,587) (533)
Common stock (1,168) (1,015) (864)
-------------- -------------- ---------------
Net cash provided by (used in) financing activities 16,214 (2,432) 1,425
-------------- -------------- ---------------
Net increase in cash and cash equivalents 2,752 457 31
Cash and cash equivalents,
Beginning of year 754 297 266
-------------- -------------- ---------------
End of year $ 3,506 $ 754 $ 297
============== ============== ===============
</TABLE>
* * * * * * * * * *
44
<PAGE>
MANAGEMENT'S REPORT
January 30, 1998
To the Shareholders of Southwest Bancorp, Inc.:
FINANCIAL STATEMENTS
The management of Southwest Bancorp, Inc. and its subsidiary, Stillwater
National Bank and Trust Company, (the "Company") is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based
upon informed judgments and estimates made by management.
INTERNAL CONTROL
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting, including safeguarding of
assets, presented in conformity with both generally accepted accounting
principles and the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income ("Call Report").
The structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and Call Report instructions as of
December 31, 1997. This assessment was based on criteria for effective internal
control over financial reporting, including safeguarding of assets, described in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Company maintained an effective internal control structure
over financial reporting, including safeguarding of assets, presented in
conformity with both generally accepted accounting principles and Call Report
instructions as of December 31, 1997.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of Company management. The Audit
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with management, the
independent auditors and the internal auditors to ensure that they are carrying
out their responsibilities. The Audit Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The independent auditors and the internal auditors
have full and free access to the Audit Committee, with or without the presence
of management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Audit Committee.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with federal laws
and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the Federal Deposit Insurance Corporation (the "FDIC") as safety and soundness
laws and regulations.
Management assessed its compliance with these designated safety and
soundness laws and regulations and has maintained records of its determinations
and assessments as required by the FDIC. Based on this assessment, management
believes that the Company has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended December
31, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/ /s/
Robert L. McCormick, Jr. Kerby E. Crowell
Vice Chairman and President Executive Vice President and Chief Financial Officer
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
BOARD OF DIRECTORS STILLWATER NATIONAL Jim D. Marshall
George M. Berry BANK & TRUST COMPANY Senior Vice President
Chairman of the Board David W. Pitts
Investments SENIOR MANAGEMENT Senior Vice President
Joyce Berry Robert L. McCormick W. Ron Rakes
Investments Vice Chairman and Chief Senior Vice President
Tom D. Berry Executive Officer Ruth E. Walker
Investments Stanley R. White Senior Vice President
Joe Berry Cannon Executive Vice President and Bill T. Burnett
Investments Chief Lending Officer Vice President
Haskell Cudd Rick J. Green Larry Collins
President, Stillwater Milling Executive Vice President and Vice President
Company Chief Operating Officer Barbara P. Franks
J. Berry Harrison Thomas E. Bennett, Jr. Vice President
Rancher President, Tulsa Division Katrina Jarvis
Erd M. Johnson Patrick E. Zimmerman Vice President
Petroleum Engineer & President, Stillwater Division Jo McCollom
Operating Partner, Johnson Joseph P. Root Vice President
Oil Partnership President, Central Oklahoma Division
David P. Lambert Kerby E. Crowell, CPA TULSA DIVISION
President, Lambert Executive Vice President and Chief Thomas E. Bennett, Jr.
Construction Company Financial Officer President, Tulsa Division
Robert L. McCormick Kimberly G. Sinclair Danny W. Williams
Vice Chairman & Chief Executive Vice President and Executive Vice President
Executive Officer, Stillwater Chief Administrative Officer Paul D. Anderson
National Bank & Trust Co. Senior Vice President
Linford R. Pitts Merle J. Budd
President, Stillwater Transfer & Storage Co. EXECUTIVE OFFICE/ELECTRONIC BANKING Senior Vice President
Robert B. Rodgers Robert L. McCormick Louis W. Ciucci
President, Perry & Rodgers Vice Chairman and Chief Senior Vice President
Motor Co. Executive Officer Lew E. Erikson
James B. Wise, M.D. Rick J. Green Senior Vice President
Ophthalmologist and Eye Executive Vice President and Roger D. Freeman
Surgeon Chief Operating Officer Senior Vice President
Lee Wise Terry M. Almon Evans C. Rector
Attorney Senior Vice President, Senior Vice President
Electronic Banking Joe E. Staires
Senior Vice President
LENDING DIVISION Stephen V. Bradshaw
SOUTHWEST BANCORP, INC. Stanley R. White Vice President
Robert L. McCormick Executive Vice President and W. Craig Caldwell
President Chief Lending Officer Vice President
Kerby E. Crowell, CPA Jerry L. Lanier Sandra K. Crooch
Executive Vice President Senior Vice President, Vice President
Deborah T. Bradley Credit Administration Elaine M. Dishman
Secretary Cleo L. Fowler Vice President
Kay W. Smith Vice President, Special Assets Jim L. Fischer
Vice President and Vice President
Comptroller STILLWATER DIVISION Janet W. Gotwals
Patrick E. Zimmerman Vice President
President, Stillwater Division
Dian S. Hardin
Senior Vice President
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CENTRAL OKLAHOMA DIVISION OPERATIONS/STUDENT LOANS/ CORPORATE INFORMATION
Joseph P. Root HUMAN RESOURCES/ MORTGAGE LOANS/SUPPORT
President, Central Oklahoma Division Kimberly G. Sinclair INDEPENDENT AUDITORS
R. Charles Smith Executive Vice President Deloitte & Touche LLP
Executive Vice President and Chief Administrative 20 N. Broadway, Suite 900
G. Johnson Hightower Officer Oklahoma City, OK 73102-8203
Senior Vice President Darlene Anderson
Shannan K. Cowden Vice President, Mortgage SPECIAL COUNSEL
Vice President Loans Kennedy, Baris & Lundy, L.L.P.
Sean C. Fuller Wayne C. Bland 4719 Hampden Lane
Vice President Vice President, Mortgage Suite 300
Derek B. Gill Loans Bethesda, MD 20814
Vice President David Dietz
B. Lynn Kelly Vice President and GENERAL COUNSEL
Vice President Chief Information Officer Hert & Baker
Keith T. Kersten Kathy Heil 222 E. 7th Avenue
Vice President Vice President, Mortgage Loans Stillwater, OK 74074
Lynn C. Lax Vicki S. Keen
Vice President Vice President, Human TRANSFER AGENTS AND REGISTRARS
Tom L. Messick Resources Harris Trust & Savings Bank
Vice President Teresa Kerby 111 W. Monroe St.
Cindy J. Nunley Vice President, Mortgage Loans Chicago, IL 60690
Vice President Sharon L. Knight
W. Chris Palmer Vice President, Loan Services State Street Bank and Trust Company
Vice President Debra Lee Two International Place
Kristine Stejskal Vice President, Mortgage Loans Boston, MA 02110
Vice President Lydia Owens
Cathy S. Westmoreland Vice President, Mortgage ANNUAL MEETING
Vice President Loans
Daryl E. Ross The 1998 Annual Meeting of
FINANCE & AUDITING Vice President, Shareholders will be held on
Kerby E. Crowell, CPA Facilities Management April 23, 1998 at 11:00
Executive Vice President Elaine E. Skillman a.m. in the Auditorium (Room 215) at
and Chief Financial Officer Vice President, Student the Stillwater Public Library,
Charles Westerheide Loans & Operations 1107 S. Duck, Stillwater,
Vice President and Gary Teel Oklahoma.
Treasury Manager Vice President, ATM Network
Brady Shuler Bruce F. Webber
Vice President and Division Controller Vice President, Student Loan Sales
Kay W. Smith
Vice President and MARKETING
Comptroller Scott Jones
Senior Vice President and
Director of Marketing
</TABLE>
47
<PAGE>
STILLWATER NATIONAL BANK & TRUST COMPANY LOCATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
Corporate Headquarters Drive-in & Mortgage Lending 6305 Waterford Blvd.,
608 S. Main Street 3rd & Main Suite 205
Stillwater, Oklahoma 74074 Stillwater, Oklahoma 74074 Oklahoma City,
405-372-2230 405-372-2230 Oklahoma 73118
405-427-4000
500 W. Grand Avenue 2547 E. 21st 2431 E. 61st, Suite 170
Chickasha, Oklahoma 73018 Tulsa, Oklahoma 74114 Tulsa, Oklahoma 74136
405-222-1272 918-523-3900 918-523-3600
Website Address
www.banksnb.com
</TABLE>
STOCK INFORMATION
NASDAQ National Market Symbols:
Common Stock - OKSB
Preferred Stock - OKSBP
Trust Preferred Securities - OKSBO
The following table sets forth the common stock dividends paid for each quarter
during 1997 and 1996 and the range of high and low closing trade prices for the
common stock for those periods.
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------------------
Dividend Dividend
High Low Declared High Low Declared
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ending:
March 31 $23.000 $19.500 $0.08 $19.250 $17.750 $0.07
June 30 25.875 21.250 0.08 19.750 18.250 0.07
September 30 26.750 20.500 0.08 20.000 18.000 0.07
December 31 28.500 21.375 0.08 20.750 19.000 0.07
</TABLE>
48
<PAGE>
ANNUAL REPORT ON FORM 10-K
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE
OBTAINED BY SHAREHOLDERS AS OF THE RECORD DATE AT NO CHARGE BY WRITING TO KERBY
E. CROWELL, CHIEF FINANCIAL OFFICER, SOUTHWEST BANCORP, INC., 608 S. MAIN
STREET, STILLWATER, OKLAHOMA 74074.
49
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the Registrant.
NAME JURISDICTION OF
INCORPORATION
--------------------------------------------------------------------
SBI Capital Trust Delaware
Stillwater National Bank & Trust Company United States
Stillwater National Building Corporation* Oklahoma
CRK Properties, Inc.* Oklahoma
Stillwater Properties, Inc.* Oklahoma
Cash Source, Inc.* Oklahoma
* Direct subsidiaries of Stillwater National Bank & Trust Company.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No. 33-
81276 (1994 Stock Option Plan) and 33-97850 (Employee Stock Purchase Plan), each
on Form S-8, and Registration Statement No. 33-94378 (Dividend Reinvestment
Plan) on Form S-3, of our report dated January 30, 1998, appearing in this
Annual Report on Form 10-K of Southwest Bancorp, Inc. for the year ended
December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
OKLAHOMA CITY, OKLAHOMA
MARCH 26, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally
constitute and appoint Robert L. McCormick our true and lawful attorney and
agent, to do any and all things in our names in the capacities indicated below
which said person may deem necessary or advisable to enable the Registrant to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the annual report on Form 10-K for the year ended December 31,
1997, including specifically, but not limited to, power and authority to sign
for us in our names in the capacities indicated below the annual report and any
amendments thereto; and we hereby approve, ratify and confirm all that said
person shall do or cause to be done by virtue thereof.
/s/ George M. Berry February 26, 1998
- ------------------------------
George M. Berry
Director
/s/ Joyce P. Berry February 26, 1998
- ------------------------------
Joyce P. Berry
Director
/s/ Thomas D. Berry February 26, 1998
- ------------------------------
Thomas D. Berry
Director
/s/ Joe Berry Cannon February 26, 1998
- ------------------------------
Joe Berry Cannon
Director
/s/ W. Haskell Cudd February 26, 1998
- ------------------------------
W. Haskell Cudd
Director
/s/ J. Berry Harrison February 26, 1998
- ------------------------------
J. Berry Harrison
Director
/s/ Erd M. Johnson February 26, 1998
- ------------------------------
Erd M. Johnson
Director
/s/ David P. Lambert February 26, 1998
- ------------------------------
David P. Lambert
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWEST
BANCORP'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,252
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,746
<INVESTMENTS-CARRYING> 86,994
<INVESTMENTS-MARKET> 87,592
<LOANS> 719,113
<ALLOWANCE> 8,282
<TOTAL-ASSETS> 963,286
<DEPOSITS> 841,425
<SHORT-TERM> 20,548
<LIABILITIES-OTHER> 8,252
<LONG-TERM> 25,013
0
690
<COMMON> 3,788
<OTHER-SE> 63,570
<TOTAL-LIABILITIES-AND-EQUITY> 963,286
<INTEREST-LOAN> 65,560
<INTEREST-INVEST> 10,582
<INTEREST-OTHER> 707
<INTEREST-TOTAL> 76,849
<INTEREST-DEPOSIT> 39,569
<INTEREST-EXPENSE> 41,247
<INTEREST-INCOME-NET> 35,602
<LOAN-LOSSES> 12,104
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 25,746
<INCOME-PRETAX> 7,647
<INCOME-PRE-EXTRAORDINARY> 7,647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,980
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 870.00
<LOANS-NON> 5,458
<LOANS-PAST> 1,677
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 27,010
<ALLOWANCE-OPEN> 7,139
<CHARGE-OFFS> 11,528
<RECOVERIES> 567
<ALLOWANCE-CLOSE> 8,282
<ALLOWANCE-DOMESTIC> 8,282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 938
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWEST
BANCORPS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED _____ __, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<CASH> 28,212 31,271 32,285
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 15,800 4,000 4,700
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 64,897 91,903 97,686
<INVESTMENTS-CARRYING> 84,787 86,780 90,905
<INVESTMENTS-MARKET> 84,598 87,105 91,434
<LOANS> 676,499 711,894 723,971
<ALLOWANCE> 8,484 8,669 8,142
<TOTAL-ASSETS> 887,809 967,972 971,176
<DEPOSITS> 314,537 847,292 869,299
<SHORT-TERM> 1,500 1,500 3,046
<LIABILITIES-OTHER> 7,233 7,968 8,390
<LONG-TERM> 0 25,013 25,013
0 0 0
690 690 690
<COMMON> 3,767 3,769 3,771
<OTHER-SE> 60,082 61,740 60,967
<TOTAL-LIABILITIES-AND-EQUITY> 887,809 947,972 971,176
<INTEREST-LOAN> 15,516 31,807 48,724
<INTEREST-INVEST> 2,254 4,777 7,650
<INTEREST-OTHER> 81 270 442
<INTEREST-TOTAL> 17,851 36,854 56,816
<INTEREST-DEPOSIT> 9,189 19,214 29,475
<INTEREST-EXPENSE> 9,259 19,479 30,339
<INTEREST-INCOME-NET> 8,592 17,375 26,477
<LOAN-LOSSES> 3,001 3,802 8,903
<SECURITIES-GAINS> 0 0 7
<EXPENSE-OTHER> 6,359 12,943 19,340
<INCOME-PRETAX> 646 3,606 2,809
<INCOME-PRE-EXTRAORDINARY> 646 3,606 2,809
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 460 2,363 1,923
<EPS-PRIMARY> 0.02 0.42 0.20
<EPS-DILUTED> 0.02 0.41 0.19
<YIELD-ACTUAL> 8.79 8.76 8.75
<LOANS-NON> 4,745 5,942 752
<LOANS-PAST> 1,748 3,960 2,665
<LOANS-TROUBLED> 568 560 552
<LOANS-PROBLEM> 20,734 19,682 21,640
<ALLOWANCE-OPEN> 7,139 7,139 7,139
<CHARGE-OFFS> 1,772 2,535 8,348
<RECOVERIES> 116 263 448
<ALLOWANCE-CLOSE> 8,484 8,669 8,142
<ALLOWANCE-DOMESTIC> 8,484 8,669 8,142
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 1,131 425 1,570
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWEST
BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 28,691 22,674 22,914
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 10,600 16,400 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 60,666 66,064 63,762
<INVESTMENTS-CARRYING> 81,538 88,410 83,589
<INVESTMENTS-MARKET> 81,157 88,099 83,963
<LOANS> 578,902 614,183 644,646
<ALLOWANCE> 6,513 7,005 7,139
<TOTAL-ASSETS> 773,362 821,793 829,117
<DEPOSITS> 703,694 749,712 753,945
<SHORT-TERM> 1,500 1,500 2,985
<LIABILITIES-OTHER> 6,006 7,365 7,155
<LONG-TERM> 0 0 0
0 0 0
690 690 690
<COMMON> 3,759 3,762 3,764
<OTHER-SE> 57,713 58,764 60,578
<TOTAL-LIABILITIES-AND-EQUITY> 773,362 821,793 829,117
<INTEREST-LOAN> 26,103 40,343 55,177
<INTEREST-INVEST> 4,390 6,676 8,999
<INTEREST-OTHER> 218 388 492
<INTEREST-TOTAL> 30,711 47,407 64,668
<INTEREST-DEPOSIT> 15,284 23,829 32,728
<INTEREST-EXPENSE> 15,355 23,916 32,833
<INTEREST-INCOME-NET> 15,356 23,491 31,835
<LOAN-LOSSES> 1,650 2,425 3,100
<SECURITIES-GAINS> 171 172 459
<EXPENSE-OTHER> 10,684 17,137 23,226
<INCOME-PRETAX> 6,102 8,601 11,858
<INCOME-PRE-EXTRAORDINARY> 6,102 8,601 11,858
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,908 5,509 7,552
<EPS-PRIMARY> 0.83 1.15 1.59
<EPS-DILUTED> 0.81 1.13 1.56
<YIELD-ACTUAL> 8.82 8.79 8.78
<LOANS-NON> 3,180 4,513 4,635
<LOANS-PAST> 895 966 1,437
<LOANS-TROUBLED> 3,467 2,702 577
<LOANS-PROBLEM> 11,203 10,028 13,114
<ALLOWANCE-OPEN> 5,813 5,813 5,813
<CHARGE-OFFS> 1,257 1,685 2,301
<RECOVERIES> 307 1,233 527
<ALLOWANCE-CLOSE> 6,513 7,005 7,139
<ALLOWANCE-DOMESTIC> 6,373 6,511 7,139
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 140 494 274
</TABLE>
