<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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
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 23, 1999, the aggregate market value of the 2,915,114 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
such date was approximately $ 68.9 million based on the closing sales price of
$23.625 per share of the registrant's Common Stock on March 23, 1999. 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 23, 1999: 4,079,996
<PAGE>
CAUTION ABOUT FORWARD LOOKING STATEMENTS
Southwest makes forward looking statements in this Form 10-K that are
subject to risks and uncertainties. These forward looking statements include:
. Statements of goals, intentions, and expectations;
. Estimates of risks and of future costs and benefits;
. Statements of the ability to achieve Year 2000 ("Y2K") compliance; and
. Statements of the ability to achieve financial and other goals.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by:
. Management's estimates and projections of future interest rates and other
economic conditions;
. Statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to "Y2K" compliance and costs;
. Future laws and regulations; and
. A variety of other matters.
Because of these uncertainties, the actual future results may be materially
different from the results indicated by these forward-looking statements. In
addition, Southwest's past results of operations do not necessarily indicate its
future results.
PART I
Item 1. Business
- -----------------
Southwest Bancorp, Inc. ("Southwest" or the "Company") is a one-bank
holding company headquartered in Stillwater, Oklahoma. The Company provides
commercial and consumer banking services through its sole banking subsidiary,
the Stillwater National Bank & Trust Company ("Stillwater National" or the
"Bank"). The Company was organized in 1981 as the holding company for Stillwater
National, which was chartered in 1894.
Strategic Focus
The Company's banking philosophy is to provide a high level of customer
service, a wide range of financial services, and products responsive to customer
needs. This philosophy has led to the development of a line of deposit and
lending products that responds to customer needs for speed, efficiency and
information. These include the Company's Sweep Repurchase Agreements, Business
Mail Processing, and the Company's DirectBanker and other internet banking
products, which complement the Company's more traditional banking products.
The Company also emphasizes marketing to highly educated, professional and
business persons in its markets. Southwest seeks to build close relationships
with businesses, professionals and their principals and to service their banking
needs throughout their business development and professional lives.
Products and Services
Southwest offers a wide variety of commercial and consumer lending and
deposit services. The Company has developed internet banking services, called
"DirectBanker," for consumer and commercial customers, a highly automated
lockbox, imaging and information service for commercial customers called
"Business Mail Processing," and a deposit product that automatically sweeps
excess funds from commercial demand deposit accounts and invests them in
short-term borrowings ("Sweep Repurchase Agreements"). The commercial loans
offered by the Company
2
<PAGE>
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 Business Mail
Processing, commercial checking and other deposit accounts, and (ii) retail
deposit services such as certificates of deposit, money market accounts,
checking accounts, NOW accounts, savings accounts and automatic teller machine
("ATM") access. Trust services, personal brokerage and credit cards are offered
through independent institutions.
Organization
The Company's business operations are conducted through three regional
divisions that offer commercial, consumer, and real estate lending services and
retail and commercial deposit products in their market areas, and a home office
that provides technology driven products, residential mortgages, and
government-guaranteed student loans. The Company's support and control functions
are centralized, although each region includes support and control staff. The
organizational structure is designed to facilitate high customer service, prompt
response, efficiency, and appropriate, uniform credit standards and other
controls.
Regional Divisions. The three regional divisions are the Stillwater
division, the Central Oklahoma division (which includes Oklahoma City and
Chickasha) and the Tulsa division. The Stillwater division 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.
All of the regional divisions focus on consumer and commercial financial
services to local businesses and their senior employees and to other managers
and professionals living and working in the Company's market areas. The Company
has a high-service philosophy. Loan officers often meet at the customer's home
or place of business to close loans. Third-party courier services often are used
to collect commercial deposits.
Management believes that the bank consolidation in the Tulsa and Central
Oklahoma markets has created opportunities for growth by the Company. At
year-end, 1998, the Company had only a small share of each of these markets
(less than 5% of deposits in each market). The disruption of service that often
accompanies consolidation enables the Company to market its customer oriented,
responsive banking philosophy to acquire new relationships. The Company believes
that its banking philosophy will assist the Company in maintaining its position
in the Stillwater market where it has in excess of a 50% share of deposits.
Stillwater is the home of Oklahoma State University and is a regional medical
center.
Home Office Business Operations. The Company manages and offers products
that are technology based, or that otherwise are more efficiently offered
centrally, through its home office. These include products that are marketed
through the regional offices, such as the Company's internet banking products
for commercial and retail customers (DirectBanker), commercial information and
item processing services (Business Mail Processing), and residential mortgage
loans, and products marketed and managed directly by central staff, such as
student lending and cash dispensing machines.
The Company's technology products are marketed both to existing customers
and to help develop new customer relationships. Use of these products by
customers enables the Company to serve its customers more effectively, use its
resources more efficiently, and increase fee income.
The Company also manages its mortgage and student lending operations
through its home office. The Company is the second largest originator of
government-guaranteed student loans in Oklahoma. The Company markets its lending
program directly to financial aid directors at Oklahoma colleges and
universities. These loans are sold as they enter repayment. The Company also
originates first mortgage loans for sale to Federal National Mortgage
Association ("FNMA") or private investors. Servicing on these loans may be
released in connection with the sale.
3
<PAGE>
Support and Control Functions. Support and control functions are
centralized, although each regional division has support and control personnel.
The Company's philosophy of customer service extends to its support and control
functions. Senior managers headquartered in the Stillwater offices travel to
Oklahoma City and Tulsa to help in marketing and management. The Company's Chief
Executive Officer, Chief Lending Officer, and others meet in committee in the
regional offices to consider credit proposals in order to ensure customers are
given prompt decisions while maintaining uniform credit standards.
Banking Offices
Banking Offices. 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, and a loan production office in Oklahoma
City. See "Item 2. Properties."
Oklahoma law significantly restricts the ability of the Bank to establish
branches without the acquisition of an existing branch or financial institution,
as described further below. The Company has developed a business strategy that
does not rely on an extensive branch network.
In January 1999, the Company occupied its new 42,000 square foot facility,
which it constructed to replace one of its Tulsa locations. Approximately half
of the building will be rented to others, although no leases have yet been
executed.
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.
Recently, Oklahoma law has been interpreted to permit more extensive branching.
The Bank has received permission to establish four additional branches under
this interpretation to support its existing operations: two in each of the Tulsa
and Oklahoma City metropolitan markets. Other Oklahoma banks also have applied
for branches under this interpretation, which is now subject to legal challenge.
If the interpretation is found to be invalid, then the Bank may not be able to
open the branches, or if opened, may be required to close them. In light of this
uncertainty, the Bank will limit its investment in the new offices.
In March 1999, the Oklahoma legislature took action that may provide
greater branching powers to national banks, such as the Bank, later in 1999.
This action is not final, however, and its outcome cannot be certain.
The Bank Holding Company Act of 1956, as amended (the "BHC Act") allows the
Board of Governors of the Federal Reserve System ("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.
4
<PAGE>
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 U.S. Comptroller of the Currency ("OCC") and
Federal Deposit Insurance Corporation ("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 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.
5
<PAGE>
Employees
As of December 31, 1998, the Company and the Bank had 316 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
government-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.
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-competitive 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
6
<PAGE>
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 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.
7
<PAGE>
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.
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.
8
<PAGE>
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.
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
Association 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 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 1999.
9
<PAGE>
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, 1998 the Bank had a maximum of approximately $12.6 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.
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; subordinated
10
<PAGE>
debt and intermediate-term preferred stock, and up to 45% of pre-tax net
unrealized gains on available for sale equity securities. 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 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 1998, 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, 1998,
the Bank was well-capitalized as defined in the OCC's regulations.
As of December 31, 1998, 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.
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"),
Farmers Home Administration ("FHA") 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
11
<PAGE>
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.
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.
Supplementary Information
The tables and other information required by the Securities and Exchange
Commission's Industry Guides for Statistical Disclosure by Bank Holding
Companies is included in Item 7 of this Form 10-K, in order to place it in the
context of other relevant information on the same topics. That information is
incorporated by reference in this Item 1.
Recent Development
On March 19, 1999, Southwest issued 250,000 shares of common stock for net
proceeds of approximately $5.2 million in a public offering. Shareholders sold
an additional 811,231 shares in the offering.
12
<PAGE>
Item 2. Properties
- -------------------
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, and a loan production office in Oklahoma City.
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 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
operations and support functions. The lease on this space expires on March 31,
2001 with options to renew through February 28, 2010.
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 which houses 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 leases 22,337 square feet of space in the Silvey office building
near 61st and Lewis Streets in Tulsa. 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. In January 1999, the Company occupied its
new 42,000 square foot facility, which it constructed to replace its 21st and
Birmingham Streets office in Tulsa.. Approximately half of the building will be
rented to others, although no leases have yet been executed.
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, which is leased to other
parties, but, continues to house an ATM on that site.
Item 3. Legal Proceedings
- --------------------------
Southwest is at all times subject to various pending and threatened legal
actions. The damages or other relief sought in some of these actions may be
substantial. After reviewing pending and threatened actions with counsel,
management believes that the outcome of currently pending or threatened actions
will not have a material adverse effect on Southwest's overall financial
position. However, the outcome of legal actions is rarely certain, and
Southwest's assessment of the effects of pending or threatened legal actions
could be wrong. In addition, even if a legal action does not have a material
adverse effect on Southwest's financial position, it may have material adverse
effects on its results of operations in a given future period.
13
<PAGE>
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 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
-------
Stock Information
NASDAQ National Market Symbols:
Common Stock - OKSB
Trust Preferred Securities - OKSBO
Southwest had approximately 3,000 shareholders of record at year-end
1998. It cannot yet determine its current holders of record because of the
recently completed offering of common stock. See Item 1, Recent Development.
The following table sets forth the common stock dividends paid for each quarter
during 1998 and 1997 and the range of high and low closing trade prices for the
common stock for those periods.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------
Dividend Dividend
High Low Declared High Low Declared
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ending:
March 31 $29.000 $26.063 $0.09 $23.000 $19.500 $0.08
June 30 32.750 27.000 0.09 25.875 21.250 0.08
September 30 30.000 26.000 0.09 26.750 20.500 0.08
December 31 28.625 19.750 0.09 28.500 21.375 0.08
</TABLE>
14
<PAGE>
Item 6. Selected 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, 1998. The selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements of the Company, including the
accompanying Notes. See Item 14.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Operations Data
Interest income $ 80,252 $ 76,849 $ 64,668 $ 55,000 $ 37,654
Interest expense 42,274 41,247 32,833 28,544 16,637
----------------------------------------------------------
Net interest income 37,978 35,602 31,835 26,456 21,017
Provision for loan losses (1) 3,380 12,104 3,100 2,000 1,800
----------------------------------------------------------
Net interest income after provision for
loan losses 34,598 23,498 28,735 24,456 19,217
Gain on sales of securities and loans (2) 2,918 5,199 2,227 1,025 1,694
Other income (2) 4,025 4,696 4,122 3,849 3,427
Other expenses 26,982 25,746 23,226 19,902 16,440
----------------------------------------------------------
Income before taxes 14,559 7,647 11,858 9,428 7,898
Taxes on income 5,181 2,667 4,306 3,336 2,754
----------------------------------------------------------
Net income $9,378 $4,980 $7,552 $6,092 $5,144
==========================================================
Net income available to common
shareholders (3) $7,392 $3,393 $5,965 $5,426 $5,144
==========================================================
Dividends Declared
Preferred stock $1,190 $1,587 $1,587 $ 533 -
Common stock 1,366 1,208 1,053 901 $ 751
Ratio of total dividends declared to net
income 27.26% 56.12% 34.96% 23.55% 14.60%
Per Share Data (4)
Basic earnings per common share (3) $ 1.95 $ 0.90 $ 1.59 $ 1.44 $ 1.37
Diluted earnings per common share (3) 1.89 0.88 1.56 1.43 1.37
Common stock cash dividends 0.36 0.32 0.28 0.24 0.20
Book value per common share (5) 15.21 13.38 12.66 11.44 10.09
Weighted average common shares
outstanding:
Basic 3,795,136 3,773,037 3,760,370 3,755,228 3,755,228
Diluted 3,914,741 3,872,888 3,828,381 3,788,089 3,756,674
Financial Condition Data (5)
Investment securities (6) $174,671 $187,740 $147,351 $147,688 $143,517
Loans (7) 793,319 719,113 644,646 531,988 412,614
Interest-earning assets 969,002 916,860 791,997 679,676 556,131
Total assets 1,027,865 963,286 829,117 711,135 582,170
Interest-bearing deposits (8) 722,962 744,865 670,216 556,079 458,899
Total deposits (8) 843,061 841,425 753,945 634,387 525,560
Long-term debt (9) 25,013 25,013 - - -
Total shareholders' equity (10) 57,801 68,048 65,032 60,357 37,888
Common shareholders' equity 57,801 50,666 47,650 42,975 37,888
Mortgage servicing portfolio 126,410 132,824 118,953 130,188 143,899
Selected Ratios
Return on average assets 0.95% 0.54% 0.98% 0.93% 1.01%
Return on average total shareholders'
equity 14.33 7.54 12.15 12.81 14.17
Return on average common equity (3) 13.70 6.95 13.30 13.48 14.17
Net interest margin 4.04 4.03 4.32 4.23 4.34
Efficiency ratio (11) 60.07 56.59 60.83 63.52 62.90
Average assets per employee $3,116 $2,667 $2,162 $2,204 $2,089
</TABLE>
15
<PAGE>
Selected Consolidated Financial Data (Continued)
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for loan losses to loans (5) 1.31% 1.15% 1.11% 1.09% 1.20%
Nonperforming loans to loans (5)(12) 0.17 0.99 1.03 0.99 0.60
Allowance for loan losses to
nonperforming loans (5)(12) 786.17 116.08 107.37 110.12 199.16
Nonperforming assets to loans and other real
estate owned (5)(13) 0.62 1.04 1.04 1.03 0.67
Net loan charge-offs to average loans 0.17 1.57 0.31 0.24 0.22
Capital Ratios
Average shareholders' equity to average
assets
Total 6.64 7.12 8.05 7.27 7.12
Common 5.48 5.26 5.81 6.15 7.12
Tier I capital to risk-weighted
assets (5)(14) 8.88 8.96 10.21 10.02 9.64
Total capital to risk-weighted
assets (5)(14) 10.81 13.30 11.40 11.41 10.89
Leverage ratio (5)(14) 7.69 6.95 7.77 8.19 6.76
</TABLE>
(1) 1997 reflects provisions for loan losses that significantly exceeded
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) The amount for 1998 is shown after adjustment for $928,000, or $0.24 per
common share, of original issues costs relating to the redemption of the
Company's Series A Preferred Stock on September 1, 1998.
(4) All share and per share information has been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share.
(5) At period end.
(6) Includes investment securities available for sale.
(7) Net of unearned discounts but before deduction of allowance for loan
losses.
(8) In late 1997, the Company adopted a funding strategy that uses alternative
sources of funds in order to reduce overall funding cost.
(9) In 1997, the Company issued $25.0 million in Subordinated Debentures in
connection with the sale of the Trust Preferred.
(10) On September 1, 1998, the Company redeemed all of its Series A Preferred
Stock at its stated liquidation value of $17.25 million.
(11) The efficiency ratio = other expenses/(net interest income + gain on sales
of securities and loan + other income).
(12) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and loans with restructured terms.
(13) Nonperforming assets consist of nonperforming loans and foreclosed assets.
(14) Computed in accordance with current regulatory guidelines.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Forward Looking Statements. This management's discussion and analysis of
financial condition and results of operations includes forward looking
statements, such as: statements of the Company's goals, intentions, and
expectations; estimates of risks and of future costs and benefits; and
statements of the Company's ability to achieve financial and other goals. These
forward looking statements are subject to significant uncertainties because they
are based upon: future interest rates and other economic conditions; statements
by suppliers of data processing equipment and services, government agencies, and
other third parties as to year 2000 compliance and costs; future laws and
regulations; and a variety of other matters. Because of these uncertainties, the
actual future results may be materially different from the results indicated by
these forward looking statements. In addition, the Company's past growth and
performance do not necessarily indicate its future results. See "Caution About
Forward Looking Statements."
You should read this management's discussion and analysis of the Company's
consolidated financial condition and results of operations in conjunction with
"Selected Consolidated Financial Data," the Company's consolidated financial
statements and the accompanying notes, and other financial data that is included
in this Form 10-K.
16
<PAGE>
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes supplementary tables and other information
required to be included in this Form 10-K by the Securities and Exchange
Commission's Industry Guides for Statistical Disclosure by Bank Holding
Companies.
Financial Condition
The Company's total assets at December 31, 1998 were $1,027.9 million, an
increase of $64.6 million, or 7%, from $963.3 million at December 31, 1997.
Assets increased $134.2 million, or 16%, between December 31, 1996 and 1997. The
1998 increase resulted mainly from a $74.2 million, or 10%increase in loans. The
increase in 1997 resulted from loan growth of $ 74.5 million, or 12%, and an
increase in investment securities of $ 40.4 million, or 27%. The 1997 increase
in investments resulted, in part, from the investment of proceeds from the
issuance of trust preferred securities that year. See Capital Resources. At
December 31, 1998, total and common shareholders' equity was $57.8 million
compared to $68.0 million in total shareholders' equity and $50.7 million in
common shareholders' equity at December 31, 1997. The decrease was the result of
the Company's redemption of preferred stock on September 1, 1998. During 1998,
earnings, net of common and preferred stock dividends, contributed $6.8 million
to common shareholders' equity. Sale of common stock through the dividend
reinvestment plan, the employee stock purchase plan and the employee stock
option plan contributed an additional $248,000 to common shareholders' equity in
1998. Net unrealized gains on investment securities available for sale (net of
tax) declined to $513,000 at December 31, 1998 as compared to $580,000 at
December 31, 1997. As a result, common shareholders' equity increased $7.1
million, or 14%, in 1998. 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 dividends.
On December 31, 1998, the Company exceeded all applicable capital
requirements, having a total risk-based capital ratio of 10.81%, a Tier 1
risk-based capital ratio of 8.88%, and a leverage ratio of 7.69%. As of December
31, 1998, the Bank also met the criteria for classification as a
"well-capitalized" institution under the prompt corrective action rules
promulgated under the Federal Deposit Insurance Act. Designation as a
well-capitalized institution under these regulations does not constitute a
recommendation or endorsement of the Company or the Bank by Federal bank
regulators.
Summary of Earnings
Net Income
Net income for 1998 was $9.4 million, an 88% increase over the $5.0 million
earned in 1997. The substantial increase in earnings was primarily the result of
the after-tax effect of an $8.7 million reduction in the provision for loan
losses. Net income for 1998 also benefited from an increase in net interest
income of $2.4 million, or 7%. These increases in income offset a reduction in
other income ($3.0 million, or 30%), and increases in other expenses ($1.2
million, or 5%) and taxes on income ($2.5 million, or 94%). Net income available
to common shareholders, after deduction of dividends on the Series A Preferred
Stock and a one-time accounting adjustment of $928,000 relating to the
redemption of the Company's Series A Preferred Stock on September 1, 1998, was
$7.4 million, compared with $3.4 million in 1997. Basic earnings per common
share increased 117% to $1.95 per share for 1998 from $0.90 per share for 1997.
Diluted earnings per common share increased 115% to $1.89 per share for 1998
from $0.88 per share for 1997.
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.
17
<PAGE>
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 appropriately identified potential
problem loans and established an appropriate allowance for loan losses at
December 31, 1997.
Net Interest Income
Years ended December 31, 1998 and 1997
Net interest income for 1998 increased to $38.0 million from $35.6 million
in 1997, primarily as a result of the increase in the Company's loan portfolio.
Yields on the Company's interest-earning assets declined by 17 basis points
during 1998, and the rates paid on the Company's interest-bearing liabilities
declined by 21 basis points resulting in an increase in the interest rate spread
to 3.34% for 1998 from 3.30% for 1997. The ratio of average interest-earning
assets to average interest-bearing liabilities declined to 115.53% for 1998 from
115.73% for 1997, due primarily to the issuance in June 1997 of the Subordinated
Debentures, and the increase in short-term borrowings.
Interest income for 1998 was $80.3 million, up from $76.8 million in 1997
primarily as a result of growth in interest-earning assets, which partially
offset the decline in yields. Yields on total interest-earning assets were 8.53%
in 1998 and 8.70% in 1997. Loan interest and fee income increased $3.5 million
because the greater volume of loans outstanding more than offset the effect of
the 24 basis point decline in loan yields. The Company generated growth of $56.5
million in average loans to $756.6 million in 1998 from $700.1 million in 1997,
an 8% increase. Interest income on investment securities increased by $575,000,
despite the sale of available for sale securities in connection with the
redemption of the Company's preferred stock on September 1, 1998. 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 lower
volumes in those areas. The increase in interest-earning assets was funded by
growth in short-term borrowings and retention of earnings.
Total interest expense for 1998 was $42.3 million, a $1.1 million increase
from $41.2 million in 1997. The increase in interest expense was primarily due
to a $49.6 million, or 750%, increase in average short-term borrowings from $6.6
million for the year ended December 31, 1997 to $56.2 million for the year ended
December 31, 1998. Average time deposits declined $11.9 million, or 2%. Rates
paid on interest-bearing liabilities declined to 5.19% in 1998 from 5.40% in
1997.
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 13 basis points, resulting
in a reduction in the interest rate spread to 3.30% for 1997 from 3.51% in 1996.
The ratio of average interest-earning assets to average interest-bearing
liabilities declined to 115.73% 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 $140.70
18
<PAGE>
million, or 23%. During the same period, the rates paid on average
interest-bearing liabilities increased to 5.40% from 5.27%, as a 3 basis point
decline in the average rate paid on time deposits (to 5.72%) 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.
19
<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,
----------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- -----------------------------
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 $756,611 $69,020 9.12% $700,129 $65,560 9.36% $580,590 $55,177 9.50%
Investment securities 181,807 11,128 6.12 170,635 10,580 6.20 146,973 8,999 6.12
Other interest-earning assets 1,947 104 5.34 12,819 709 5.53 9,200 492 5.35
-------------------- -------------------- --------------------
Total interest-earning assets 940,365 80,252 8.53 883,583 76,849 8.70 736,763 64,668 8.78
Noninterest-earning assets:
Other assets 44,362 44,672 35,019
=========== ========== ===========
Total assets $984,727 $928,255 $771,782
=========== ========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand (1) $6,553 $ 150 2.29% $ 37,740 $ 894 2.37% $ 36,088 $ 838 2.32%
Money market accounts (1) 127,020 4,213 3.32 93,118 3,836 4.12 81,939 3,129 3.82
Savings accounts 3,442 76 2.21 3,860 96 2.49 4,580 114 2.49
Time deposits 595,766 32,614 5.47 607,710 34,743 5.72 498,283 28,647 5.75
-------------------- -------------------- --------------------
Total interest-bearing
deposits 732,781 37,053 5.06 742,428 39,569 5.33 620,890 32,728 5.27
Short-term borrowings (2) 56,164 2,895 5.15 6,605 340 5.15 1,940 105 5.41
Long-term debt 25,013 2,326 9.30 14,459 1,338 9.30 - - -
-------------------- -------------------- --------------------
Total interest-bearing
liabilities 813,958 42,274 5.19 763,492 41,247 5.40 622,830 32,833 5.27
--------- ---------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand (1) 22,399 88,575 79,739
Noninterest-bearing money
market accounts (1) 68,271 - -
Other noninterest-bearing
liabilities 14,678 10,099 7,066
Shareholders' equity 65,421 66,089 62,147
----------- ---------- -----------
Total liabilities and
shareholders' equity $984,727 $928,255 $771,782
=========== ========== ===========
Net interest income $37,978 $35,602 $31,835
========= ========== =========
Interest rate spread 3.34% 3.30% 3.51%
======== ======== =========
Net interest margin (3) 4.04% 4.03% 4.32%
======== ======== =========
Ratio of average interest-earning assets
to interest-bearing
liabilities 115.53% 115.73% 118.29%
======== ======== =========
</TABLE>
(1) Interest-bearing demand, money market accounts, noninterest-bearing demand
and noninterest-bearing money market accounts average balances for 1998
reflect the use of a program which reclassifies excess funds in transaction
accounts into money market accounts for regulatory reporting purposes. The
effect is to reduce the reserve amount required to be maintained at the
Federal Reserve Bank.
(2) The increase in short-term borrowings resulted
mainly from increases in Federal Home Loan Bank borrowings and in Sweep
Repurchase Agreements, under which commercial demand deposits are moved
into repurchase agreements.
(3) Net interest margin = net interest income/total interest-earning assets.
20
<PAGE>
Rate/Volume Analysis
The following table analyzes 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.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
Compared to Compared to
December 31, 1997 December 31, 1996
---------------------------------- ----------------------------------
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).................. $ 5,137 $ (1,677) $ 3,460 $ 11,182 $ (799) $ 10,383
Investment securities ............... 684 (109) 575 1,534 49 1,583
Federal funds sold .................. (609) (23) (632) 199 16 215
--------- --------- --------- --------- --------- ---------
Total interest income ........... 5,212 (1,809) 3,403 12,915 (734) 12,181
--------- --------- --------- --------- --------- ---------
Interest paid on:
NOW accounts ........................ (715) (29) (744) 38 18 56
Money market accounts (2) ........... 810 (433) 377 449 258 707
Savings accounts .................... (10) (10) (20) (18) -- (18)
Time deposits ....................... (659) (1,470) (2,129) 6,402 (306) 6,096
Short-term borrowings ............... 2,555 -- 2,555 240 (5) 235
Long-term debt ...................... 988 -- 988 1,338 -- 1,338
--------- --------- --------- --------- --------- ---------
Total interest expense .......... 2,969 (1,942) 1,027 8,449 (35) 8,414
--------- --------- --------- --------- --------- ---------
Net interest income ............. $ 2,243 $ 133 $ 2,376 4,466 $ (699) $ 3,767
========= ========= ========= ========= ========= =========
</TABLE>
(1) Average balances include nonaccrual loans. Fees included in interest income
on loans receivable are not considered material. Interest on tax-exempt
loans and securities is not shown on a tax-equivalent basis because it is
not considered material.
(2) Includes interest-bearing money market accounts only.
Provision for Loan Losses
The Company makes provisions for loan losses in amounts necessary to
maintain the allowance for loan losses at the level the Company deems
appropriate. 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; appraisals of the value of collateral; and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio. Based upon this review, management
established an allowance of $10.4 million, or 1.31% of total loans, at December
31, 1998 compared to an allowance of $8.3 million, or 1.15% of total loans, at
December 31, 1997. During fiscal years 1998, 1997 and 1996, the provisions for
loan losses were $3.4 million, $12.1 million and $3.1 million, respectively.
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 $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 revised
the Bank's credit and loan review policies and standards, revised individual and
21
<PAGE>
committee loan authorities, and committed additional resources to the credit
administration and loan review functions.
In establishing the level of the allowance for December 31, 1998,
management considered a number of factors that tended to indicate a potential
need for an increased allowance level, including: the continued growth in the
portfolio; the increased risk associated with the level of real estate
construction loans, which are viewed as entailing greater risk than certain
other categories of loans; the increased risk inherent in the amount and
percentage of total loans attributable to commercial and commercial real estate
loans, which are viewed as entailing greater risk than certain other categories
of loans; and charge-off history. 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, 1998, total nonperforming loans were $1.3
million, or 0.17% of total loans, compared to $7.1 million, or 0.99% of total
loans, at December 31, 1997. The Company determined the level of the allowance
for loan losses at December 31, 1998 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, 1997 and 1996.
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.
Other Income
The following table sets forth the Company's other income for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Service charges and fees $3,550 $3,177 $2,985
Credit cards 63 659 869
Other noninterest income 412 360 268
Gain on sale of credit card portfolio - 3,745 -
Gain on sales of loans receivable 2,652 1,936 1,768
Gain on sales of investment securities 266 18 459
-------------------------------------------
Total other income $6,943 $9,895 $6,349
===========================================
</TABLE>
The Company has sought to develop sources of noninterest income through
student lending and mortgage banking, in addition to traditional deposit and
loan service charges and fees.
Total other income declined by $3.0 million for fiscal year 1998 compared
to 1997 primarily due to the $3.7 million gain on sale of the credit card
portfolio in 1997. This reduction was partially offset by increased gains on
sales of residential mortgage loans, increased gains on sales of investment
securities and increased service charges attributable to its higher demand
deposit base. The principal balance of residential mortgage loans sold was
$124.3 million during 1998 compared to $71.0 million during 1997.
The gain on sales of investment securities during 1998 occurred when
"available for sale" securities were called prior to their stated maturity date
or were sold to fund the redemption of the Company's preferred stock.
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 gain
22
<PAGE>
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.
Other Expenses
The following table sets forth the Company's other expenses for the periods
indicated.
For the Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(dollars in thousands)
Salaries and employee benefits $14,147 $13,808 $12,164
Occupancy 4,980 4,681 3,671
FDIC and other insurance 248 254 859
Credit cards 8 313 411
General and administrative 7,599 6,690 6,121
-------------------------------------------
Total other expenses $26,982 $25,746 $23,226
===========================================
The Company's other expenses increased $1.2 million, or 5%, for fiscal year
1998 compared to fiscal year 1997. This increase was primarily the result of an
increase in general and administrative expense. In addition, occupancy expense
increased $299,000, due primarily to increased data processing, depreciation and
equipment costs, as systems, facilities and equipment continue to be upgraded,
and salaries and employee benefits increased $339,000. These increases were
offset by a $305,000 reduction in credit card expense.
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 recently completed construction of a new facility for its Tulsa
operations. The building includes space for rental to third parties. The total
cost of the building is expected to be $10.5 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 1998, 1997 and 1996 was
$5.2 million, $2.7 million and $4.3 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.
Financial Condition, Capital Resources and Liquidity
Lending
The Company's loan portfolio is its main source of income, and has been the
main cause of its revenue growth. The Company offers commercial real estate
mortgage and construction loans, commercial loans, residential mortgage and
construction loans, government-guaranteed student loans and other consumer
loans. The Company emphasizes commercial lending to professionals and
businesses.
23
<PAGE>
Loans were $793.3 million at December 31, 1998, an increase of $74.2
million, or 10%, compared to December 31, 1997. Most of the growth in loans, and
in commercial loans, originated in the Tulsa and Oklahoma City markets. The
Company experienced increases in all categories of outstanding loans other than
credit card receivables. The Company sold its credit card portfolio in the
fourth quarter of 1997 after a review of the increasing price competition for
its affinity card groups. The allowance for loan losses increased by $2.1
million, or 26%, from December 31, 1997 to December 31, 1998. At December 31,
1998, the allowance for loans losses was $10.4 million, or 1.31% of total loans,
compared to $8.3 million, or 1.15% of total loans, at 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 all categories of outstanding loans other than credit card
receivables, which declined by $20.8 million, or 99%, due to the sale of
substantially all of that portfolio of loans. 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.
24
<PAGE>
Loan Portfolio
The following table presents the composition of the Company's loan portfolio,
net of unearned interest:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ -------------------- ------------------ ------------------- ------------------- -
Amount % Amount % Amount % Amount % Amount %
--------- -------- ---------- --------- --------- -------- --------- --------- ---------- --------
(dollars in thousands)
Real estate mortgage:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential.............. $ 83,657 10.55 $ 79,843 11.10 61,175 9.49 42,988 8.08 33,882 8.21
Commercial............... 275,729 34.75 223,672 31.10 196,163 30.43 160,126 30.10 132,297 32.06
Real estate construction... 76,544 9.65 72,454 10.08 54,369 8.43 33,159 6.23 20,725 5.02
Commercial................. 252,341 31.81 241,007 33.52 218,515 33.90 181,081 34.04 120,781 29.27
Installment and consumer
Government-guaranteed
student loans.............. 65,242 8.22 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........... 39,806 5.02 37,674 5.24 31,626 4.91 25,377 4.77 22,219 5.39
--------- ------- ---------- ------- --------- ------- --------- -------- ---------- -------
793,319 100.00 719,113 100.00 644,646 100.00 531,988 100.00 412,614 100.00
======= ======= ======= ======== =======
Less:
Allowance for loan losses.. (10,401) (8,282) (7,139) (5,813) (4,959)
--------- ---------- --------- --------- ----------
Total................ $782,918 $ 710,831 $637,507 $526,175 $407,655
========= ========== ========= ========= ==========
</TABLE>
25
<PAGE>
Collateral and Concentration. At December 31, 1998 and 1997, substantially
all of the Company's loans were collateralized with real estate, inventory,
accounts receivable and/or other assets or were guaranteed by federal government
agencies. Loans to individuals and businesses in the healthcare industry totaled
$79.1 million, or 10% of total loans, at December 31, 1998. The Company does not
have any other concentrations of loans to individuals or businesses involved in
a single industry totaling 5% of total loans. The Bank's lending limit under
federal law to any one borrower was $13.6 million at December 31, 1998, but
lending policy generally limits loans to any one borrower to 90% of the Bank's
legal lending limit. Exceptions to this policy are made from time to time. The
Bank's largest single borrower, net of participations, at December 31, 1998 had
outstanding loans of $9.3 million.
Loan Portfolio Maturity. The following table shows the remaining
maturities of loans at December 31, 1998. Student loans, which do not have
stated maturities, are shown as due in one year or less.
One to
One year five Over
or less years five years Total
---------- ---------- ----------- ----------
(dollars in thousands)
Real estate mortgage:
Commercial................ $ 20,663 $ 62,107 $ 192,959 $ 275,729
One-to-four family 13,128
residential............... 34,130 36,399 83,657
Real estate construction....... 55,723 11,567 9,254 76,544
Commercial..................... 109,299 99,139 43,903 252,341
Installment and consumer:
Government-guaranteed
student loans............. 65,242 - - 65,242
Other..................... 13,619 25,029 1,158 39,806
---------- ---------- ----------- ----------
Total............... $ 277,674 $ 231,972 $ 283,673 $ 793,319
========== ========== =========== ==========
Loan Portfolio Sensitivity. The following table shows the sensitivity of
loans due after December 31, 1999 by dollar amount outstanding.
Fixed Variable Total
----------- ---------- -----------
(dollars in thousands)
Real estate mortgage:
Commercial................. $ 99,490 $ 155,576 $ 255,066
One-to-four family
residential................ 24,410 46,119 70,529
Real estate construction....... 5,735 15,086 20,821
Commercial..................... 23,415 119,627 143,042
Installment and consumer:
Government-guaranteed
student loans............. - - -
Other..................... 23,962 2,225 26,187
----------- ---------- -----------
Total................ $ 177,012 $ 338,633 $ 515,645
=========== ========== ===========
26
<PAGE>
Nonperforming Assets
Nonperforming loans consist of loans on a nonaccrual basis, loans
contractually past due 90 days or more, and loans with restructured terms. At
December 31, 1998, approximately $254,000, or 19% of the total loans reported as
nonperforming, are guaranteed by the federal government, a government agency, or
a government sponsored corporation. The following table shows the amounts of
nonperforming assets:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Commercial:
Nonaccrual $ 372 $3,938 $ 191 $ 107 $ 179
Past due 90 days or more 194 179 614 88 -
Restructured terms - - 577 608 639
One-to-four family residential:
Nonaccrual 323 110 265 18 58
Past due 90 days or more 107 700 363 251 72
Restructured terms - - - - -
Real estate construction:
Nonaccrual - - - - 86
Past due 90 days or more - 603 119 - -
Restructured terms - - - - -
Commercial:
Nonaccrual 156 1,403 4,149 567 805
Past due 90 days or more 149 195 71 435 241
Restructured terms - - - 2,996 -
Installment and consumer:
Guaranteed student loans:
Nonaccrual - - - - -
Past due 90 days or more - - - - -
Restructured terms - - - - -
Credit cards:
Nonaccrual - - - - -
Past due 90 days or more - - 82 63 138
Restructured terms - - - - -
Other consumer:
Nonaccrual 21 7 30 32 210
Past due 90 days or more 1 - 188 114 62
Restructured terms - - - - -
--------------------------------------------------------------
Total nonperforming loans 1,323 7,135 6,649 5,279 2,490
Other real estate owned 3,650 362 64 195 264
--------------------------------------------------------------
Total nonperforming assets $4,973 $7,497 $6,713 $5,474 $2,754
==============================================================
Loans receivable $793,319 $719,113 $644,646 $531,988 $412,614
==============================================================
Summary:
Total nonaccrual $ 872 $5,458 $4,635 $ 724 $1,338
Total past due 90 days or more 451 1,677 1,437 951 513
Total restructured - - 577 3,604 639
--------------------------------------------------------------
Total nonperforming loans 1,323 7,135 6,649 5,279 2,490
Other real estate owned 3,650 362 64 195 264
--------------------------------------------------------------
Total nonperforming assets $4,973 $7,497 $6,713 $5,474 $2,754
==============================================================
Allowance for loan losses to loans 1.31% 1.15% 1.11% 1.09% 1.20%
Nonperforming loans to loans 0.17 0.99 1.03 0.99 0.60
Allowance for loan losses to nonperforming
loans 786.17 116.08 107.37 110.12 199.16
Nonperforming assets to loans and other real
Estate owned 0.62 1.04 1.04 1.03 0.67
</TABLE>
27
<PAGE>
Other real estate owned consisted of a foreclosed motel property with a
carrying value of $3.7 million, which is being operated by a motel management
company engaged by the Company while being actively marketed. The loan secured
by this property was classified as nonperforming at year-end 1997.
Other Nonperforming Assets. The Company does not have any material amounts
of interest-earning assets which would have been classified as nonperforming if
such assets were loans, or which were recognized by management as potential
problem assets based upon known information about possible credit problems of
the borrower or issuer.
Nonaccrual Loans. The recognition of interest income on loans is
discontinued when management believes that interest will not be collectible in
the normal course of business. Generally, the Company does not accrue interest
on any asset (i) that 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. During 1998, $197,000 in interest
income was received on nonaccrual loans. If interest on those loans had been
accrued, total interest income of $682,000 would have been recorded. During the
years ended December 31, 1997 gross interest income of $144,000 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 1997 amounted to approximately $30,000.
Potential Nonperforming Loans. Those performing loans considered potential
nonperforming loans, loans which are not included in the past due, nonaccrual or
restructured categories, but for which known information about possible credit
problems cause management to be uncertain as to the ability of the borrowers to
comply with the present loan repayment terms over the next six months, amounted
to approximately $22.9 million at December 31, 1998, compared to $27.0 million
at December 31, 1997. 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.
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; appraisals of 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 are added to the allowance. The allowance for loan losses increased
by $2.1 million, or 26%, from December 31, 1997 to December 31, 1998. At
December 31, 1998, the allowance for loan losses was $10.4 million, or 1.31% of
total loans, compared to $8.3 million, or 1.15% of total loans, at December 31,
1997.
28
<PAGE>
Allowance for Loan Losses
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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $8,282 $7,139 $5,813 $4,959 $3,960
Loans charged-off:
Real estate mortgage:
Commercial 354 1,150 68 - 156
One-to-four family
residential 106 155 80 7 16
Real estate construction - - - 1 -
Commercial 1,320 8,691 1,064 1,101 461
Installment and consumer:
Guaranteed student loans - 1 - - 1
Credit cards 15 829 803 528 370
Other consumer 579 702 286 166 199
--------------------------------------------------------------
Total charge-offs 2,374 11,528 2,301 1,803 1,203
--------------------------------------------------------------
Recoveries:
Real estate mortgage:
Commercial 93 6 10 119 34
One-to-four family
residential 12 79 15 33 23
Real estate construction - - - - -
Commercial 582 300 288 334 94
Installment and consumer:
Guaranteed student loans - 2 - 1 -
Credit cards 57 108 106 111 139
Other consumer 369 72 108 59 112
--------------------------------------------------------------
Total recoveries 1,113 567 527 657 402
--------------------------------------------------------------
Net loans charged-off 1,261 10,961 1,774 1,146 801
Provision for loan losses 3,380 12,104 3,100 2,000 1,800
--------------------------------------------------------------
Balance at end of period $ 10,401 $8,282 $7,139 $5,813 $4,959
==============================================================
Loans outstanding:
Average $756,611 $700,129 $580,590 $473,080 $356,323
End of period 793,319 719,113 644,646 531,988 412,614
Ratio of allowance for loan losses to loans
Outstanding:
Average 1.37% 1.18% 1.23% 1.23% 1.39%
End of period 1.31 1.15 1.11 1.09 1.20
Ratio of net charge-offs to average loans
Outstanding during the period 0.17 1.57 0.31 0.24 0.22
</TABLE>
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. The Company's investment securities declined by $13.0 million, or 7%,
from $187.7 million at December 31, 1997 to $174.7 million at December 31, 1998
after increasing by $40.4 million, or 27%, between December 31, 1996 and 1997.
The reduction during 1998 was due primarily to the sale of available for sale
securities in connection with the redemption of the Company's preferred stock on
29
<PAGE>
September 1, 1998. 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.
Investment Portfolio
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
U.S. Government and agency securities....... $ 121,656 $ 154,209 $ 109,989
State and municipal obligations............. 15,372 10,953 13,153
Mortgage-backed securities.................. 31,020 16,427 23,060
Other securities............................ 6,623 6,151 1,149
----------- ----------- ----------
Total investment securities............. $ 174,671 $ 187,740 $ 147,351
=========== =========== ==========
Available for sale (fair value)............. $ 97,096 $ 100,746 $ 63,762
Held to maturity (amortized cost)........... 77,575 86,994 83,589
----------- ----------- ----------
Total investment securities............. $ 174,671 $ 187,740 $ 147,351
=========== =========== ==========
</TABLE>
30
<PAGE>
Investment Portfolio Maturity
The following table shows 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,
1998. 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, 1998.
<TABLE>
<CAPTION>
One to Five Five to Ten
One Year or Less Years Years
---------------------- ----------------------- ------------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---------- ---------- ----------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government and agency
Securities....................... $ 21,121 6.25 % $ 42,942 6.13 % - -
State and municipal
Obligations...................... 1,704 4.20 11,504 4.00 304 3.75
Mortgage-backed securities.......... - - - - - -
Other securities.................... - - - - - -
---------- ----------- -----------
Total held to maturity........... 22,825 6.10 54,446 5.68 304 3.75
---------- ----------- -----------
Available for Sale:
U.S. government and agency
Securities....................... 2,082 6.47 50,997 6.17 3,922 7.06
State and municipal
Obligations...................... 999 5.34 853 3.82 - -
Mortgage-backed securities.......... 4,934 6.24 17,699 6.09 8,580 5.62
Other securities.................... - - 4,174 7.04 - -
---------- ----------- -----------
Total available for sale......... 8.015 6.19 73,723 6.17 12,502 6.07
---------- ----------- -----------
Total investment securities...... $ 30,840 6.12 $ 128,169 5.96 $ 12,806 6.02
========== =========== ===========
More than Ten Total Investment
Years Securities
----------------------- -------------------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
------------ ---------- ------------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. government and agency
Securities.......................
State and municipal
Obligations...................... - $ 64,063 $ 65,256 6.17%
Mortgage-backed securities.......... 13,512 13,516 4.02
Other securities.................... - - - -
Total held to maturity........... - - - -
----------- ------------- -----------
77,575 78,772 5.79
Available for Sale: ----------- ------------- -----------
U.S. government and agency
Securities.......................
State and municipal
Obligations...................... - 57,001 57,593 6.24
Mortgage-backed securities..........
Other securities.................... - 1,852 1,860 4.64
- 31,213 31,020 5.99
Total available for sale......... $ 2,000 6.84 % 6,174 6,623 6.98
----------- ------------- -----------
Total investment securities...... 2,000 6.84 96,240 97,096 6.18
----------- ------------- -----------
$ 2,000 6.84 $ 173,815 $ 175,868 6.01
=========== ============= ===========
</TABLE>
31
<PAGE>
At December 31, 1998, the Company held mortgage-backed securities with a
book value of $31.2 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 ("FHLMC" or
Freddie Mac), Federal National Mortgage Association ("FNMA" or Fannie Mae), or
the Government National Mortgage Association ("GNMA" or Ginnie Mae), when such
securities can be acquired at attractive yields, and where the investment
characteristics of the securities complement the Company'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, 1998, 1997, and
1996, 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.
Deposit Activity
The principal sources of funds for the Company 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 Company's offices. The Company's deposit base includes transaction
accounts, time and savings accounts and accounts which customers use for cash
management and which provide the Company 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 Company remains certificates of deposit. The Company also obtains
deposit funds through its retail certificate of deposit programs with brokerage
companies. Certificates of deposit issued through these programs totaled $39.8
million at December 31, 1998.
The Company's deposits increased by $1.7 million, or less than 1%, from
$841.4 million at December 31, 1997 to $843.1 million at December 31, 1998 after
increasing by $87.5 million, or 12%, between December 31, 1996 and December 31,
1997. In February 1998, the Bank began using a program that reclassifies excess
funds in transaction accounts into money market accounts for regulatory
reporting purposes. At December 31, 1998, $62.5 million and $36.0 million had
been swept out of demand and NOW accounts, respectively, and $98.5 million had
been swept into money market accounts. Without these reclassifications, demand
deposits would have totaled $120.1 million (a $23.5 million, or 24%, increase),
NOW accounts would have totaled $43.1 million (a $5.6 million, or 15%, increase)
and money market accounts would have totaled $97.1 million (a $2.6 million, or
3%, increase). This reclassification has no effect on the customer, but reduces
the amount of reserve funds the Company is required to keep on deposit at the
Federal Reserve Bank. The freed funds can then be used to support the Company's
lending and investment operations.
Deposit growth during 1997 came mainly from time deposits. Total time
deposits increased by $64.4 million, or 12% from December 31, 1996 to December
31, 1997.
32
<PAGE>
Deposit Composition
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1998 (1) 1997 1996
---------------------------- --------------------------- ----------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
----------- --------- ------ ---------- --------- ------ ---------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits........................ $ 57,601 6.83% N/A $ 96,560 11.48% N/A $ 83,729 11.11% N/A
Noninterest-bearing
money market accounts................. 62,498 7.41 N/A - - N/A - - N/A
NOW accounts........................... 7,076 0.84 2.29 37,447 4.45 2.37% 34,309 4.55 2.32%
Money market accounts.................. 133,105 15.79 3.32 94,496 11.23 4.12 86,910 11.53 3.82
Savings accounts....................... 3,416 0.41 2.21 3,655 0.43 2.49 4,086 0.54 2.49
Time deposits.......................... 579,365 68.72 5.47 609,267 72.41 5.72 544,911 72.27 5.75
--------- ------- --------- ------- --------- -------
Total deposits.................... $ 843,061 100.00 $ 841,425 100.00% $ 753,945 100.00%
========= ======= ========= ======= ========= =======
</TABLE>
(1) Without the effects of the reserve reclassification program, deposits at
December 31, 1998 would have been as follows:
Percent
of
Amount Deposits
-------- ---------
Demand deposits............... $120,099 14.24%
NOW accounts.................. 43,080 5.11
Noninterest-bearing money
market accounts............ - -
Money market accounts......... 97,101 11.52
Savings accounts.............. 3,416 0.41
Time deposits................. 579,365 68.72
-------- -------
Total deposits........ $843,061 100.00%
======== =======
The Company offers a variety of cash management services to its commercial
deposit customers including Business Mail Processing. Commercial customers in
Tulsa and Oklahoma City frequently use third-party courier services to deliver
deposits which has allowed the Company to effectively service these metropolitan
areas from its current branch locations.
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998:
Maturity Period Amount
------------------------------------- ----------
(dollars in thousands)
Three months or less (1).............. $ 53,864
Over three through six months (1)..... 37,940
Over six through 12 months (1)........ 56,186
Over 12 months........................ 26,439
----------
Total............................. $ 174,429
==========
(1) The amount of certificates of deposit that mature within 12 months is
$148.0 million. The Company does not have any liquidity concerns as a
result of the volume of these maturities.
33
<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, securities sold under agreements to repurchase, and
borrowings from the Federal Reserve Bank, the Federal Home Loan Bank of Topeka
("FHLB") and the Student Loan Marketing Association ("SLMA"). The Company also
carries interest-bearing demand notes issued to the U.S. Treasury in connection
with the Treasury Tax and Loan note program. The Sweep Repurchase Agreement
product introduced by the Company in 1998 caused most of the large increase in
federal funds purchased and securities sold under repurchase agreements. At
December 31, 1998, repurchase agreements were $36.0 million and federal funds
purchased were $20.0 million.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
Treasury, tax and loan note option $ 601 $ 1,595 $ 1,185
Federal funds purchased and securities
sold under repurchase agreements 55,971 18,953 1,800
Borrowed from the Federal Home Loan Bank 38,000 - -
Other short-term borrowings - - -
Weighted average rate outstanding:
Treasury, tax and loan note option 4.11% 5.25% 4.99%
Federal funds purchased and securities
sold under repurchase agreements 4.65 4.94 6.70
Borrowed from the Federal Home Loan Bank 5.14 - -
Other short-term borrowings - - -
Maximum amounts of borrowings outstanding
at any month-end:
Treasury, tax and loan note option $ 2,500 $ 1,843 $ 1,500
Federal funds purchased and securities
sold under repurchase agreements 56,329 19,953 2,300
Borrowed from the Federal Home Loan Bank 38,000 - -
Other short-term borrowings - 5,000 -
Approximate average short-term borrowings
outstanding for the year:
Treasury, tax and loan note option $ 1,589 $ 1,205 $ 1,135
Federal funds purchased and securities
sold under repurchase agreements 33,965 4,657 251
Borrowed from the Federal Home Loan Bank 20,576 - -
Other short-term borrowings 26 743 554
Approximate weighted average rate for the year:
Treasury, tax and loan note option 5.14% 5.36% 4.96%
Federal funds purchased and securities
sold under repurchase agreements 4.99 4.98 5.78
Borrowed from the Federal Home Loan Bank 5.43 - -
Other short-term borrowings 5.80 5.84 5.59
</TABLE>
34
<PAGE>
Capital Resources
The Company effected its planned redemption of the Series A Preferred Stock
on September 1, 1998, at the cash redemption price of $17.25 million. Funds for
this redemption came from the sale of securities purchased with proceeds from
the Trust Preferred issued in 1997. The Trust Preferred is less expensive to the
Company, on an after tax basis, than the Series A Preferred Stock. The redeemed
Preferred Stock exceeded the amount of Trust Preferred that may be included in
Tier 1 capital for regulatory purposes, so the redemption did not cause a
decrease in the Company's Tier 1 or Leverage Capital ratios. At December 31,
1998, total and common shareholders' equity was $57.8 million compared to $68.0
million in total shareholders' equity and $50.7 million in common shareholders'
equity at December 31, 1997.
During 1998, earnings, net of common and preferred stock dividends,
contributed $6.8 million to common shareholders' equity. Sale of common stock
through the dividend reinvestment plan, the employee stock purchase plan and the
employee stock option plan contributed an additional $248,000 to common
shareholders' equity in 1998. Net unrealized gains on investment securities
available for sale (net of tax) declined to $513,000 at December 31, 1998 as
compared to $580,000 at December 31, 1997. As a result, common shareholders'
equity increased $7.1 million, or 14%, in 1998.
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 dividends. 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
Company 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 Capital"), a
statutory business trust and consolidated subsidiary of the Company, sold
1,000,500 Trust Preferred, having a liquidation amount of $25 per security, for
a total price of $25,012,500. The distributions payable on the Trust Preferred
are based on a 9.30% fixed annual rate. The Trust Preferred meets the regulatory
criteria for Tier I capital, subject to Federal Reserve guidelines that limit
the amount of the Trust Preferred and cumulative perpetual preferred stock to an
aggregate of 25% of Tier I capital for the calculation of Tier 1 capital.
Proceeds from the Trust Preferred were invested in 9.30% Subordinated Debentures
of the Company. For accounting purposes, the Trust Preferred 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." 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, and,
on September 1, 1998, redemption of the Company's Series A Preferred Stock.
Bank holding companies are required to maintain capital ratios in
accordance with guidelines adopted by the Federal Reserve Board. The guidelines
are commonly known as Risk-Based Capital Guidelines. On December 31, 1998, the
Company exceeded all applicable capital requirements, having a total risk-based
capital ratio of 10.81%, a Tier 1 risk-based capital ratio of 8.88%, and a
leverage ratio of 7.69%. As of December 31, 1998, the Bank also met the criteria
for classification as a "well-capitalized" institution under the prompt
corrective action rules promulgated under the Federal Deposit Insurance Act.
Designation as a well-capitalized institution under these regulations does not
constitute a recommendation or endorsement of the Company or the Bank by Federal
bank regulators.
Liquidity
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans. 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
35
<PAGE>
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 79%, 84% and 84% of total deposits at December
31, 1998, 1997 and 1996, respectively.
The Company uses various forms of short-term borrowings for cash management
and liquidity purposes. These forms of borrowings include federal funds
purchases, securities sold under agreements to repurchase, and borrowings from
the Federal Reserve Bank, the Student Loan Marketing Association ("SLMA") and
the Federal Home Loan Bank of Topeka ("FHLB"). The Bank also carries
interest-bearing demand notes issued by the U.S. Treasury in connection with the
Treasury Tax and Loan note program. The Bank has approved federal funds purchase
lines totaling $20.0 million with three other banks. In addition, the Bank has
available a $35.0 million line of credit from the SLMA and a $109.1 million line
of credit from the FHLB. Borrowings under the SLMA line would be secured by
student loans. Borrowings under the FHLB line would be secured by all unpledged
securities and qualifying real estate loans. The Bank also has available
unsecured brokered certificate of deposit lines of credit in connection with its
retail certificate of deposit program from Merrill Lynch & Co., Morgan Stanley
Dean Witter and Salomon Smith Barney that total $260.0 million.
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-four day periods and
do not materially affect the Company's liquidity or operations.
During 1998, cash and cash equivalents decreased by $3.9 million as
compared to the year ended December 31, 1997. The increase was the result of
cash generated from financing activities (primarily increased deposits) of $56.1
million and operating activities of $12.1 million offset by $72.1 million in
cash used in investing activities.
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.
The Company redeemed all of the outstanding shares of its 9.20% Redeemable,
Cumulative Preferred Stock, Series A (the "Preferred Stock"), on September 1,
1998, at the cash redemption price of $17.25 million. Substantially all of the
funds for this redemption were obtained from maturities or sales of investment
securities acquired by the Company with proceeds from the 1997 issuance of Trust
Preferred.
See "Item 1. Recent Development."
Asset/Liability Management and Quantitative and Qualitative Disclosures
about Market Risk
The Company's net income is largely dependent on its net interest income.
The Company seeks to maximize its net interest margin within an acceptable level
of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates. Interest rate risk, or sensitivity,
arises when the maturity or repricing characteristics of assets differ
significantly from the maturity or repricing characteristics of liabilities. Net
interest income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by other
sources of funds, such as noninterest-bearing deposits and shareholders' equity.
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 Company may
determine to increase its interest rate risk position somewhat in order to
increase its net interest margin. The Company monitors interest rate risk and
adjusts the composition of its interest-related assets and liabilities in order
to limit its exposure to changes
36
<PAGE>
in interest rates on net interest income over time. The Company's
asset/liability committee reviews its interest rate risk position and
profitability, and recommends adjustments. The Company also reviews the
securities portfolio, formulates investment strategies, and oversees the timing
and implementation of transactions. Notwithstanding the Company'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 Company'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.
"Gap analysis" is a measure of interest rate sensitivity traditionally used
in the banking industry. Gap analysis measures the cumulative differences
between the amounts of assets and liabilities maturing or repricing within
various time periods.
The following table shows the Company"s interest rate sensitivity gaps for
selected maturity periods at December 31, 1998:
<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 $384,109 $ 207,267 $113,631 $ 88,312 $793,319
Investment securities 10,501 24,864 124,452 14,854 174,671
Federal funds sold - - - - -
Due from banks 1,012 - - - 1,012
---------------------------------------------------------------------------
Total 395,622 232,131 238,083 103,166 969,002
Interest-bearing liabilities:
Money market deposit accounts 133,105 - - - 133,105
Time deposits 172,575 324,551 82,230 9 579,365
Savings accounts 3,416 - - - 3,416
NOW accounts 7,076 - - - 7,076
Short-term borrowings 94,572 - - - 94,572
Long-term debt - - - 25,013 25,013
---------------------------------------------------------------------------
Total 410,744 324,551 82,230 25,022 842,547
---------------------------------------------------------------------------
Interest sensitivity gap $(15,122) $(92,420) $155,853 $ 78,144 $126,455
===========================================================================
Cumulative interest sensitivity gap $(15,122) $(107,542) $ 48,311 $126,455 $126,455
===========================================================================
Percentage of interest-earning assets
To interest-bearing liabilities 96.32 % 71.52 % 289.53% 412.30% 115.01%
===========================================================================
Percentage of cumulative gap to total
assets (1.47)% (10.46)% 4.70% 12.30% 12.30%
===========================================================================
</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 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.
A principal objective of the Company's asset/liability management effort is
to balance the various factors that generate interest rate risk, thereby
maintaining the interest rate sensitivity of the Company within acceptable risk
levels. To measure its interest rate sensitivity position, the Company utilizes
a simulation model that facilitates
37
<PAGE>
the forecasting of net interest income under a variety of interest rate and
growth scenarios. At December 31, 1998, the model projected net income for the
year 1999 would increase by 0.87% if interest rates would immediately fall by
200 basis points. It projects a decrease in net income for the year 1999 of
3.78% if interest rates would immediately rise by 200 basis points. The model
projected net income for the year 1999 would decrease by 0.69% if interest rates
would gradually rise by 200 basis points over a one-year time horizon. The
earnings simulation model includes assumptions about how the various components
of the balance sheet and rate structure are likely to react through time in
different interest rate environments. These assumptions are derived from
historical analysis and Management's outlook.
Year 2000
Many computer programs now in use have not been designed to properly
recognize years after 1999. If not corrected, these programs could fail or
create erroneous results. This Year 2000 ("Y2K") issue affects the entire
banking industry because of its reliance on computers and other equipment that
use computer chips. This problem is not limited to computer systems. Y2K issues
may affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom the Company
does business such as vendors, suppliers, utility companies, and customers.
The Y2K issue poses certain risks to the Company and its operations. Some
of these risks are present because the Company purchases technology and
information system applications from other parties who also face Y2K challenges.
Other risks are specific to the banking industry.
Commercial banks may experience a deposit base reduction if customers
withdraw significant amounts of cash in anticipation of Y2K. Such a deposit
contraction could cause an increase in interest rates, require the Company to
locate alternative sources of funding or sell investment securities or other
liquid assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about the Company's Y2K compliance efforts.
The Company lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect the Company's financial performance. In an effort to
identify any potential loan loss risk because of borrower Y2K noncompliance, all
loan customers with loans or commitments exceeding $500,000 were asked to
complete a Y2K questionnaire. Where the customer does not reply, the loan
officer will personally contact the customer. The Company has purchased software
to assist it in interpreting the responses, and is in the process of analyzing
the results and any risks identified. The Company has also modified its loan
underwriting controls to ensure that potential borrowers are carefully evaluated
for Y2K compliance before any new loan is approved.
The Company's operations, like those of many other companies, can be
adversely affected by Y2K triggered failures which may be experienced by third
parties upon whom the Company relies for processing transactions. The Company
has identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. The Company's primary supplier of data
processing services has adopted a Y2K compliance plan which includes a timetable
for making changes necessary to be able to provide services in the Y2K. That
supplier has provided written assurances to the Company regarding its progress
toward Y2K compliance and has been examined for Y2K readiness by federal bank
examiners.
The Company's operations may also be adversely affected by Y2K related
failures of third party providers of electricity, telecommunications services
and other utility services. Although the Company's contingency plan includes
backup power generation, failures in these areas could impact the Company's
ability to conduct business. The Y2K compliance of these providers is largely
beyond the control of the Company.
The Company has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of
38
<PAGE>
the Y2K issue on the Company and its customers. Goals of the Y2K plan include
identifying Y2K risks, information systems and equipment used by the Company,
informing customers of Y2K issues and risks, establishing a contingency plan for
operating if Y2K issues cause important systems or equipment to fail,
implementing changes necessary to achieve Y2K compliance, and verifying that
these changes are effective. The Comptroller of the Currency has examined the
Company's Y2K compliance plan and the Company's progress in implementation. In
addition, the Board of Directors is carefully monitoring progress under the plan
on a monthly basis.
The Company's plan to address the Y2K issue involves several phases,
described below:
. Awareness - In this phase, the Company's Y2K plan and project team
were established, the overall Y2K approach was identified, compliance
standards were defined, and responsibility for corrective action was
assigned. This phase has been completed.
. Assessment - During this phase, the Company gathered and analyzed
information to determine the size and the impact of the Y2K problem
and then made decisions to modify, re-engineer, or replace existing
systems and programs. This phase has been completed.
. Renovation - This phase involves obtaining and implementing upgraded
software applications provided by the Company's vendors, modifying
system codes, reengineering Y2K vulnerable systems and programs,
developing bridges for systems which cannot be reengineered, and
changing files and databases as necessary. All system renovations will
be completed by March 31, 1999.
. Validation - During the validation phase, the Company is testing
systems and software for Y2K compliance in an effort to identify and
correct any errors that may be identified in the renovation phase.
Thirty percent of system validation has been performed and the
remainder is expected to be completed by June 30, 1999.
. Implementation - In this phase all new and revised systems will be
implemented, data exchange issues will be resolved, and backup and
recovery plans will be developed. This phase will begin once the
validation phase is complete and will be fully executed by December
31, 1999.
Based on information developed to date, Company management believes that
the cost of remediation will not be material to the Company's business,
operations, liquidity, capital resources, or financial condition. The Company
estimates that total cash outlays in connection with Y2K compliance will be less
than $500,000, excluding costs of Company employees involved in Y2K compliance
activities. Less than one half of this amount had been expended as of December
31, 1998. The Company is funding Y2K expenditures through continuing operations.
Designated personnel will report to work on January 1 and 2, 2000,
(Saturday and Sunday) to assess the proper functioning of critical and
non-critical systems. In the event that some or all systems experience failure,
the Company has developed a detailed contingency plan. This plan calls for
manual processing of bank transactions at designated locations supported by
backup power systems. Delays in processing transactions would result in the
event that the Company is forced to process transactions manually. These delays
could disrupt normal business activities of the Company and its customers.
The discussion above regarding issues associated with Y2K includes certain
forward looking statements. The Company's ability to predict results or effects
of issues related to the Y2K issue is inherently uncertain and is subject to
factors that may cause actual results to differ materially from those projected.
Factors that could affect the actual results include the following:
. The possibility that protection procedures, contingency plans, and
remediation efforts will not operate as intended;
. The Company's failure to timely or completely identify all software or
hardware applications requiring remediation;
. Unexpected costs;
. The uncertainty associated with the impact of Y2K issues on the
banking industry and the Company's
39
<PAGE>
customers, vendors, and others with whom it conducts business; and
. The general economy.
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 fluctuations in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
40
<PAGE>
Recently Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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. SFAS No.
131 sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. The Company adopted SFAS No. 131
on January 1, 1998 as required; the Company has only one segment, as that term
is defined in SFAS No. 131.
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 separate financial statement or
as a component of the statement of operations or the statement of shareholders'
equity and display the accumulated balance of other comprehensive income
separately in the shareholders' equity section of the statement of financial
condition. The Company adopted SFAS No. 130 on January 1, 1998 as required.
In February 1997, the FASB issued 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. 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 adopted SFAS No. 127 on January 1, 1998 as required; the adoption
did not affect the Company's consolidated position or results of operations.
Accounting Standard Issued But Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. The Company
will adopt SFAS No. 133 on January 1, 2000, as required. Management of the
Company believes that adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial condition or results of operations.
41
<PAGE>
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
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The consolidated financial statements contained in Item 14 of the Form 10-K
are incorporated herein by reference.
42
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended
---------------------------------------------------------------
12-31-98 09-30-98 06-30-98 03-31-98
---------------------------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Operations Data
Interest income $19,722 $20,301 $20,282 $19,947
Interest expense 10,418 10,584 10,634 10,638
---------------------------------------------------------------
Net interest income 9,304 9,717 9,648 9,309
Provision for loan losses 675 930 950 825
---------------------------------------------------------------
Net interest income after provision for
loan losses 8,629 8,787 8,698 8,484
Gain on sales of securities and loans 774 1,078 480 586
Other income 1,029 956 1,014 1,026
Other expenses 7,040 7,050 6,440 6,452
---------------------------------------------------------------
Income before taxes 3,392 3,771 3,752 3,644
Taxes on income 1,177 1,351 1,342 1,311
---------------------------------------------------------------
Net income $ 2,215 $ 2,420 $ 2,410 $ 2,333
===============================================================
Per Share Data (1)
Basic earnings per common share (2) $ 0.59 $ 0.32 $ 0.53 $ 0.51
Diluted earnings per common share (2) $ 0.57 $ 0.31 $ 0.51 $ 0.50
Weighted average common shares outstanding:
Basic 3,798,379 3,796,886 3,794,839 3,790,332
Diluted 3,902,731 3,913,883 3,926,988 3,908,292
<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 (3) 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 (4) 3,811 488 489 411
Other income (4) 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 (1)
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>
(1) All share and per share information has been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share.
(2) The amount for the three months ended September 30, 1998 is shown after
adjustment for $928,000, or $0.24 per common share, of original issue costs
relating to the redemption of the Company's Series A Preferred Stock on
September 1, 1998.
(3) The first, third and fourth quarters of 1997 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.
(4) 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.
43
<PAGE>
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
- ------------------------------------------------------------
Directors.
The Company's Board of Directors is currently composed of thirteen members.
Under the Company's Certificate of Incorporation, directors of the Company are
divided into three classes and elected for terms of three years and until their
successors are elected and qualified. The following table shows the name and age
of each director of the Company, the year he or she first became a director, and
the year each director's term expires. Each director of the Company is also a
member of the Board of Directors of the Company's wholly owned subsidiary,
Stillwater National Bank and Trust Company (the "Bank").
Year First
Elected as Term
Director of Currently
Name Age the Company Expires
- ---- --- ----------- -------
J. Berry Harrison 60 1991 1999
Erd M. Johnson 69 1988 1999
Robert L. McCormick, Jr. 64 1981 1999
Lee A. Wise 40 1996 *
James B. Wise, MD 62 1981 *
James E. Berry II 53 1998 2000
Joyce P. Berry 76 1981 2000
Joe Berry Cannon 62 1981 2000
Alfred L. Litchenburg 49 1998 2000
Robert B. Rodgers 45 1996 2000
Thomas D. Berry 55 1981 2001
Rick J. Green 51 1998 2001
David P. Lambert 59 1981 2001
Linford R. Pitts 61 1981 2001
Stanley R. White 52 1998 2001
* Directors Lee A. Wise and James B. Wise, M.D., resigned from the Board of
Directors in March 1999, following completion of the offering of all of the
shares of the Company's common stock owned by Dr. Wise. See Item 1. Recent
Developments. Their terms as directors would have expired in 1999. James B.
Wise, M.D. is the father of Lee A. Wise.
Additional information concerning the directors of the Company follows.
Unless otherwise stated, (a) all directors have held the positions indicated for
at least the past five years, and (b) there are no family relationships closer
than first cousin among directors and executive officers.
James E. Berry II has served as a director of the Company and the Bank
since being appointed to the Board of Directors in June 1998, following the
retirement of his father, George M. Berry, from the Board. Mr. Berry is the
44
<PAGE>
owner of Shading Concepts, which manufactures and sells solarium draperies.
Joyce P. Berry is his aunt and Robert B. Rodgers and J. Berry Harrison are his
cousins.
Joyce P. Berry has served as a director of the Company since its inception
in 1981. She has been a director of the Bank since 1978. Her principal
occupation is personal investments. Robert B. Rodgers, J. Berry Harrison, and
James E. Berry II are her nephews.
Thomas D. Berry has been a director of the Company since its inception in
1981. He has been a director of the Bank since 1978. He is involved in oil and
gas exploration in North Central Oklahoma, and is an Auctioneer and Real Estate
Broker in Stillwater, Oklahoma.
Joe Berry Cannon has been a director of the Company since its inception in
1981 and a director of the Bank since 1961. He is a Professor of Management at
Oral Roberts University School of Business in Tulsa, Oklahoma. Mr. Cannon served
as Chairman, President, Chief Executive Officer and Senior Trust Officer of
First National Bank and Trust Co. in Blackwell, Oklahoma from 1968-1991. He has
been a member of the Kiwanis Club, a member of the Methodist Church Board of
Directors, and a member of the American and Oklahoma Bar Associations.
Rick J. Green was appointed the Chief Executive Officer of the Company and
the Bank effective in January 1999. Previously, Mr. Green has served as Chief
Operating Officer, President of the Central Oklahoma division of the Bank, and
Executive Vice President of the Bank. Mr. Green was appointed to the Boards of
Directors of the Company and the Bank in November 1998. 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. Mr. Green is also a member of
Leadership Stillwater and Leadership Oklahoma City.
J. Berry Harrison has been a director of the Company since 1991. He is
currently an Oklahoma State Senator, and has been a rancher and farmer in
Fairfax, Oklahoma since 1962. Mr. Harrison serves as Conservation District
Director of Osage County, President of the Oklahoma Association of Conservation
Districts, and is a member of many other civic groups in his Senate District.
Joyce P. Berry is his aunt, and Robert B. Rodgers and James E. Berry II are his
cousins.
Erd M. Johnson has been a director of the Company since 1988. He is
presently Operating Partner of Johnson Oil Partnership, Midland, Texas. Mr.
Johnson is a retired Petroleum Engineer and was Operating Partner of Johnson
Ranch, Fairfax, Oklahoma prior to its liquidation in 1997. Mr. Johnson served
from 1984-87 as a director of Beefmaster Breeders Universal, and from 1987-89 as
its Treasurer. Mr. Johnson is a former Trustee and Treasurer of Trinity School
of Midland, Texas and a former director and president of The Racquet Club,
Midland, Texas.
David P. Lambert has been a director of the Company since its inception in
1981. He has been a director of the Bank since 1979. He has also served as
President and Chief Executive Officer of Lambert Construction Company,
Stillwater, Oklahoma since 1974, and is a Trustee of Stillwater Industrial
Foundation, a Trustee of the Oklahoma Construction Advancement Foundation, and a
Director of the Stillwater Chamber of Commerce.
Alfred L. Litchenburg was elected a director by the Board of Directors of
the Company and the Bank in February 1998. He is Senior Vice President and
Director of Strategic Development for American Fidelity Assurance Company,
Oklahoma City, Oklahoma, and has served in various capacities with that company
since 1975. He also serves as Vice President of the Board for the Variety Health
Center and Group Chair for the Oklahoma City United Way, and is a member of the
Finance Committee of New Covenant United Methodist Church and Leadership
Oklahoma City. He is a Fellow of the Society of Actuaries and a member of the
American Academy of Actuaries.
45
<PAGE>
Robert L. McCormick is Chairman of the Board of Directors of the Company
and the Bank, and has been a director of the Company since its inception in
1981. He served as Chief Executive Officer of the Company from its inception
until December 31, 1998, and as President, Chief Executive Officer and a
director of the Bank from 1970 until December 31, 1998. He is a Regent, Oklahoma
State Regents for Higher Education. He has served as President of the
Independent Bankers Association of America; President of the 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 named 1990 Citizen of the Year by the Stillwater Chamber of Commerce.
Linford R. Pitts has been a director of the Company since its inception in
1981. He has been a director of the Bank since 1977. He is currently President
of Stillwater Transfer & Storage Company in Stillwater, Oklahoma, and invests in
real estate and in oil and gas properties. Mr. Pitts is a member of the Past
President's Council of the Stillwater Chamber of Commerce.
Robert B. Rodgers has been a director of the Company and the Bank since
February 1996, and Vice Chairman of the Board since May 1998. Robert B. Rodgers
is president of Perry and Rodgers Motor Company in Pauls Valley, Oklahoma, and
is owner of Rapid Roberts Enterprises. He is director and former President and
Chairman of the Board of Directors of CDI II insurance, a credit life insurance
company headquartered in Oklahoma City, Oklahoma. Mr. Rodgers also serves on the
Board of Directors and is Regional Vice President of the Oklahoma Auto Dealers
Association. Joyce P. Berry is his aunt, and J. Berry Harrison and James E.
Berry II are his cousins.
Stanley R. White was appointed Chief Lending Officer in December 1995 and
elected to the Boards of Directors of the Company and the Bank in November 1998.
Prior to this appointment as Chief Lending Officer, 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.
James B. Wise, M.D. became a director of the Company and the Bank in 1981.
Dr. Wise is an Ophthalmologist and Eye Surgeon in Oklahoma City, Oklahoma. Lee
A. Wise is his daughter.
Lee A. Wise became a director of the Company in March 1996. Ms. Wise is a
doctoral candidate in computer science at the University of Oklahoma. She is a
graduate of Wesleyan University of Middletown, Connecticut and University of
Oklahoma College of Law, and is a member of the Oklahoma bar. Ms. Wise was
engaged in the private practice of law in Oklahoma City, Oklahoma for ten years
prior to engaging in her current graduate studies. James B. Wise, M.D. is her
father.
46
<PAGE>
Executive Officers.
The Company's executive officers who are not directors of the Company are
listed below.
Name Age Position
- ---- --- --------
Kerby E. Crowell................. 49 Executive Vice President,
Treasurer and Chief
Financial Officer of the
Company and the Bank
Kimberly G. Sinclair............. 43 Executive Vice President
and Chief Administrative
Officer of the Bank
Mark A. Poole.................... 39 President, Tulsa division
of the Bank
Joseph P. Root................... 34 President, Central Oklahoma
division of the Bank
Patrick E. Zimmerman............. 37 President, Stillwater
division of the Bank
Terry M. Almon................... 43 Senior Vice President and
Director of Corporate
Marketing, Retail Sales,
Electronic Banking and
Training
Jerry L. Lanier.................. 50 Senior Vice President,
Credit Administration of the
Bank
Charles H. Westerheide........... 50 Senior Vice President and
Treasury Manager of the Bank
The principal occupations and business experience of each executive officer
of the Company are shown below.
Kerby E. Crowell has served as Executive Vice President, Treasurer and
Chief Financial Officer of the Company and the Bank since 1986. Mr. Crowell
joined the Bank in 1969. He is a Past President and Board member 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 and the
Federal Reserve's Industry Advisory Group on Electronic Check Presentment. He is
past President and Director of the Oklahoma 4-H Foundation, Inc., Director and
past President of the Payne County Affiliate of the American Diabetes
Association, past President of the Stillwater Breakfast Kiwanis Club, the Bank
Administration Institute's Northern Oklahoma Chapter, and the North Central
Chapter of Certified Public Accountants, and past Vice Chairman of the
Independent Bankers Association of America's Bank Services Committee. Mr.
Crowell is also a graduate of the Leadership Stillwater Class XI.
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.
Mark A. Poole was appointed President of the Tulsa division of the Bank in
December 1998. Prior to joining the Bank in 1998, Mr. Poole was Senior Vice
President/Sales Manager of Bank One, Oklahoma in Tulsa from 1996 to 1998; and
served as commercial lending officer for BankIV in Oklahoma City from 1994 to
1996; Bank of Oklahoma in Oklahoma City from 1991 to 1994; and Security Pacific
Bank of Arizona from 1987 to 1991. In 1981, Mr. Poole was drafted by the Toronto
Blue Jays and played professional baseball in the A, AA and AAA leagues until
1986. Mr. Poole is a board member of the Tulsa Area United Way Allocations
Committee and Downtown Tulsa Unlimited. He is a former board member of Citizens
Caring for Children, was chairman of the 1996 OBA Basic Banking School, and a
member of the Advisory Board for the 1994 OBA Commercial Lending School.
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
47
<PAGE>
of Robert Morris Associates. In addition, he is a member of the Oklahoma City
Men's Dinner Club.
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.
Terry M. Almon is a Senior Vice President and was appointed Director of
Corporate Marketing, Retail Sales, Electronic Banking and Training in September
1998. Prior to September 1998, she was Senior Vice President and manager of
Electronic Banking from 1996, and was responsible for the management of the
Tulsa division's Marketing, Operations and Retail Sales from 1990 to 1996. Ms.
Almon joined the Bank in 1990. She is a member of the Oklahoma Commission for
Teacher Preparation, a member of the American Bank Marketing Association and a
director of the Southwest Education Development Laboratory. She is past Chairman
of the Oklahoma Commission for Teacher Preparation, former board member of the
Magic Empire Council of the Girl Scouts of America, a charter founding member of
the Juliette Lowe Leadership Society and a former Chairman of the Tulsa Women's
Foundation. Ms. Almon was awarded the Oklahoma Education Association's "Friend
of Education" award in 1992. She was elected to the Board of Education of the
Jenks Public Schools in 1992, and has served actively on numerous education
committees for public schools.
Jerry L. Lanier was appointed Senior Vice President in Credit
Administration in 1998, supervising this area Company-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.
Charles H. Westerheide is Senior Vice President and Treasury Manager of the
Bank. He joined the Bank in 1997 coming from NationsBank, Wichita, Kansas
(previously BankIV) where he served as Treasury/Funding Manager. Prior to
joining BankIV, Mr. Westerheide served as Executive Vice President and Chief
Financial Officer of Security Bank and Trust Co., Ponca City, OK. Mr.
Westerheide has held a number of community leadership positions including
Chairman of the Ponca City Chamber of Commerce, President of the Ponca City
Foundation for Progress, Inc., and a director and officer of numerous community
foundations and clubs. Mr. Westerheide is a graduate of Leadership Oklahoma,
Class II.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on the Company's review of the copies of initial statements of
beneficial ownership on Form 3 and reports of changes in beneficial ownership on
Form 4 that it has received in the past year, annual statements of changes in
beneficial ownership on Form 5 with respect to the last fiscal year, and written
representations that no such annual statement of change in beneficial ownership
was required, the Company believes that all directors, executive officers, and
beneficial owners of more than 10% of its commons stock have timely filed those
reports with respect to
48
<PAGE>
1998. The Company makes no representation regarding persons who have not
identified themselves as being subject to the reporting requirements of Section
16(a) of the Securities Exchange Act of 1934, and has not made an independent
assessment of whether any such person is subject to those reporting
requirements, or of the appropriateness of disclaimers of beneficial ownership.
Item 11. Management Remuneration
- ---------------------------------
Compensation Committee Report on Executive Compensation
As members of the Compensation Committees of the Company and the Bank, it
is our duty to review compensation policies applicable to senior officers; to
consider the relationship of corporate performance to that compensation; to
recommend salary and bonus levels for senior officers for consideration by the
Boards of Directors of the Company and the Bank; and to administer various
incentive plans of the Company and the Bank.
Overview. Under the compensation policies of the Company, which are
endorsed by the Compensation Committee, compensation is paid based both on the
senior officer's performance and the performance of the entire Company. In
assessing the performance of the Company and the Bank for purposes of
compensation decisions, the Compensation Committee considers a number of
factors, including profits of the Company and the Bank during the past year
relative to their profit plans, changes in the value of the Company's stock,
reports of federal regulatory examinations of the Company and the Bank, growth,
business plans for future periods, and regulatory capital levels. The
Compensation Committee assesses individual executive performance based upon its
determination of the officer's contributions to the performance of the Company
and the accomplishment of the Company's strategic goals, such as the completion
of the Company's public offerings of Common Stock in 1993, Preferred Stock in
1995, and Trust Preferred Securities in 1997. In assessing performance for 1998
and previous years, the members of the Committee did not make use of a
mechanical weighing formula or use specific performance targets, but instead
weighed the described factors as they deemed appropriate in the total
circumstances.
Base Salary. The 1998 salary levels of the Company's senior officers were
established consistent with this compensation policy. Mr. McCormick served as
the President and Chief Executive Officer of the Company throughout 1998. His
base compensation effective January 1, 1998, was based upon a review performed
by the Committee in 1997. In this review, the Committee considered the
performance of Mr. McCormick in managing the Company and the Bank, based upon
the 1997 financial performance of the Company; the financial performance trends
for 1997 and the preceding four years; the results of confidential regulatory
examinations; his continued involvement in community affairs in the communities
served by the Company; the Company's planned levels of financial performance for
1998; his management of the problem asset and lending issues that arose in 1997,
and the general management of the Company and the Bank for 1997. Based upon the
results of this review, the salary of Mr. McCormick was established at $262,392
per year for 1998, which represented an increase of 3% over his 1997 base
salary.
Bonuses. Bonuses of $25,000, $10,000, and $10,000 were granted to Mr.
McCormick, Mr. Green, and Mr. Crowell in 1998 based upon each officer's
performance consistent with the compensation policy described above. No other
bonuses were awarded to Named Executive Officers in 1998.
Stock Options. The purposes of the Company's Stock Option Plans (the
"Option Plans") are to attract, retain and motivate key officers of the Company
and the Bank by providing key officers with a stake in the success of the
Company, as measured by the value of its shares, and to increase the commonality
of interests among key employees and other shareholders. Members of the
Compensation Committee serve as the Stock Option Committee, which has general
responsibility for granting stock options to key employees and administering the
Option Plans. During 1998, incentive stock options for 150,000 shares were
granted at exercise prices of $ 26.00 to $ 27.72 per share (the fair market
value of the shares on the dates of grant).Certain of these options are subject
to shareholder approval. No stock options were granted in 1998 to the Chief
Executive Officer or any other executive who was paid over $100,000 in
compensation in that year.
49
<PAGE>
No member of the Compensation Committee is a former or current officer or
employee of the Company or the Bank.
March 25, 1999 Robert B. Rodgers, Chairman
Erd M. Johnson
David P. Lambert
50
<PAGE>
Stock Performance Comparisons
The following table compares the cumulative total return on a hypothetical
investment of $100 in the Common Stock at the closing price on December 31, 1993
through December 31, 1998, with the hypothetical cumulative total return on the
Nasdaq Stock Market Index (U.S. Companies) and the Nasdaq Bank Index for the
comparable period.
Cumulative Total Shareholder Return
Compared with Performance of Selected Indexes
December 31, 1993 through December 31, 1998
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
- --------------------------------------------------------------------------------
------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
------------------------------------------------------------
The Company $100 $106 $153 $172 $242 $229
------------------------------------------------------------
NASDAQ Stock Market
Index (U.S.) 100 98 138 170 209 293
------------------------------------------------------------
NASDAQ Bank Index 100 100 148 196 328 325
------------------------------------------------------------
51
<PAGE>
Executive Compensation and Other Benefits
The following table summarizes compensation earned by or awarded to the
Company's Chief Executive Officer and the Company's four most highly compensated
executive officers whose aggregate annual salary and bonuses exceeded $100,000
during 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------------- -------- -------
Other Securities All Other
Name and Annual Underlying LTIP Compen-
Principal Position Year Salary Bonus Compensation(1) Options/SARs(2) Payouts(3) sation
- ------------------ ---- ------ ----- --------------- --------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert L. McCormick, Jr. 1998 $262,400 $25,000 -- -- $ $35,678 (5)
President of the Company; 1997 254,750 -- -- -- 43,970 24,872
Vice Chairman and Chief 1996 214,750 -- -- -- 15,738 27,559
Executive Officer of
the Bank
Rick J. Green 1998 $142,000 10,000 -- -- -- 21,923 (6)
Executive Vice President 1997 130,460 5,654 -- 10,000 17,588 12,681
Chief Operating Officer of 1996 119,411 4,084 -- -- 15,738 15,762
the Bank
Stanley R. White 1998 $121,250 -- -- -- -- 18,627 (7)
Chief Lending Officer 1997 117,750 5,000 -- -- 17,588 11,823
of the Bank 1996 113,250 -- -- -- 15,738 14,284
Kerby E. Crowell 1998 $111,400 10,000 -- -- -- 18,096 (8)
Executive Vice President 1997 105,400 -- -- 10,000 17,588 10,056
and Chief Financial Officer 1996 102,400 -- -- -- 15,738 12,712
</TABLE>
- ----------
(1) Consists of certain perquisites and other personal benefits, the value of
which in the aggregate did not exceed the lesser of $50,000 or 10% of
salary and bonus for any Named Executive Officer.
(2) In each case, represents stock options granted under the Company's Stock
Option Plan.
(3) In each case, consists of payouts under the Company's Performance Unit
Plan.
(4) Bonus was deferred at election of Mr. McCormick.
(5) Consisted of $10,400 in directors' fees, $2,878 in dollar value of term
life insurance premiums paid by the Company for the benefit of Mr.
McCormick and $22,400 contributed to Mr. McCormick's account in the Profit
Sharing Plan.
(6) Consisted of $1,181 in dollar value of term life insurance premiums paid by
the Company for the benefit of Mr. Green and $20,742 contributed to Mr.
Green's account in the Profit Sharing Plan.
(7) Consisted of $1,181 in dollar value of term life insurance premiums paid by
the Company for the benefit of Mr. White and $17,446 contributed to Mr.
White's account in the Profit Sharing Plan.
(8) Consisted of $654 in dollar value of term life insurance premiums paid by
the Company for the benefit of Mr. Crowell and $17,442 contributed to Mr.
Crowell's account in the Profit Sharing Plan.
Option Grants in 1998
No stock options were granted to Named Executive Officers in 1998.
Year-End Option Values
The following table sets forth information concerning the number and
potential realizable value at the end of the year of options held by each the
Named Executive Officers.
52
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End at Year-End (1)
Shares Acquired Value ------------------------------ ---------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. McCormick, Jr. $ -- $ -- $35,000 $ 7,000 $485,625 $ 97,128
Rick J. Green -- -- 21,000 19,000 267,375 167,625
Stanley R. White -- -- 19,000 11,000 263,625 152,625
Kerby E. Crowell -- -- 16,000 14,000 194,000 82,250
</TABLE>
- ----------
(1) Calculated based on the product of: (a) the number of shares subject to
options and (b) the difference between the fair market value of the
underlying Common Stock at December 31, 1998, based on the closing sale
price of the Common Stock on December 31, 1998 as reported on the Nasdaq
National Market of $26.625 per share, and the exercise price of the options
$12.75 to $26.75 per share.
53
<PAGE>
No options or stock appreciation rights ("SARs") were exercised by the
Named Executive Officers during 1998. No SARs were held by any Named Executive
Officer at year-end. No options or SARs held by any Named Executive Officer
repriced during the Company's last ten full years.
Severance Arrangements
The Bank has adopted a Severance Compensation Plan pursuant to which
Messrs. McCormick, Green, White and Crowell are entitled to lump-sum severance
compensation upon a qualifying termination of service equal to a percentage of
their respective total annual base compensation in effect at the date of
termination. For purposes of the Severance Compensation Plan, a qualifying
termination of service is defined as either an involuntary termination of
service or a voluntary termination of service for good reason, in either case
within two years following a change-in-control occurring after the effective
date of the Severance Compensation Plan. Good reason would include: (i) a
reduction in their base salary; (ii) their assignment without their consent to a
location other than in Oklahoma; (iii) the failure to maintain them in a
position of comparable authority or responsibility; or (iv) a material reduction
in their level of incentive compensation or benefits. A change-in-control is
deemed to occur whenever: (i) any entity or person becomes the beneficial owner
of or obtains voting control over 50% or more of the outstanding shares of
common stock of either the Company or the Bank; (ii) the shareholders of either
the Company or the Bank approve (a) a merger or consolidation in which the
Company or the Bank is not the survivor or pursuant to which the outstanding
shares of either would be converted into cash, securities or other property of
another corporation other than a transaction in which shareholders maintain the
same proportionate ownership interests, or (b) a sale or other disposition of
all or substantially all of the assets of either the Company or the Bank; or
(iii) there shall have been a change in a majority of the Boards of Directors of
either the Company or the Bank within a twelve-month period unless each new
director was approved by the vote of two-thirds of the directors still in office
who were in office at the beginning of the twelve-month period. Messrs.
McCormick, Green, White, and Crowell would have received lump-sum severance
payments of $262,400, $142,000, $121,250, and $111,400 respectively, upon a
qualifying termination of service if such termination had occurred on December
31, 1998.
54
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Persons and groups beneficially owning in excess of 5% of the Common
Stock are required to file certain reports with respect to such ownership
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The following table sets forth, as of the most recent practicable date,
certain information as to the Common Stock beneficially owned by all persons who
have filed the reports required of persons beneficially owning more than 5% of
the Common Stock.
Amount and Nature Percent of
of Beneficial Shares
Name Ownership (1) Outstanding
- ---- ------------- -----------
George M. Berry 220,870 (2) 5.41%
Joyce P. Berry 220,901 (3) 5.41
American Fidelity Corporation 404,575 (4) 9.92
Stillwater National Bank
and Trust Company 238,855 (5) 5.85
- ----------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock or Preferred Stock if he or she has or shares
voting or investment power with respect to such Common Stock or has a
right to acquire beneficial ownership at any time within 60 days from
March 23, 1999. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to
dispose or direct the disposition of shares. Except as otherwise
noted, ownership is direct, and the named persons exercise sole voting
and investment power over the shares of the Common Stock.
(2) Includes 147,600 shares held by George M. Berry Revocable Inter
Vivos Trust and 72,600 shares held by Monica B. Berry Trust. The
address of Mr. Berry is 402 South Willis, Stillwater, Oklahoma 74074.
Does not include shares held by his children as to which he disclaims
beneficial ownership.
(3) The address of Joyce P. Berry is 312 South Willis, Stillwater,
Oklahoma 74074. Does not include shares held by her children as to
which she disclaims beneficial ownership.
(4) American Fidelity Corporation ("AFC") is controlled by Cameron
Enterprises, A Limited Partnership ("CELP").The general partners of
CELP are Lynda L. Cameron, William M. Cameron, Theodore M. Elam, and,
as trustees, certain officers of the Bank of Oklahoma, N.A. Includes
shares owned by Security General Life Insurance Company ("SGLI"), a
subsidiary of AFC. The address of AFC, SGLI, and CELP is 2000 Classen
Center, Oklahoma City, Oklahoma 73106. Includes 100 shares owned by
Alfred A. Lichtenburg, a director of the Company, who is an officer of
American Fidelity Assurance Company, the principal subsidiary of AFC.
(5) Includes shares held in various trusts for which Stillwater National
Bank and Trust Company acts as trustee and over which it has sole or
shared dispositive power. Includes 147,600 shares held by the George
M. Berry Revocable Inter Vivos Trust and 72,600 shares held by Monica
B. Berry Trust. The address of Stillwater National Bank and Trust
Company is 608 South Main Street, Stillwater, Oklahoma 74074.
55
<PAGE>
(b) Security Ownership of Management
--------------------------------
The following table sets forth, as of March 23, 1999, the beneficial
ownership of the Company's Common Stock by each of the Company's directors in
office, each of the Named Executive Officers and by all directors and executive
officers as a group.
Amount and
Nature of Percent of
Beneficial Shares
Name Ownership (1) Outstanding (2)
- ---- ------------- ---------------
James E. Berry, II 5,300 *
Joyce P. Berry 220,901 (3) 5.41%
Thomas D. Berry 15,005 *
Joe Berry Cannon 44,625 (4) 1.09
Rick J. Green 23,407 (5) *
J. Berry Harrison 35,392 *
Erd M. Johnson 61,588 (6) 1.51
David P. Lambert 14,320 (7) *
Alfred L. Litchenburg 100 (8) *
Robert L. McCormick, Jr. 88,000 (9) 2.14
Linford R. Pitts 7,320 *
Robert B. Rodgers 15,593 (10) *
Stanley R. White 24,147 (11) *
Lee A. Wise 527 (12) *
James B. Wise, MD 0 (13) *
Kerby E. Crowell 20,625 (14) *
All Directors and Executive
Officers as a Group
(23 persons) 608,850 (15) 14.49%
- ----------
* Less than one percent of shares outstanding.
(1) For the definition of beneficial ownership, see footnote 1 to the
table in "Voting Securities and Principal Holders Thereof." Unless
otherwise indicated, ownership is direct and the named individual
exercises sole voting and investment power over the shares listed as
beneficially owned by such person.
(2) In calculating the percentage ownership of each named individual and
the group, the number of shares outstanding includes any shares of the
Common Stock which the individual or the group has the right to
acquire within 60 days of March 23, 1999.
(3) Does not include shares held by her children as to which she
disclaims beneficial ownership.
(4) Excludes 18,270 shares beneficially owned by his wife, Beverly
Cannon, as trustee and 800 shares held by his wife.
(5) Includes 280 shares held jointly with his spouse and 2,127 shares held
by his spouse. Includes 21,000 shares which Mr. Green has the right to
acquire within 60 days of March 23, 1999 pursuant to the exercise of
options issued under the 1994 Stock Option Plan.
(6) Excludes 10 shares held by his wife, Ann W. Johnson. Includes 2,729
shares held by Johnson Oil Partnership of which Mr. Johnson is a
general partner.
(7) Includes 7,000 shares held by his wife.
(8) Excludes 404,475 shares (9.92%) owned by AFC and its subsidiary, SGLI
Mr. Litchenburg is an officer of American Fidelity Assurance Company,
the principal subsidiary of AFC.
(9) Includes 44,000 shares held by Robert L. McCormick, Jr. Trust and
9,000 shares held by Peggy Anne McCormick Trust. Includes 35,000
shares which Mr. McCormick has the right to acquire within 60 days of
March 23, 1999 upon the exercise of options issued under the 1994
Stock Option Plan.
(10) Excludes any shares owned by his father, James W. Rodgers, Jr. and his
mother, Sarah Jane Berry Rodgers.
(11) Includes 19,000 shares which Mr. White has the right to acquire within
60 days of March 23, 1999 pursuant to the exercise of options issued
under the 1994 Stock Option Plan. Includes 170 shares held by his
spouse.
(12) Ms. Wise resigned from the Board of Directors on March 25, 1999. See
Item 10.
(13) Dr. Wise resigned from the Board of Directors on March 25, 1999. See
Item 10.
(14) Includes 16,000 shares which Mr. Crowell has the right to acquire
within 60 days of March 23, 1999 pursuant to the exercise of options
issued under the 1994 Stock Option Plan.
(15) Includes shares held by certain directors and executive officers as
custodians under Uniform Transfers to Minors Acts, by their spouses
and children, and for the benefit of certain directors and executive
officers under individual retirement accounts ("IRAs") and living
trusts. Includes 123,000 shares which executive officers have the
right to acquire within 60 days of March 23, 1999 pursuant to the
exercise of options issued under the 1994 Stock Option Plan.
(c) Changes in Control
------------------
Management of the Company knows of no arrangements, including any
pledge by any person of securities of
56
<PAGE>
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 Bank has and expects to have in the future, banking transactions
with certain officers and directors of the Company and the Bank and greater than
5% shareholders of the Company and the immediate families and associates of such
persons. Such transactions are in the ordinary course of business, and loans
have been and will be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons. In the opinion of the Company's management,
such loans did not involve more than normal risk of collectibility or present
other unfavorable features.
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 index to financial
--------------------
statements and financial statements included in Exhibit 99 to this Form 10-K are
incorporated by reference in Item 8 of this Form 10-K.
Index to Financial Statements
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1998
and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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.
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))
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))
57
<PAGE>
* 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 (incorporated by
reference from Exhibit 10.5 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1997)
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
24 Power of Attorney
27 Financial Data Schedule
99 Financial Statements
(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.
- -------------
* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
58
<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 29, 1999 By: /s/ Rick J. Green
-----------------------
Rick J. Green
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Rick J. Green March 29, 1999
- ------------------------------------
Rick J. Green
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Kerby E. Crowell March 29, 1999
- ------------------------------------
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, 1998. This report has been signed below by such
attorney-in-fact as of March 29, 1999.
By: /s/ Robert L. McCormick
--------------------------------------
Robert L. McCormick
Attorney-in-Fact for Majority of the
Directors of the Company
59
<PAGE>
Exhibit 21
<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
BNS, Inc.** Oklahoma
* Direct subsidiaries of Stillwater National Bank & Trust Company.
** Direct subsidiary of CRK Properties, Inc.
<PAGE>
Exhibit 23
<PAGE>
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, 1999, appearing in this
Annual Report on Form 10-K of Southwest Bancorp, Inc. for the year ended
December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
OKLAHOMA CITY, OKLAHOMA
MARCH 29, 1999
<PAGE>
Exhibit 24
<PAGE>
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,
1998, 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 18, 1999
- --------------------------
George M. Berry
Director
/s/ Joyce P. Berry February 18, 1999
- --------------------------
Joyce P. Berry
Director
/s/ Thomas D. Berry February 18, 1999
- --------------------------
Thomas D. Berry
Director
/s/ Joe Berry Cannon February 18, 1999
- --------------------------
Joe Berry Cannon
Director
/s/ W. Haskell Cudd February 18, 1999
- --------------------------
W. Haskell Cudd
Director
/s/ J. Berry Harrison February 18, 1999
- --------------------------
J. Berry Harrison
Director
/s/ Erd M. Johnson February 18, 1999
- --------------------------
Erd M. Johnson
Director
/s/ David P. Lambert February 18, 1999
- --------------------------
David P. Lambert
Director
/s/ Linford R. Pitts February 18, 1999
- --------------------------
Linford R. Pitts
Director
/s/ Robert B. Rodgers, February 18, 1999
- --------------------------
Robert B. Rodgers
Director
- --------------------------
James B. Wise, M.D.
Director
/s/ Lee A. Wise February 18, 1999
- --------------------------
Lee A. Wise
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, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 32,339
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,096
<INVESTMENTS-CARRYING> 77,575
<INVESTMENTS-MARKET> 78,772
<LOANS> 793,319
<ALLOWANCE> 10,401
<TOTAL-ASSETS> 1,027,865
<DEPOSITS> 843,061
<SHORT-TERM> 94,572
<LIABILITIES-OTHER> 7,418
<LONG-TERM> 25,013
0
0
<COMMON> 3,799
<OTHER-SE> 54,002
<TOTAL-LIABILITIES-AND-EQUITY> 1,027,865
<INTEREST-LOAN> 69,020
<INTEREST-INVEST> 11,157
<INTEREST-OTHER> 75
<INTEREST-TOTAL> 80,252
<INTEREST-DEPOSIT> 37,053
<INTEREST-EXPENSE> 42,274
<INTEREST-INCOME-NET> 37,978
<LOAN-LOSSES> 3,380
<SECURITIES-GAINS> 266
<EXPENSE-OTHER> 26,982
<INCOME-PRETAX> 14,559
<INCOME-PRE-EXTRAORDINARY> 14,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,378
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 8.53
<LOANS-NON> 872
<LOANS-PAST> 451
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 22,899
<ALLOWANCE-OPEN> 8,282
<CHARGE-OFFS> 2,374
<RECOVERIES> 1,113
<ALLOWANCE-CLOSE> 10,401
<ALLOWANCE-DOMESTIC> 10,401
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,454
</TABLE>
<PAGE>
Exhibit 99
<PAGE>
Index to Financial Statements
Page
----
Independent Auditors' Report 1
Consolidated Statements of Financial Condition at
December 31, 1998 and 1997 2
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997 and 1996 3
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1998, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 6
Notes to Consolidated Financial Statements. 7
Management's Report 25
<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 ("Southwest") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, comprehensive income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Southwest'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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Oklahoma City, Oklahoma
February 5, 1999 (except for note 19, as to which the date is March 19, 1999)
1
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At December 31, 1998 and 1997
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 32,339 $ 26,259
Federal funds sold - 10,000
-------------- --------------
Cash and cash equivalents 32,339 36,259
Investment securities:
Held to maturity, fair value $78,772 (1998) and $87,592 (1997) 77,575 86,994
Available for sale, amortized cost $96,240 (1998) and $99,778 (1997) 97,096 100,746
Loans receivable, net of allowance for loan losses
of $10,401 (1998) and $8,282 (1997) 782,918 710,831
Accrued interest receivable 8,658 8,883
Premises and equipment, net 19,204 13,571
Other assets 10,075 6,002
-------------- --------------
Total assets $1,027,865 $963,286
============== ==============
Liabilities and shareholders' equity
Deposits:
Noninterest-bearing demand $ 57,601 $ 96,560
Interest-bearing demand 7,076 37,447
Money market accounts 195,603 94,496
Savings accounts 3,416 3,655
Time deposits 579,365 609,267
-------------- --------------
Total deposits 843,061 841,425
-------------- --------------
Income taxes payable 151 521
Accrued interest payable 5,584 6,504
Other liabilities 1,683 1,227
Short-term borrowings 94,572 20,548
Long-term debt:
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 25,013 25,013
-------------- --------------
Total liabilities 970,064 895,238
-------------- --------------
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; shares issued and outstanding 690,000 (1997) - 690
Class B, $1 par value; 1,000,000 shares authorized; none issued - -
Common stock - $1 par value; 10,000,000 shares authorized; issued
and outstanding 3,799,065 (1998) and 3,787,839 (1997) 3,799 3,788
Capital surplus 9,369 24,764
Retained earnings 44,120 38,226
Accumulated other comprehensive income:
Unrealized gain on investment securities available for sale, net of tax 513 580
-------------- --------------
Total shareholders' equity 57,801 68,048
-------------- --------------
Total liabilities & shareholders' equity $1,027,865 $963,286
============== ==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996 (Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $69,020 $65,560 $55,177
Investment securities:
U.S. Government and agency obligations 8,873 8,667 6,815
State and political subdivisions 582 508 577
Mortgage-backed securities 1,245 1,234 1,531
Other securities 457 173 76
Federal funds sold 75 707 492
--------------- --------------- ---------------
Total interest income 80,252 76,849 64,668
Interest expense:
Interest-bearing demand 150 894 838
Money market accounts 4,213 3,836 3,129
Savings accounts 76 96 114
Time deposits 32,614 34,743 28,647
Short-term borrowings 2,895 340 105
Long-term debt 2,326 1,338 -
--------------- --------------- ---------------
Total interest expense 42,274 41,247 32,833
--------------- --------------- ---------------
Net interest income 37,978 35,602 31,835
Provision for loan losses 3,380 12,104 3,100
--------------- --------------- ---------------
Net interest income after provision for loan losses 34,598 23,498 28,735
Other income:
Service charges and fees 3,550 3,177 2,985
Credit cards 63 659 869
Other noninterest income 412 360 268
Gain on sale of credit card portfolio - 3,745 -
Gain on sales of loans receivable 2,652 1,936 1,768
Gain on sales of investment securities 266 18 459
--------------- --------------- ---------------
Total other income 6,943 9,895 6,349
Other expenses:
Salaries and employee benefits 14,147 13,808 12,164
Occupancy 4,980 4,681 3,671
FDIC and other insurance 248 254 859
Credit cards 8 313 411
General and administrative 7,599 6,690 6,121
--------------- --------------- ---------------
Total other expenses 26,982 25,746 23,226
--------------- --------------- ---------------
Income before taxes 14,559 7,647 11,858
Taxes on income 5,181 2,667 4,306
--------------- --------------- ---------------
Net income $ 9,378 $ 4,980 $ 7,552
=============== =============== ===============
Net income available to common shareholders $ 7,392 $ 3,393 $ 5,965
=============== =============== ===============
Basic earnings per common share $ 1.95 $ 0.90 $ 1.59
=============== =============== ===============
Diluted earnings per common share $ 1.89 $ 0.88 $ 1.56
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Net income $9,378 $4,980 $7,552
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on investment securities
available for sale arising during the period 154 643 (219)
Reclassification adjustment for (gains) losses
arising during the period (266) (18) (459)
--------------- --------------- --------------
Other comprehensive income (loss), before tax 9,266 5,605 6,874
Tax (expense) benefit related to items
of other comprehensive income (loss) 45 (250) 271
--------------- --------------- --------------
Other comprehensive income (loss), net of tax $9,311 $5,355 $7,145
=============== =============== ==============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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, 1996 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
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
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
Cash dividends paid:
Common, $0.27 per share - - - - - (1,024) - (1,024)
Preferred, $1.725 per share - - - - - (1,190) - (1,190)
Cash dividends declared:
Common, $0.09 per share - - - - - (342) - (342)
Common stock issued:
Employee Stock Purchase Plan - - 2,557 2 69 - - 71
Dividend Reinvestment Plan - - 3,669 4 100 - - 104
Stock Option Plan - - 5,000 5 68 - - 73
Preferred Stock Redeemed (690,000) (690) - - (15,632) (928) - (17,250)
Change in unrealized gain
on available for sale
securities, net of tax - - - - - - (67) (67)
Net income - - - - - 9,378 - 9,378
----------------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 3,799,065 $3,799 $9,369 $44,120 $ 513 $ 57,801
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SOUTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 9,378 $ 4,980 $ 7,552
Adjustments to reconcile net income to net
cash (used in) provided from operating activities:
Provision for loan losses 3,380 12,104 3,100
Depreciation and amortization expense 1,883 1,577 1,254
Amortization of premiums and accretion of
discounts on securities, net 171 113 244
Amortization of intangibles 293 221 174
(Gain) Loss on sales of securities (266) (18) (459)
(Gain) Loss on sales of loans receivable (2,652) (1,936) (1,768)
(Gain) Loss on sale of credit card portfolio - (3,745) -
(Gain) Loss on sales of premises/equipment 37 (25) (10)
(Gain) Loss on other real estate owned, net (34) 13 (2)
Proceeds from sales of residential mortgage loans 125,885 71,710 45,519
Residential mortgage loans originated for resale (124,307) (69,205) (48,469)
Changes in assets and liabilities:
Accrued interest receivable 225 (1,483) (283)
Other assets (1,034) (1,879) (1,188)
Income taxes payable (370) 334 (84)
Accrued interest payable (920) 1,443 795
Other liabilities 417 (720) 786
------------- ------------- -------------
Net cash (used in) provided from operating activities 12,086 13,484 7,161
------------- ------------- -------------
Investing activities:
Proceeds from sales of available for sale securities 14,097 - 438
Proceeds from principal repayments, calls and maturities:
Held to maturity securities 29,001 19,649 25,388
Available for sale securities 34,610 18,017 28,969
Purchases of held to maturity securities (19,734) (23,178) (34,538)
Purchases of available for sale securities (44,921) (54,347) (20,383)
Loans originated and principal repayments, net (119,769) (145,116) (157,501)
Proceeds from sale of credit card portfolio - 21,798 -
Proceeds from sales of guaranteed student loans 41,503 40,545 47,768
Purchases of premises and equipment (7,680) (5,603) (4,693)
Proceeds from sales of premises and equipment 127 129 24
Proceeds from sales of other real estate 619 210 152
------------- ------------- -------------
Net cash (used in) provided from investing activities (72,147) (127,896) (114,376)
------------- ------------- -------------
Financing activities:
Net increase (decrease) in deposits 1,636 87,480 119,558
Net increase (decrease) in short-term borrowings 74,024 17,563 (7,786)
Net proceeds from issuance of common stock 248 456 170
Redemption of preferred stock (17,250) - -
Proceeds from issuance of subordinated debentures - 25,013 -
Common stock dividends paid (1,327) (1,168) (1,015)
Preferred stock dividends paid (1,190) (1,587) (1,587)
------------- ------------- -------------
Net cash (used in) provided from financing activities 56,141 127,757 109,340
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (3,920) 13,345 2,125
Cash and cash equivalents,
Beginning of period 36,259 22,914 20,789
============= ============= =============
End of period $ 32,339 $ 36,259 $ 22,914
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
SOUTHWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. Summary of Significant Accounting and Reporting Policies
Organization and Nature of Operations - Southwest Bancorp, Inc.
("Southwest") 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" or "SNB"), a national bank established in 1894, and SBI Capital
Trust, a Delaware Business Trust established in 1997. SNB and SBI Capital Trust
are wholly owned, direct subsidiaries of Southwest. Southwest 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 and a
loan production office in Oklahoma City. Southwest 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),
Southwest may change the investment security classification. The classifications
Southwest 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. Southwest 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 Southwest'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.
SNB originates real estate mortgage loans and government-guaranteed student
loans for portfolio investment or sale in the secondary market. During the
period of origination, real estate mortgage loans are designated as held either
for investment purposes or sale. Mortgage loans held for sale are generally sold
within a one-month period from loan closing at amounts approximating par value
of the loans. Government-guaranteed student loans are generally sold after
Southwest 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 government-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 Southwest will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The allowance for loan losses
related to loans that are 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,
7
<PAGE>
including mortgage, student and consumer, are collectively evaluated for
impairment. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. All of
Southwest's nonaccrual loans 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; appraisals of 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 their impact on economic prospects
and the 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.
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 Southwest, but that have not been identified as
nonperforming or potential problem loans. Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the unexpected deterioration of one or a few of such
loans may cause a significant increase in nonperforming assets, and, as occurred
in 1997, may lead to a material increase in charge-offs and the provision for
loan losses.
Deposits - The total amount of time deposits with a minimum
denomination of $100,000 was approximately $174.4 million and $132.0 million at
December 31, 1998 and 1997, respectively. The total amount of overdrawn deposit
accounts that were reclassified as loans at December 31, 1998 and 1997 was $1.5
million and $437,000, respectively.
Loan Servicing Income - Southwest earns fees for servicing real estate
mortgages owned by others. These fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when received.
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 revaluation based upon estimates of fair value. In
determining the valuation of other real estate owned, management obtains
independent appraisals for significant properties. Valuation adjustments are
provided, as necessary, by charges to operations. 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 Southwest 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
based on estimated fair market value at the point of origination. The servicing
rights are amortized on an individual loan by loan basis over the period of
estimated net servicing income. Impairment of 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,
1998 and 1997, SNB had recorded cumulative amortization of $1.5 million and $1.2
million, respectively.
Long-term Debt - The long-term debt consists of the Guaranteed
Preferred Beneficial Interests in Southwest's Subordinated Debentures purchased
from SBI Capital Trust. See Note 6.
Taxes on Income - Southwest and its subsidiaries file consolidated
income tax returns. Deferred income taxes arise from temporary differences
between financial and tax bases of certain assets and liabilities. A valuation
8
<PAGE>
allowance will be established if it is more likely than not that some portion of
the deferred tax asset will not be realized.
Earnings per Common Share - Basic earnings per common share is computed
based upon net income, 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. For 1998, earnings available to common shareholders also
reflects an adjustment of $928,000 of original issue costs relating to the
redemption of Southwest's Series A Preferred Stock on September 1, 1998. At
December 31, 1998, 1997 and 1996, Southwest had zero, 3,858 and 302 antidilutive
options to purchase common shares, respectively. The following is a
reconciliation of net income available to common shareholders and the common
shares used in the calculations of basic and diluted earnings per common share:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Net income $ 9,378 $ 4,980 $ 7,552
Less: preferred stock dividend requirement (1,058) (1,587) (1,587)
Less: redemption price of preferred stock in
excess of the carrying amount (928) - -
------------- ------------- -------------
Net income available to common shareholders $ 7,392 $ 3,393 $ 5,965
============= ============= =============
Weighted average common shares outstanding:
Basic earnings per share 3,795,136 3,773,037 3,760,370
Effect of dilutive securities:
Stock options 119,605 99,851 68,011
------------- ------------- -------------
Weighted average common shares outstanding:
Diluted earnings per share 3,914,741 3,872,888 3,828,381
============= ============= =============
</TABLE>
Trust - Southwest 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 SNB 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 SNB.
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-to-three day periods.
Liquidity - SNB 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 $809,000 and $4.6 million
at December 31, 1998 and 1997, respectively. The significant reduction in
required balances at December 31, 1998 is due to a program SNB began using in
February 1998 that reclassifies excess funds in transaction accounts into money
market accounts for regulatory reporting purposes.
At December 31, 1998, SNB 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 $109.1 million, respectively. Short-term borrowings outstanding on these
lines of credit totaled $58.0 million, with weighted average rates of 5.08%, at
December 31, 1998; there were no borrowings outstanding on these lines of credit
at December 31, 1997. The average balances outstanding on these lines of credit
for the years ending December 31, 1998 and 1997 were $26.6 million and $984,000,
respectively.
Reclassifications - Certain reclassifications have been made to the
prior year amounts to conform to the current
year presentation.
2. Investment Securities
A summary of the amortized cost and fair values of investment
securities follows:
9
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------
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 $64,063 $1,193 $ - $65,256
Obligations of state and political
subdivisions $13,512 77 73 13,516
---------- ---------- --------- -------
Total $77,575 $1,270 $ 73 $78,772
========== ========== ========= =======
Available for Sale:
U.S Government and agency obligations $57,001 $ 667 $ 75 $57,593
Obligations of state and political
subdivisions 1,852 12 4 1,860
Mortgage-backed securities 31,213 35 228 31,020
Other securities 6,174 449 - 6,623
---------- ---------- --------- --------
Total $96,240 $1,163 $307 $97, 096
========== ========== ========= =========
<CAPTION>
At December 31, 1997
-----------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Loss Value
-----------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and agency
obligations $77,261 $ 667 $ 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
---------- -------- ---------- -----------
$99,778 $1,031 $ 63 $100,746
========== ========= ========= ===========
</TABLE>
As required by law, investment securities are pledged to secure public
and trust deposits, as well as the Sweep Repurchase Agreement Product.
Securities with an amortized cost of $162.1 million and $127.5 million were
pledged to meet such requirements of $89.6 million and $53.9 million at December
31, 1998 and 1997, respectively. Any amount overpledged can be released at any
time.
A comparison of the amortized cost and approximate fair value of
Southwest's investment securities by maturity date at December 31, 1998 follows.
Mortgage-backed securities are included in the period in which they are
estimated to prepay.
10
<PAGE>
<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 $ 8,015 $ 8,015 $22,825 $22,999
Two years through five years 69,549 70,006 54,446 55,470
Five years through ten years 12,502 12,452 304 303
More than ten years 2,000 2,098 - -
Other securities not due at a single maturity date 4,174 4,525 - -
------------- ------------- ------------- --------------
Total $96,240 $97,096 $77,575 $78,772
============= ============= ============= ==============
</TABLE>
Realized gross gains/(losses) on sales of investment securities were
$266,000, $18,000 and $459,000 during 1998, 1997 and 1996, respectively. The
gross proceeds from such sales of investment securities totaled approximately
$14.1 million, $0 and $438,000 during 1998, 1997 and 1996, respectively. All of
the gain on sales of investment securities during 1997 and a portion of the gain
on sales of investment securities during 1998 and 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.
3. Loans Receivable
Major classifications of loans are as follows:
At December 31,
----------------------------------
1998 1997
----------------------------------
(dollars in thousands)
Real estate mortgage:
Commercial $275,729 $223,672
One-to-four family residential 83,657 79,843
Real estate construction 76,544 72,454
Commercial 252,341 241,007
Installment and consumer:
Government-guaranteed student loans 65,242 64,390
Credit cards - 73
Other 39,806 37,674
------------- -------------
793,319 719,113
Allowance for loan losses (10,401) (8,282)
------------- -------------
Loans receivable, net $782,918 $710,831
============= =============
SNB 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, 1998 and 1997, substantially all of
SNB's loans 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
$79.1 million, or 10% of total loans. Southwest does not have any other
concentrations of loans to individuals or businesses involved in a single
industry of more than 5% of total loans. In the event of total nonperformance by
the borrowers, Southwest's accounting loss would be limited to the recorded
investment in the loans receivable reduced by proceeds received from disposition
of the related collateral.
11
<PAGE>
Southwest had loans which were held for sale of $14.2 million and $13.0
million at December 31, 1998 and 1997, respectively. These loans are carried at
cost, which does not exceed market. Government-guaranteed student loans are
generally sold to a single servicer. A substantial portion of the one-to-four
family residential loans and loan servicing rights are sold to three servicers.
The principal balance of loans for which accrual of interest has been
discontinued totaled approximately $872,000 and $5.5 million at December 31,
1998 and 1997, 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 $682,000, $144,000 and $398,000
for 1998, 1997 and 1996, respectively.
The unpaid principal balance of real estate mortgage loans serviced for
others totaled $126.4 million and $132.8 million at December 31, 1998 and 1997,
respectively. SNB maintained escrow accounts totaling $474,000 and $547,000 for
real estate mortgage loans serviced for others at December 31, 1998 and 1997,
respectively.
The following table sets forth the remaining maturities for certain
loan categories at December 31, 1998. 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 $ 20,663 $ 62,107 $ 192,959 $ 275,729
One-to-four family residential 13,128 34,130 36,399 83,657
Real estate construction 55,723 11,567 9,254 76,544
Commercial 109,299 99,139 43,903 252,341
Installment and consumer:
Government-guaranteed student loans 65,242 - - 65,242
Other 13,619 25,029 1,158 39,806
------------ ----------- ------------ ------------
Total $ 277,674 $ 231,972 $ 283,673 $ 793,319
============ =========== ============ ============
</TABLE>
The following table sets forth at December 31, 1998 the dollar amount of all
loans due more than one year after December 31, 1998.
<TABLE>
<CAPTION>
Fixed Variable Total
----------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Real estate mortgage:
Commercial $ 99,490 $ 155,576 $ 255,066
One-to-four family residential 24,410 46,119 70,529
Real estate construction 5,735 15,086 20,821
Commercial 23,415 119,627 143,042
Installment and consumer:
Government-guaranteed student loans - - -
Other 23,962 2,225 26,187
----------- ------------ ------------
Total $ 177,012 $ 338,633 $ 515,645
=========== ============ ============
</TABLE>
The allowance for loan losses is summarized as follows:
12
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 8,282 $7,139 $ 5,813
Provision for loan losses 3,380 12,104 3,100
Loans charged off (2,374) (11,528) (2,301)
Recoveries 1,113 567 527
---------------- ---------------- ---------------
Total $10,401 $8,282 $ 7,139
================ ================ ===============
</TABLE>
As of December 31, 1998 and 1997, impaired loans totaled $923,000 and
$5.5 million and had been allocated a related allowance for loan loss of
$155,000 and $707,000, respectively. The average balance of impaired loans
totaled $3.4 million and $4.1 million and interest income recognized on impaired
loans totaled $203,000 and $187,000, respectively, for the years ended December
31, 1998 and 1997.
Directors and officers of Southwest and SNB were customers of, and had
transactions with, SNB 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 SNB totaling $1.4 million
and $2.1 million at December 31, 1998 and 1997, respectively. During 1998,
$743,000 of new loans were made to these persons and repayments totaled $1.4
million.
4. Premises and Equipment
These consist of the following:
At December 31,
-------------------------------
1998 1997
-------------------------------
(dollars in thousands)
Land $4,361 $ 4,397
Buildings and improvements 4,081 4,115
Furniture, fixtures, and equipment 15,225 12,855
Construction/Remodeling in progress 5,654 895
------------ -------------
29,321 22,262
Accumulated depreciation and amortization (10,117) (8,691)
------------ -------------
Premises and equipment, net $ 19,204 $13,571
============ =============
5. Other Borrowed Funds
During 1997, Southwest began selling securities under agreements to
repurchase with Southwest retaining custody of the collateral. Collateral
consists of direct obligations of the U.S. Government or U.S. Government Agency
issues and Southwest retains custody of the security which is designated as
pledged with Southwest's safekeeping agent. The type of collateral required, and
the retention of the collateral and the security sold, minimizes Southwest's
risk of exposure to loss. These transactions are for one-to-four day periods and
do not materially impact Southwest's liquidity or operations.
During 1998, Southwest established unsecured brokered certificate of
deposit lines of credit with Merrill Lynch & Co., Morgan Stanley Dean Witter and
Salomon Smith Barney. Southwest also has available a line of credit with the
Federal Home Loan Bank of Topeka ("FHLB").
13
<PAGE>
During 1998, the only categories of short-term borrowings whose averages
exceeded 30% of ending shareholders' equity were repurchase agreements and funds
borrowed from the FHLB.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
Treasury, tax and loan note option $ 601 $ 1,595 $ 1,185
Federal funds purchased and securities sold
under repurchase agreements 55,971 18,953 1,800
Borrowed from the Federal Home Loan Bank 38,000 - -
Other short-term borrowings - - -
Weighted average rate outstanding:
Treasury, tax and loan note option 4.11% 5.25% 4.99%
Federal funds purchased and securities sold
under repurchase agreements 4.65 4.94 6.70
Borrowed from the Federal Home Loan Bank 5.14 - -
Other short-term borrowings - - -
Maximum amounts of borrowings outstanding
at any month-end:
Treasury, tax and loan note option $ 2,500 $ 1,843 $1,500
Federal funds purchased and securities sold
under repurchase agreements 56,329 19,953 2,300
Borrowed from the Federal Home Loan Bank 38,000 - -
Other short-term borrowings - 5,000 -
Approximate average short-term borrowings
outstanding for the year:
Treasury, tax and loan note option $ 1,589 $ 1,205 $1,135
Federal funds purchased and securities sold
under repurchase agreements 33,965 4,657 251
Borrowed from the Federal Home Loan Bank 20,576 - -
Other short-term borrowings 26 743 554
Approximate weighted average rate for the year:
Treasury, tax and loan note option 5.14% 5.36% 4.96%
Federal funds purchased and securities sold
under repurchase agreements 4.99 4.98 5.78
Borrowed from the Federal Home Loan Bank 5.43 - -
Other short-term borrowings 5.80 5.84 5.59
</TABLE>
6. Long-Term Debt
On June 4, 1997, SBI Capital Trust, a newly-formed subsidiary of Southwest,
issued 1,000,500 of its 9.30% Cumulative Trust Preferred Securities (the "Trust
Preferred") in an underwritten public offering for an aggregate
14
<PAGE>
price of $25,012,500. Proceeds of the Trust Preferred were invested in the 9.30%
Subordinated Debentures (the "Subordinated Debentures") of Southwest. After
deducting underwriter's compensation and other expenses of the offering, the net
proceeds were available to Southwest to increase capital and for general
corporate purposes, including use in investment activities and SNB's lending
activities, and the redemption, in whole, of Southwest'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 Trust Preferred and the Subordinated Debentures each mature on July 31,
2027. If certain conditions are met, the maturity dates of the Trust Preferred
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 Trust
Preferred and the Subordinated Debentures also may be redeemed prior to maturity
if certain events occur. The Trust Preferred are subject to mandatory
redemption, in whole or in part, upon repayment of the Subordinated Debentures
at maturity or their earlier redemption. Southwest also has the right, if
certain conditions are met, to defer payment of interest on the Subordinated
Debentures, which would result in a deferral of dividend payments on the Trust
Preferred, at any time or from time to time for a period not to exceed 20
consecutive quarters in a deferral period.
Southwest and SBI Capital Trust believe that, taken together, the
obligations of Southwest under the Trust Preferred 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 Trust Preferred and the Subordinated Debentures, in the
aggregate constitute a full and unconditional guarantee by Southwest of the
obligations of SBI Capital Trust under the Trust Preferred.
SBI Capital Trust is a Delaware business trust created for the purpose of
issuing the Trust Preferred and purchasing the Subordinated Debentures, which
are its sole assets. Southwest owns all of the 30,960 outstanding common
securities, liquidation value $25 per share, (the "Common Securities") of SBI
Capital Trust.
The Trust Preferred meet the regulatory criteria for Tier I capital,
subject to Federal Reserve guidelines that limit the amount of the Trust
Preferred and cumulative perpetual preferred stock to an aggregate of 25% of
Tier I capital. At December 31, 1998, $19.1 million of the Trust Preferred was
included in Tier I Capital.
For accounting purposes, the Trust Preferred is presented on the
Consolidated Statements of Financial Condition as a separate category of long-
term debt entitled "Guaranteed Preferred Beneficial Interests in Southwest's
Subordinated Debentures."
7. Income Taxes
The components of taxes on income follow:
The components of taxes on income follow:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $5,437 $3,266 $4,275
State 726 366 667
Deferred tax benefit:
Federal (849) (820) (543)
State (133) (145) (93)
-------------- --------------- --------------
Taxes on income $5,181 $2,667 $4,306
============== =============== ==============
</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:
15
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Computed tax expense at statutory rates $5,096 $2,600 $4,032
Increase (decrease) in income
taxes resulting from:
Benefit of income not subject
to U.S. Federal income tax (287) (240) (210)
State income taxes, net of
Federal income tax benefit 386 146 379
Other (14) 161 105
--------------- --------------- ---------------
Taxes on income $5,181 $2,667 $4,306
=============== =============== ===============
</TABLE>
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses $(897) $(772) $(754)
Accelerated depreciation 239 158 135
Intangibles (4) (16) (26)
Sales of other real estate owned 17 5 225
Other (337) (340) (216)
--------------- --------------- ---------------
Total $(982) $(965) $(636)
=============== =============== ===============
</TABLE>
Net deferred tax assets of $3.4 million and $2.9 million at December 31,
1998 and 1997, respectively, are reflected in the accompanying consolidated
statements of financial condition in other assets. There were no valuation
allowances at December 31, 1998 or 1997.
Temporary differences that give rise to the deferred tax assets and
(liabilities) include the following:
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1998 1997
----------------------------------
(dollars in thousands)
<S> <C> <C>
Allowance for loan losses $ 4,022 $3,125
Accumulated depreciation (1,073) (834)
Write-down on other real estate owned 13 30
Deferred compensation accrual 186 103
Intangibles 182 178
Other 534 726
--------------- ---------------
3,864 3,328
Deferred taxes (payable) receivable on
investment securities available for sale (447) (387)
--------------- ---------------
Net deferred tax asset $ 3,417 $2,941
=============== ===============
</TABLE>
8. Shareholders' Equity
16
<PAGE>
On July 31, 1995, Southwest issued 690,000 shares of 9.20% Redeemable,
Cumulative Preferred Stock, Series A (the "Shares"), and received net proceeds
of $16.3 million. The Shares were redeemed by Southwest on September 1, 1998 at
their liquidation price of $25 per share plus accumulated unpaid dividends to
the redemption date. Such dividends were 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, 1998,
the cumulative accrued dividend requirement was $1.1 million. Dividends declared
and paid during 1998 totaled $1.2 million.
Southwest has reserved for issuance 200,000 shares of common stock pursuant
to the terms of the Dividend Reinvestment and Employee Stock Purchase Plans. The
Dividend Reinvestment Plan allows shareholders of record a convenient and
economical method of increasing their equity ownership of Southwest. The
Employee Stock Purchase Plan allows Company employees to acquire additional
common shares through payroll deductions. At December 31, 1998, 24,837 shares
had been issued by these plans.
9. Capital Requirements
Southwest and SNB 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 Southwest's and SNB's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Southwest and SNB must meet specific capital guidelines that involve
quantitative measures of Southwest's and SNB's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
Southwest's and SNB's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
As of December 31, 1998 and 1997, the most recent notifications from the
Federal Deposit Insurance Corporation ("FDIC") categorized SNB as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, SNB 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 SNB's category.
Quantitative measures established by regulation to ensure capital adequacy
require Southwest and SNB 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 Southwest and SNB meet all capital adequacy requirements to
which they are subject as of December 31, 1998 and 1997.
Southwest's and Bank's actual capital amounts and ratios are presented
below.
17
<PAGE>
<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, 1998:
Total Capital (to risk-weighted assets)
Southwest $92,527 10.81% N/A N/A $68,491 8.00%
SNB 90,628 10.61 $85,444 10.00% 68,355 8.00
Tier I Capital (to risk-weighted assets)
Southwest 76,006 8.88 N/A N/A 34,245 4.00
SNB 80,026 9.37 51,267 6.00 34,178 4.00
Tier I Leverage (to average assets)
Southwest 76,006 7.69 N/A N/A 39,529 4.00
SNB 80,026 8.12 49,297 5.00 39,437 4.00
As of December 31, 1997:
Total Capital (to risk-weighted assets)
Southwest $100,322 13.30% N/A N/A $60,331 8.00%
SNB 80,631 10.72 $75,182 10.00% 60,145 8.00
Tier I Capital (to risk-weighted assets)
Southwest 67,607 8.96 N/A N/A 30,165 4.00
SNB 72,349 9.62 45,109 6.00 30,073 4.00
Tier I Leverage (to average assets)
Southwest 67,607 6.95 N/A N/A 38,901 4.00
SNB 72,349 7.57 47,756 5.00 38,205 4.00
</TABLE>
The approval of the Comptroller of the Currency is required if the
total of all dividends declared by SNB 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, SNB may not pay a dividend if, after paying
the dividend, SNB would be under capitalized. SNB's maximum amount of dividends
available for payment totaled approximately $11.7 million at December 31, 1998.
Dividends declared by SNB for the years ended December 31, 1998, 1997 and 1996
did not exceed the threshold requiring regulatory approval.
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. Southwest 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, Southwest's
proforma data would have been as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(dollars in thousands, except share data)
<S> <C> <C> <C>
Proforma net income $8,368,511 $4,778,707 $7,382,355
Proforma net income available to common shareholders $6,382,511 $3,191,707 $5,795,355
Basic earnings per common share $1.68 $0.85 $1.54
Diluted earnings per common share $1.63 $0.82 $1.51
Weighted average fair value at grant date $11.01 $9.24 $7.57
</TABLE>
The compensation cost is calculated using the Black-Scholes option
pricing model with the following weighted average assumptions:
18
<PAGE>
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Expected dividend yield 1.37% 1.30% 1.47%
Expected volatility 31.10% 17.87% 20.66%
Risk-free interest rate 4.65% 5.89% 6.90%
Expected option term (in years) 10 10 10
The Stock Plan's activity follows:
Weighted
Number of Average
Options Exercise Price
-----------------------------
Outstanding at January 1, 1996 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
Granted 150,000 26.08
Exercised (5,000) 14.55
Canceled/expired (3,000) 13.38
-----------------------------
Outstanding at December 31, 1998 402,500 $19.08
=============================
Total exercisable at December 31, 1996 116,500 $13.36
Total exercisable at December 31, 1997 126,000 $13.30
Total exercisable at December 31, 1998 163,000 $14.69
At December 31, 1998, Southwest had reserved 375,522 shares under the
Stock Plan, and had 402,500 shares under option. In December 1998, Southwest
granted options to purchase 140,000 shares of common stock to senior and other
officers of Southwest. Southwest plans to submit a new option plan for
shareholder approval at the 1999 annual meeting. If approved, it will replace
the current plan with respect to future option grants. The following summarizes
the information concerning options outstanding and exercisable at December 31,
1998.
<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>
203,500 $12.75-$13.38 4.72 $12.82 137,500 $12.78
19,000 $19.25-$21.81 7.76 $19.92 4,500 $19.82
180,000 $24.75-$27.22 9.75 $26.08 21,000 $26.08
</TABLE>
11. Employee Benefits
19
<PAGE>
Southwest sponsors a noncontributory, defined contribution profit
sharing plan intended to provide retirement benefits for employees of Southwest.
The plan covers all employees who have completed one year of service and have
attained the age of 21. The plan is subject to the Employee Retirement Income
Security Act of 1974, as amended. Company contributions are made at the
discretion of the Board of Directors; however, the annual contribution may not
exceed 15% of the total annual compensation of all participants. Southwest made
contributions of $1.2 million, $588,000 and $671,000 in 1998, 1997, and 1996,
respectively.
12. Operating Leases
Southwest 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, 1998
follow:
1999 $797,440
2000 672,514
2001 568,433
2002 396,060
2003 10,101
The total rental expense was $1.2 million, $1.2 million and $1.0
million in 1998, 1997 and 1996, 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 Southwest 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 Southwest could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
Cash and cash equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment securities - The fair value of U.S. Government and agency
obligations, other securities and mortgage-backed securities is estimated based
on quoted market prices or dealer quotes. The fair value for other investments
such as obligations of state and political subdivisions is estimated based on
quoted market prices.
Loans receivable - Fair values are estimated for certain homogeneous
categories of loans adjusted for differences in loan characteristics. SNB's
loans have been aggregated by categories consisting of commercial, real estate,
student, and other consumer. The fair value of loans is estimated by discounting
the cash flows using credit and interest rate risks inherent in the loan
category and interest rates currently offered for loans with similar terms and
credit risks.
Accrued interest receivable - The carrying amount is a reasonable
estimate of fair value for accrued interest receivable.
Deposits - The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the statement
of financial condition date. The fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities.
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.
20
<PAGE>
Commitments - Commitments to extend credit, standby letters of credit
and financial guarantees written or other items have short maturities and
therefore have no significant fair values.
The carrying values and estimated fair values of Southwest's financial
instruments follow:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Values Values Values Values
--------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 32,339 $ 32,339 $ 36,259 $ 36,259
Investment securities:
Held to maturity 77,575 78,772 86,994 87,592
Available for sale 97,096 97,096 100,746 100,746
Loans receivable 782,918 807,037 710,831 731,459
Accrued interest receivable 8,658 8,658 8,883 8,883
Deposits 843,061 848,444 841,425 841,935
Accrued interest payable 5,584 5,584 6,504 6,504
Other liabilities 1,683 1,683 1,227 1,227
Short-term borrowings 94,572 94,572 20,548 20,548
Long-term debt 25,013 26,513 25,013 25,607
Commitments - - - -
</TABLE>
14. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, Southwest makes use of a number of
different financial instruments to help meet the financial needs of its
customers. In accordance with generally accepted accounting principles, these
transactions are not presented in the accompanying consolidated financial
statements and are referred to as off-balance sheet instruments. These
transactions and activities include commitments to extend lines of commercial
and real estate mortgage credit, standby and commercial letters of credit and
available credit card lines of credit.
The following table provides a summary of Southwest's off-balance sheet
financial instruments:
At December 31,
----------------------------------
1998 1997
----------------------------------
(dollars in thousands)
Commitments to extend commercial and
real estate mortgage credit $263,623 $242,401
Standby and commercial letters of credit 3,001 4,505
Credit card lines of credit 621,876 559,261
--------------- --------------
Total $888,500 $806,167
=============== ==============
A loan commitment is a binding contract to lend up to a maximum amount
for a specified period of time provided there is no violation of any financial,
economic or other terms of the contract. A standby letter of credit obligates
Southwest to honor a financial commitment by issuing a guarantee to a third
party should Southwest's customer fail to perform. Many loan commitments and
most standby letters of credit expire unfunded, and, therefore, total
commitments do not represent future funding obligations of Southwest. Loan
commitments and letters of credit are made under normal credit terms, including
interest rates and collateral prevailing at the time, and usually require the
payment of a fee by the customer. Commercial letters of credit are commitments
generally issued to finance the movement of goods between buyers and sellers.
SNB'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. SNB has an agreement with other
financial institutions to purchase $621.9 million and $558.1 million of
unadvanced credit card lines of credit at December 31, 1998 and 1997,
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. SNB does not anticipate any material losses as
a result of the commitments.
21
<PAGE>
15. Commitments and Contingencies
In the normal course of business, Southwest is at all times subject to
various pending and threatened legal actions. The relief or damages sought in
some of these actions may be substantial. After reviewing pending and threatened
actions with counsel, management considers that the outcome of such actions will
not have a material adverse effect on Southwest's financial position; however,
Southwest is not able to predict whether the outcome of such actions may or may
not have a material adverse effect on results of operations in a particular
future period as the timing and amount of any resolution of such actions and
relationship to the future results of operations are not known.
At periodic intervals, the Federal Reserve Bank and the Office of the
Comptroller of the Currency routinely examine Southwest's and SNB's financial
statements as part of their legally prescribed oversight of the banking
industry. Based on these examinations, the regulators can direct that
Southwest's and SNB's financial statements be adjusted in accordance with their
findings.
SNB 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 SNB by providing severance compensation to them upon their involuntary
termination of employment after a change in control of SNB. At December 31,
1998, SNB 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 $1.0
million.
16. Supplemental Cash Flows Information
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid for interest $43,194 $39,804 $32,038
Cash paid for taxes on income 5,664 2,333 4,390
Loans transferred to other real estate owned 3,873 521 21
Unrealized gain/(loss) on investment
securities available for sale, net of tax (67) 375 (407)
</TABLE>
17. Accounting Standard Issued But Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that Southwest recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. Southwest will
adopt SFAS No. 133 on January 1, 2000, as required. Management of Southwest
believes that adoption of SFAS No. 133 will not have a material impact on
Southwest's consolidated financial condition or results of operations.
18. Parent Company Condensed Financial Information
Following are the condensed financial statements of Southwest Bancorp,
Inc. ("Parent Company only") for the periods indicated:
22
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1998 1997
-----------------------------------
(dollars in thousands)
<S> <C> <C>
Statements of Financial Condition
Assets:
Cash and due from banks $ 176 $ 3,506
Investment in subsidiary bank 80,929 73,297
Investment securities, available for sale 925 15,408
Other assets 1,530 1,603
=============== ================
Total $83,560 $93,814
=============== ================
Liabilities:
Subordinated debentures $25,013 $25,013
Other liabilities 746 753
Shareholders' Equity:
Preferred - 17,382
Common 57,801 50,666
=============== ================
Total $83,560 $93,814
=============== ================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Statements of Operations
Income:
Cash dividends from subsidiary bank $2,933 $1,875 $1,053
Dividend income - - 22
Investment income 636 585 116
Other income - 2 -
Security gains/(losses) 129 - 288
---------------- --------------- ----------------
Total income 3,698 2,462 1,479
Expense:
Interest on subordinated debentures 2,326 1,338 -
Other interest expense 1 - -
General and administrative expense 377 227 150
---------------- --------------- ----------------
Total expense 2,704 1,565 150
---------------- --------------- ----------------
Total income before tax expense and equity
in undistributed income of subsidiary bank 994 897 1,329
Taxes on income (752) (383) 99
---------------- --------------- ----------------
Income before equity in undistributed
income of subsidiary bank 1,746 1,280 1,230
Equity in undistributed income of subsidiary bank 7,632 3,700 6,322
---------------- --------------- ----------------
Net income $9,378 $4,980 $7,552
================ =============== ================
Net income available to common shareholders $7,392 $3,393 $5,965
================ =============== ================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Statements of Cash Flows
Operating activities:
Net income $ 9,378 $ 4,980 $ 7,552
Equity in undistributed income of subsidiary bank (7,632) (3,700) (6,322)
Other, net 149 (871) 140
---------------- --------------- ----------------
Net cash provided by operating activities 1,895 409 1,370
---------------- --------------- ----------------
Investing activities:
Available for sale securities:
Purchases (504) (15,506) (1,806)
Sales 13,963 - -
Maturities 835 1,635 3,325
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 14,294 (13,871) 1,519
---------------- --------------- ----------------
Financing activities:
Proceeds from issuance of:
Common stock 248 456 170
Subordinated debentures - 25,013 -
Redemption of preferred stock (17,250) - -
Capital contribution to Bank - (6,500) -
Cash dividends paid:
Preferred stock (1,190) (1,587) (1,587)
Common stock (1,327) (1,168) (1,015)
---------------- --------------- ----------------
Net cash provided by (used in) financing activities (19,519) 16,214 (2,432)
---------------- --------------- ----------------
Net increase in cash and cash equivalents (3,330) 2,752 457
Cash and cash equivalents,
Beginning of year 3,506 754 297
---------------- --------------- ----------------
End of year $ 176 $ 3,506 $ 754
================ =============== ================
</TABLE>
19. Subsequent Event
On March 19, 1999, Southwest issued 250,000 shares of common stock for net
proceeds of approximately $5.2 million in a public offering. Shareholders
sold an additional 811,231 shares in the offering.
* * * * * * * * * *
24
<PAGE>
February 5, 1999
MANAGEMENT'S REPORT
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 effective
internal control over financial reporting, including safeguarding of assets, for
financial presentations 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 internal control contains monitoring mechanisms, and actions are taken to
correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of an internal
control may vary over time.
Management assessed Southwest's internal control over financial
reporting, including safeguarding of assets, for financial presentations in
conformity with both generally accepted accounting principles and Call Report
instructions as of December 31, 1998. 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 Southwest maintained effective internal
control over financial reporting, including safeguarding of assets, for
financial presentations in conformity with both generally accepted accounting
principles and Call Report instructions as of December 31, 1998.
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 Southwest in addition to reviewing Southwest'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 over 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 the 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 the 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 Southwest has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended December
31, 1998.
/s/ Rick J. Green /s/ Kerby E. Crowell
Rick J. Green Kerby E. Crowell
Chief Executive Officer Executive Vice President and Chief Financial Officer
25
